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As a small business owner or entrepreneur-to-be, it’s important to understand the basics of financial projections. A financial projection predicts how much money your business anticipates earning based on available data, such as past profits and losses, and hypothetical situations. You can use it to assess how profitable a new business idea might be or to anticipate the future success of an existing business.
If math isn’t your favorite subject, you may be worried about creating financial projections. In fact, it’s not too challenging. This guide provides a basic introduction to the topic.
Understand the significance of financial projections
If you’re going to put time and energy into learning about financial statements, you probably want to make sure the effort is worth it. Exactly what can you do with this paperwork? A lot, actually! For example, you can use projections to determine future financing needs, ensuring you’re never strapped for cash unexpectedly.
You can also use this data to determine when it’s a good time to make capital expenditures. Financial projections can further influence everyday business decisions like production plans and pricing amendments. Finally, if you ever seek external investment for your business, providing accurate financial projections can help you get the funds you need.
Know what financial statements to include
Financial projections are based on three primary financial statements: the cash-flow statement, balance sheet, and income statement (also known as a profit and loss statement). You will have to learn how to create each of these documents if you want to create accurate financial projections. Don’t worry: There’s help available.
Start with your profit and loss, P&L, statement. Digital offers tips on preparing it. This measures business income or sales within a set time period, such as a financial quarter. Your P&L statement will cover key points like revenue, expenditures, direct costs of goods sold, gross profits, operating expenses, depreciation, and earnings before interest and tax.
Next up, you should tackle your balance sheet. Hubspot offers a primer for preparing balance sheets. This document is divided into two columns, with assets reported on the left side and liabilities on the right. Line items are listed according to liquidity, with more liquid items like cash listed first.
Finally, there is the cash flow statement. CPD Box provides a step-by-step guide to creating a cash flow statement. This involves accounting for all your various forms of cash flow, including business operations, financing, and investing activities. You’ll have to determine the increase and decrease in cash and non-cash assets to determine your total cash flow.
Invest in software to help with the process
Creating accurate financial statements and projections requires compiling and analyzing large swaths of data. Luckily, technology can help. For example, some accounting software can be linked directly with your business bank accounts, automatically tracking all profits and losses. There are also apps to help with financial projections, like PocketSmith.
If you find the entire process of creating financial statements and projections too tedious, you can hire a professional to help. Jason Arsenault CPA LLC provides forecasting services and certified tax planning, bookkeeping, payroll, and more. Knowing that a licensed expert is handling your finances can be a relief and allow you to focus on other business areas.
Chelsea Lamb
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