Regardless of what type of business you operate, at some point, you will need to create a set of financial projections, whether it’s to raise funding or internal management.
However, it is one of the most challenging tasks for most business owners.
Financial projections are used to determine whether a project will succeed financially. They’re also helpful when planning for future growth. This article shows you how to create an effective financial projection for your business so that you can plan effectively.
In this article, we will help you create a set of financial projections for your business.
What are financial projections?
Similar to creating a budget, financial projections are a way to forecast future revenue and expenses for your business.
Frequently used to attract future investors, financial projections are also important when preparing a new business plan or creating a strategic plan for your current business.
You can create both short-term and long-term financial projections, with most business owners using both types of forecasts:
Short-term projections usually cover a year and are broken down by month.
Long-term projections typically cover the next three to five years and are usually used when creating a strategic plan or attracting investors.
What are financial projections used for?
Financial projections are usually used to attract investors or when applying for a bank loan.
Primary situations you will need a set of financial projections.
- Creating a business plan: One of the first things potential investors or banks want to see is a financial projection for your business, even if it isn’t operational yet, to analyse its viability and growth potential.
- Attracting investors: Investors typically look for financial viability. No one will invest in a business without a financial projection that outlines variables such as expenses, revenue, and growth patterns.
- Bank Loan: Banks or other financial institutions are interested in the financial health of your business. This means providing them with current financial statements that outline recent business performance and how you see your business performing over the next few years to ensure you can repay the loan.
- Business Improvement: You may not be in the market to attract investors or obtain a bank loan, but you want to map out your potential growth and create budgets allowing your business to grow and thrive. Financial projections are a really useful tool in this process.
How to create financial projections for your small business
The approach you take depends on the stage of the business.
If you have not started your business yet, then it’s going to be much harder accurately predict your sales and expenditure.
To estimate your future sales, you first need to understand your target market and what they are willing to spend on your product or service. Do market research to understand your industry’s average pricing and project how much growth you expect in the coming years.
Then develop a set of core assumptions to start building your forecasts.
For example, if you operated a gym, you can make the following assumptions:
- It costs £40 per month per member – this works out to be £440 per year per member
- On average, each customer will stay a member for two years – this means the Life Time Value of each customer is £880.
- The member attrition rate is approximately 20%
- The gym capacity is four hundred member
- Gym utilisation is 75%
Using these assumptions, you can start to map out how much sales you expect to generate.
Expenses can be forecasted using a similar methodology.
If you are a sole trader, freelancer, or micro-business owner, you’ll likely use data from your accounting software to prepare financial projections.
First, you will need to look at your past sales and revenue. This will give you an idea of how your company has been performing and whether or not it is growing.
You will also need to project future sales and revenue. This can be a bit more difficult, but it is important to make a realistic estimate based on your current situation and the market.
This is the first step in figuring out your future sales potential. Knowing how much you’ve sold in the past will give you a good starting point for estimating future sales.
When estimating your future sales, it’s essential to be realistic. Don’t estimate that you’ll sell twice as many products next year if there is no evidence that this will be the case.
It’s also important to consider any potential market changes, such as a recession.
Understanding your business’s costs is one of the most critical aspects of creating accurate financial projections.
Making an expense projection may seem more straightforward because it’s easier to research future expenses than predict potential customers’ buying choices.
This includes both fixed and variable costs, as well as projected increases or decreases in spending. Be as realistic as possible when estimating your costs, and account for any potential unforeseen expenses.
However, it’s much harder to predict one-time expenses that have the potential to destroy your business.
Balance sheet projections
Balance sheets show your company’s financial position, including assets, liabilities, and capital.
Established businesses should be able to create a balance sheet directly within their accounting software. You can also use your balance sheet to forecast future cash flow needs.
If you’ve been operating for at least six months, you should be able to create a basic balance sheet.
If you are in the planning phase, create a balance sheet based on the information you have collected from your sales and expenditure forecasts.
Following these tips can create accurate and realistic financial projections for your business.
- Make sure your assumptions are realistic, based on experience and industry averages.
- Estimate your sales and expenses and include a provision for unexpected costs and seasonal variations.
- If you have historical data from your business, use it to create your financial projections. This data can help you estimate future sales and expenses and better understand your business’s performance.
Let Us Help You WIth Your Financial Projections
Whether you need financial projections for investment, funding or internal management we have a number of business planning services available. Visit our business plan writing services page and fund out how we can help you.