Do you want to find out how to make financial projections and how to do it realistically? Here’s an easy-to-understand guide about making financial projections.
A financial projection – meaning
A financial projection is a forecast of the revenue and expenses that you expect for your business for a given period of time in the future.
It usually contains predictions of several outcomes within. So, you can make a projection for your business in the case of sales or certain costs increasing/decreasing. In a sense, it gives you a plan B, and C… It doesn’t necessarily mean that it will pan out.
Despite lacking accuracy, as it is a projection, it’s still a necessary part of business planning and development that you need to do each year. The reason being that it helps tremendously to set your business on the right path. And what it also does is it prepares you for the future.
So, how do you actually make financial projections for your business? Let’s have a look.
Part 1: Forecast sales
What’s probably the most exciting part of it is projecting your sales. This is usually the first step in the process, too.
Forecasting sales for existing businesses
If you’re an existing business, you’ll make your sales forecast based on your previous year’s sales. So, it’s your performance in the past that you’ll be analysing. If there are slow seasons in your business, they need to be taken into account. And you should really go into detail and understand the dynamics of your business. By doing so, you’ll be able to make a very reasonable projection of sales.
Forecasting sales for new businesses
If you’re just starting out, then you should try to be as realistic as possible. Wondering how you can do that? Try to inform yourself well about the current and future trends on the market. So, look at things like what the demand is like for your type of product or service – in other words, research demand. What you also want to be doing is taking a broader view of the health of the economy because an overall understanding of what the current and future trends are will play an important role in you being reasonable when making your forecast.
Part 2: Predict costs
Even though the word costs might give you the chills, consider it a necessary evil for running a business. Your costs are an indicator of all the moving parts that make your business perform. Therefore, you may want to look at them as an investment (winking face).
So, part two of your financial projection process will be to predict your costs. As you probably already know, there are two types of costs: fixed and variable.
Fixed costs
These are easier to predict as they normally stay the same. You may, however, see if some of these could increase due to things like a salary increase in the future, or maybe a rent increase if you plan to relocate, etc.
Variable costs
They will be more difficult to forecast because they depend on the scale of your sales. They will be closely linked to your sales projections and also the marketing spend that you’ll decide to have in the future.
N.B. It’s always a good idea to add 15% to your projected costs to ensure that you have a safety net. Unexpected developments, such as a computer malfunction, or something as simple as a plumbing issue in your office, can therefore be catered for with ease.
Part 3: Calculate your break even point (BEP)
Your break even point is the point when your revenue covers the costs of running your business.
I cannot emphasise enough how much of an important part of making your financial projections it is. I say this because your BEP gives you a clear understanding of how much you need to sell in order to avoid loss. Or make a profit for that matter.
That is why, knowing your BEP will guide you towards making a sound financial projection for your business in the next year, or several years.
Part 4: Make a cash flow projection
A cash flow projection will give you information about your likely future sales and expenses. Your cash flow statement will show you how much cash is flowing into your business and whether that’s enough to keep it rolling. Naturally, if you’re an existing business, you will analyse your past cash flow data and make your financial projections based on it.
If you’re new to the world of business, there are cash flow tools as well as online financial planning tools to help you in the process. To begin, you can download our FREE Cash Flow Guide. Or you can join our Financial Story Plan Community and get a firm grip on your cash flow planning.
To sum up, when it comes to how to make financial projections, you need to be very knowledgeable of your numbers. You need to know how much cash comes into your business and how much you spend. You also need to know how much is enough to cover your operating costs. All of this data will allow you to forecast the future of your business in a reasonable way, thus allowing for rational expectations and goal setting.
If you’re keen to dig deeper into your finances and get some help while doing so, do sign up for a FREE trial to Numbers Know How and gain access to a Cloud planning tool, tips, techniques and resources.
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