How to create Realistic Financial Projections

On 21 Apr., 2018

Steps for creating financial projection that will drive your business and get it funded.

How to create Realistic Financial Projections

The most important part of your business is to create financial projections that align with your plan and your company vision. Creating realistic financial projections will help convince prospective investors or lenders that your business will be profitable and will be able to yield them good return on their investment.
Considering that you don’t need financial projections at all just because you don’t need finance is a big mistake! Financial projection is as vital to your business as it is to those that need finance. Firstly, getting financial projections will enable you to budget and plan for growing your business and secondly, they serve as a yardstick.
Comparing your projections to your actual financial statement, it will be easier to see if your business is falling short or surpassing your projections. In case of falling short of your projections, you need seriously to reconsider your business model or at least the prices you are working with. Alternatively, if your income surpasses, hiring more employees, expanding your facilities may be the changes you will have to make.
Generally, getting financial projections should include a period of at least three years into the future as it will be harder to get historical data to project further than that. To get started, you will need to create:
• A sales forecast – with monthly sales for the first year and quarterly for the following years, you can project your sales out for at least three years. Use the numbers of planned units to be sold and customers that you expect in combination with your price strategy;
• An expense budget – define your production costs /direct material and labour expenses/, your selling costs /marketing expenses/, fixed /rental
expenses/ and variable costs /transportation expenses/. You may not have to break it down incredibly but you will need general figures.
Three basic documents must be included in financial projections to make up your business’s financial statements:
• Income statement – by projecting income and expenses like sales, expenses, capital and cost of goods sold, this will project how much money your business will generate. You will have to create monthly income statement for your first year in the business and quarterly statements for the second year and annual income statement for the subsequent years.
• Cash flow statement – the main purpose is to show you how much cash your business can generate over a period of time, simple by extracting all your payments /cash outflows/ from your revenues /cash inflows/. At the end of each period (monthly, quarterly or annually), you will be able to detect the surplus your business generates or the shortfall you need to finance.
• Balance sheet – this shows the details of all the business overall finances which include assets, liabilities and equity. Typically, financial projections are done on annual balance sheet.
Make your projections for the next three years, show the risk is mitigated with strong data and investors will be willing to take that risk with you. Your business doesn’t need to be the next Facebook to prove that you will pay them back on time with their interest.
Creating financial projections that will not only guide your business but will also obtain finance to start it, you will need to carefully gather information, understand your financial sources goals and strike a balance between optimism and realism.

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