By Elena Stewart
Whether you are hoping to open a new location, hire new employees or improve your investment portfolio, accurate financial projections are important for your small business. They provide insight into how your decisions may impact the future financial health of your enterprise. Agile BSA presents the following tips that can help you make accurate financial projections for your small business.
Importance of Financial Projections
Financial projections provide insight into how your business earns and spends money. They help you monitor your cash flow, adjust production plans and change your pricing strategies. An accurate financial projection is also important for estimating your annual tax burden. Additionally, state regulations may require you to file an annual report to retain your right to do business. Financial projections are usually part of this report. Failing to comply with regulations can result in fines or penalties.
Uses of Financial Projections
There are a variety of ways you can use financial projections to improve your business. Investors and lenders want to see the documentation that supports your ability to meet future financial obligations and grow your company. Your business plan and financial projections are a central component of this documentation. Financial projections also help you adjust your business strategies to achieve your profit goals.
Financial Projection Creation
The financial projection creation process begins with creating a sales forecast. This forecast provides a picture of what is driving sales for your company. Next, create an expense budget. This gives you an idea of how much your expenses may change for different scenarios. Third, create your income statement projection. This is how much money you expect to make during the forecast period.
A cash flow projection is your next step. This provides you with an idea of what your liquidity is and how cash flows in and out of your business throughout the projection period. Follow this with a balance sheet projection. The balance sheet shows you what your company's predicted worth is.
The process of creating and interpreting financial projections is not a simple one. If you are struggling to understand it, refreshing your skills by obtaining an online accounting degree may be helpful. You can increase your knowledge of basic accounting principles, balance sheets and other financial statements and learn how to make accurate financial projections.
Alternatively, consider an online Master of Business Administration program to boost your financial skills and business savvy. According to government data, 79% of colleges offer classes or entire degrees online. Going to school online allows you to keep running your business while also managing your studies and family life.
Software for Financial Projection Creation
Financial modeling is a complex process. Using software can simplify the process and make the data easier to understand. Many accounting packages include basic financial forecasting tools. However, you can access more advanced features by using a program specifically for financial projections.
These programs usually integrate with your accounting software so that you do not need to input the data a second time. Financial forecasting software can help you fine-tune your business plan, create multiple budgets for various scenarios, track historical budgets, consolidate budgets across departments, compare forecasts with actual data and set up "what if" scenarios to account for future budget changes.
Understanding the financial implications of business decisions is an important part of running a successful business. Learning how to create and interpret financial projections can help you with your decision-making process.