Many small business owners find that creating and understanding financial statements and financial projections are daunting tasks, despite their importance. Creating financial projections is incredibly challenging if you don’t know the process for making them. Though you can use software to develop vital business documents and monitor your net income and gross margin, they won’t help you create your financial projections.
Continue reading below to learn how to make financial projections and incorporate them into your business plan.
Why Are Financial Projections Necessary?
Business owners use financial projections to create a business plan to show the enterprise’s earning potential. They are also helpful when looking for potential investors or acquiring business loans. The projections will include budgets, cash flow statements, income statements, and balance sheets.
Projections show the business’s financial forecast, meaning you will better understand the short-term and long-term bottom lines along with investors and financial institutions. You can use the projections to seek additional funding, make hiring decisions, or make capital investments.
How To Make Financial Projections
Small businesses should consider short-term projections that break down potential earnings each month for a year, as well as long-term financial projections that cover the upcoming two to three years. Long-term forecasts are best for gaining investors or creating a new business plan.
When it’s time to create your financial projections, gather your current cash flow statement, balance sheet, and income statements, and follow the steps below.
Step 1: Make a Sales Forecast
Existing businesses can use previous financial statements to create projects for an upcoming month, quarter, or year. For example, if sales tend to slow down in the fall, your sales projection should reflect the expected drop during the upcoming season. Consider other factors that may affect sales, like the economy and industry trends.
Step 2: Develop an Expense Budget
Fixed expenses like rent and payroll are easy to project because they seldom change. Account for your recurring costs in your budget and allot a percentage for additional charges you cannot immediately account for, such as a rise in inventory prices.
Step 3: Make a Balance Sheet Projection
If you use bookkeeping software for an established business, you can use it to make a balance sheet showing assets, liabilities, revenue, and expenses. This document will help you predict your business’s growth over the next year or more.
Ste 4: Make an Income Statement Projection
This report will lay out your business’s net income and estimate the enterprises’ performance over time.
Step 5: Develop a Cash Flow Projection
The cash flow statement explains how the business spends money, which helps attract investors or obtain credit. Along with the income statement and balance sheet, you will clearly understand what cash-related actions affect your business’s bottom lines.
Learning how to make financial projections may not be easy, but they are essential for company growth. If you need assistance managing your financial statements to plan for your business’s future, a skilled CPA from Accounting & Tax Advisers CPAs can assist you. Contact us today to learn more about our small business accounting services.