Why financial projections are important

Missing or underestimating key expenses at this stage could be the difference between success and failure. Tip: You may come across items which require more in-depth data to be gathered or updating.

Colour-coding the spreadsheet entries may help you identify those areas. For example as shown in the example below green areas may be used for items that you are very certain of. Yellow shaded areas require some additional information, while red areas may mean you require more extensive updating or critical information to be gathered.

Tip: It is important to have sufficient capital funding for the startup of your business. A startup capital worksheet will help you to calculate how much is needed before you begin to generate income.

Tip: Developing smaller spreadsheets will assist you in recapping the individual costs associated with the project. Remember: It isn't necessary to utilize a spreadsheet in all cases, as long as you are realistic in your assumptions and you can support them when needed. Similar to startup or expansion costs, you need to investigate and give careful consideration to the development of other key data that would be utilized in the completion of the opening balance sheet, forecasted profit and loss statements and the development of cash flows.

One of the first key assumptions that needs to be addressed in the startup of a new business venture, and or expansion, is the source of equity and or debt. This would be the assumption around the contributions to be made to the business by ownership, whether sole proprietor, partners, or shareholders.

You would be advised to develop a spreadsheet that shows the timing and amount of each contribution and the terms in which they are being made.

The spreadsheet should show both contributions and the formation of the business and throughout the planning period. Production costs need to be forecasted. The production cost is determined by your research and accurate determination of the cost of all inputs that make up all your manufacturing costs. These costs should include all material costs, labour, service and manufacturing overhead requirements that are required in the development of your products. Prior to forecasting your sales projections and revenue, you need to calculate a realistic cost for your product s and break the cost down into a per unit basis.

Labour costs associated with production should be addressed here as well. Below is an example of a basic worksheet to calculate product cost. Tip: Once you calculate the input costs on a per unit basis, you can begin the sales and revenue forecasts. Each individual product that you produce would require its own individual calculations for these per unit costs.

Tip: If you manufacture a product, it is advisable that you include not only your material costs in your cost of sales, but all manufacturing costs such as rent only equipment rent utilities and labour - anything that is variable and related to manufacturing your product.

Placing the right selling price on your product or service can be the difference between financial success and failure. In order to price your product or service profitably, you need to take into consideration many factors such as cost of production, your customer, your competitors and how much value the market places on your product. The cost of production includes both variable and fixed costs. This is a very important step and is the foundation to establishing an accurate price for your product.

Do not guess, know your costs and be sure to include all costs. Price is not the same as value. Value is a perception in your customer's mind. If you have a unique product that the customer needs or wants, they will place a higher value on it. Your price should reflect how much value your customer places on your product.

If the product you are producing is commonly available and you have considerable competition customers will place less value on your product and it may be very difficult to establish a market share. Answers to these and many other critical questions will require thorough market research and other investigation efforts. Once you have established that you have a product worthwhile to market, and you have established a realistic price for your product a cost price to produce, ship and market, plus a profit margin you can then determine if the market will support your venture.

Tip : Research into pricing of similar or like products can include the use of your own inquiries into the marketplace, focus groups, trial markets or enlisting the assistance of professionals.

One of the most significant expenses a business will incur is that of salaries wages and benefits. Create an accurate monthly estimate of your labour costs through each of your planning stages. You will also need to project labour costs in your cash flow summaries, to ensure your business can manage and meet payroll obligations.

Below is an example of a labour cost spreadsheet that also estimates the company costs of employee benefits. If you intend to pay bonuses, you would simply add another row or rows as required. It will be critical to outline your assumptions as to the timing of these bonuses as your financial advisor will require this information to manage your cash flow.

Bonuses should only be paid out if the company is profitable. Tip: Using a spreadsheet that allows you to easily make quick adjustments throughout the forecasted year and handle changes such as wage increases, personnel changes and so on , will help you manage and prepare for your cash-flow requirements document.

In this particular spreadsheet example, the jobs have been highlighted in different colours. This is to help assign their associated cost to either overhead costs fixed or cost of sales. Tip: You may wish to consider the development of additional spreadsheets to support other general and administration expenses. Tip : At times you may have special sales, seasonal highs or lows that affect your forecasts.

It is very important that you include in your key assumptions how you managed to arrive at these various forecasted levels. Maintain a record of your specific assumptions in these areas. The preparation of your projected income statement is the planning for the profit of your financial plan.

Tip : As you are developing your sales forecast, it is critical that you document and develop a narrative in your business plan that can support your projections including the best estimate of timing of the conversion of sales to cash.

The assumption of the timing from invoice to conversion of cash is required by your financial coach. Are these sales projections reasonable?

Can they be supported though signed orders, contracts or letters of intent from your customers? Do you have a competitive advantage with your product that fills a consumer need or is at a price better than anything else currently on the market? Can your operation's infrastructure support the volume of sales? Lenders or investors will need evidence that these projections are realistic.

Over-estimating your sales forecasts could result in financial disaster. To complete an accurate cash flow forecast it will be critical to make key assumptions around the following:. Tip: In completing cash flow forecasts for existing businesses, to be accurate, the following additional steps will be required:.

One of the first steps in the cash flow planning for the next year of an existing operation will be to determine when opening accounts receivables will be collected in the next period and when outstanding accounts payable will be paid in the next forecasted period.

Tip: Quite often the development of an initial cash flow statement will initiate a revised cash flow statement that will include the additional financing required to fund the cash flow deficit.

The Balance Sheet is a summary of the assets and liabilities and equity of a business at a specific point of time. In addition it provides a picture of the financial solvency and risk bearing ability of the business. The Balance Sheet will vary slightly depending on the legal structure of your company whether it is a sole proprietorship, partnership or corporation. This is an example of what a typical balance sheet may look like for a corporate entity Limited Company.

If your business is a sole proprietorship, the equity section of the balance sheet will simply be the difference between the assets and liabilities - there will be no indication of original share capital reflected. While that may sound confusing, it just means that most software applications such as QuickBooks Online , Sage 50cloud Accounting , and Xero can create the financial statements needed for you to prepare your financial projections, but the software itself will not be used in the actual creation of the projections.

Financial projections are an important part of managing your business. Preparing financial projections may seem like a daunting task for small business owners, but if you can create financial statements, you can create financial projections. Similar to creating a budget , financial projections are a way to forecast future revenue and expenses for your business. Frequently used as a way to attract future investors, financial projections are also an important component when preparing a business plan for a new business 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 projections:. Short-term projections: Short-term projections usually cover a year and are typically broken down by month.

Long-term projections : Long-term projections typically cover the next three to five years and are usually used when creating a strategic plan, or for attracting investors. This includes creating projections based on your own experience in the field, or by doing some market research in the industry in which your business will operate.

Sales projections are an important component of your financial projections. For existing businesses, you can base your projections on past performance obtained from your financial statements. For those working from history, you can predict with some certainty what your fixed expenses are, such as your rent or mortgage, along with recurring expenses such as utilities and payroll. A balance sheet shows the financial position of your business, listing assets, liabilities, and equity balances for a particular time frame.

When creating your financial projections, you can use your current balance sheet totals to better predict where your business will be one to three years down the road. For those of you in the planning stages, create a balance sheet based on the information you have collected from industry research.

Current business owners can easily create an income statement projection by using your current income statement to estimate your projected numbers. This Excel template can be used to display revenue, cost of goods sold, expenses, and other income to identify net income. An income statement provides a view of the net income of your business after things such as cost of goods sold, taxes, and other expenses have been subtracted.

This can give you a good idea of how your business is currently performing as well as serve as the basis for estimating net income for the next one to three years. The last step in completing your financial projection is the cash flow statement. The cash flow statement ties into both the income statement and the balance sheet, displaying any cash or cash-related activities that affect your business.

The cash flow statement shows how money is being spent, a must for those looking to attract an investor or obtain financing. If so, the availability of financial reports such as a balance sheet, income statement, and cash flow statement are valuable resources when creating financial projections. Are you paying more in taxes than you need to? Every dollar makes a difference, and you can save more of them by taking ALL the tax deductions available to your business.

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Compare the development of the market with the rate at which your business is flourishing. Reveal growth deviations from your projections early on to efficiently mitigate any concerns. Tips for a Successful Projection Plan Create a budget congruent with the long-term objectives of your company, and be sure to stick to it despite successful or challenging periods.