Creating financial projections is a necessary but challenging process for many businesses. Your partners and investors want to see hard numbers. But in the ever-changing business world, how can you realistically forecast concrete numbers three years into the future?
Nevertheless, if you want your business to be taken seriously, producing short- and medium-term financial projections are an integral part of your business plan.
So how can you successfully create accurate financial forecasts in your business plan?
Continue reading to learn five components of successful financial projections for your company.
1. Create a Sales Forecast
Start by projecting your sales from the bottom up. In other words, examine your unit and price details and use them to create specific assumptions.
For instance, if you have distributors extending your product to retail stores, then determine how many stores you can reach and how many distributors would you need to reach those stores? You can then estimate how many units you can sell per store each month.
As for your forecast, create a spreadsheet with months and years listed across the top and category names vertically along the left side. In this spreadsheet, break down your monthly sales, how many units are sold, their price points, and your sales expectations.
For the second and third year, you can reduce your projections to quarterly sales. This format can be followed for most sections of your business plan.
2. Add Up Your Expenses
Create another spreadsheet in a similar format to your sales forecast. This time, log all your operating expenses including rent, payroll, advertising, utilities, and other monthly expenses. These are your fixed expenses.
Then create a separate list of your direct costs, which are variable expenses, such as raw materials, advertising, and seasonal help.
3. Cash Flow Statement
If you are starting a new business, coming up with a cash flow statement can be difficult without historical data to go by. In this case, look into templates, software or professional help.
This statement demonstrates how much cash your business brings in each month compared to how much money is going out of the business. Use your sales forecasts and your expenses spreadsheet to estimate your monthly cash flow.
4. Profit and Loss Statement (P&L)
At this point, you have all the information you need to execute a profit or loss statement. Calculate your P&L by subtracting your direct costs from your total sales number to determine your gross margin. Next, subtract your operating expenses to discover your earnings before interest and taxes (EBIT).
Note that your P&L statement needs to be done for each individual year as well as a cumulative figure for the three-year period.
5. Update Regularly
Having a financial forecast for 12 months and the following two years is important to set expectations and help you manage your business budget. That said, financial projections are never going to be pinpoint accurate.
Your financial projections are never complete. Rather, they are fluid and require regular updating. As time goes on, compare your results against your projections and make corrections.
Financial Projections Point the Way Forward
Financial projections are just that–projections. Don’t expect perfection. Just aim for forecasts that are plausible and supported by data as much as possible.
Projections help your company see where it’s going. When the macro picture is in view, the day-to-day goals are easier to define.
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