Financial Projections: A Guide To Making Them for Your Business

As a business owner, you know the first step in starting a company is to create your business plan. One important component of your plan is the financial projections needed to help keep you on track. Use this guide from the Santa Barbara South Coast Chamber of Commerce to understand how to make them and why you'll need them.

What Are Financial Projections?

Financial projections are forecasts of cash flow, balance sheets, and income. They are important because they help you determine your end-of-year taxes. Remember, most states require you to file an annual business financial report to remain compliant and in good standing with the government. Failing to do so could result in expensive penalties or even the loss of your business license.

Additionally, having financial projections in your business plan allows you to keep up with your company goals. Research shows that companies need a minimum of five years forecasted to show investors when they need funding. Forecasts should include revenues, expenses, owner equity, and projections for potential growth and profit margins. 

How Do You Make Financial Projections?

The detailed process for creating a financial forecast will be different for every company. The actual numbers depend on the type of business you have and the cost of operations. However, there are some basic steps that every company can follow to create a productive forecast. The steps for creating your business's financial projections include:

• Spending and sales. Look at rent, utilities, salaries, marketing, supplies, and maintenance.

• Cash flow projections. Use Excel to compare cash flow with expenses.

• Financial needs. Assess your financial needs for operations and create a budget to meet those needs.

• Contingencies. Plan for the unexpected, including things that may throw off your projections.

Remember to continuously monitor operations and financial status to ensure you remain in line with your projections. Make adjustments as needed to help the company stay on track, and keep detailed documents of your financial information. Excel is a great tool for putting spreadsheets together, which you can then convert to PDF files so you can easily share and print them with your team members and investors. There are also a lot of tools on the market you can use to keep these records organized. For example, this tool will rotate a PDF if you need to turn pages in a file so they’re all facing the same direction, and you can also find tools that let you edit, combine, and sign PDFs.

What Documents Do You Need?

There are three main documents you need to create financial projections. The first is your net income statement, sometimes called the statement of earnings. This shows your revenue after subtracting your expenses and losses. You use this internally to monitor your business's performance and produce your annual report. The second document you need is the cash flow statement, which allows you to keep up with how much cash you have on hand at all times. A strong cash flow statement looks good to investors. The final document is the balance sheet, which shows your assets versus your liabilities. What money you have left over is the owner's equity.

What Software Will Make the Process More Efficient?

Having the right software is important for your financial projections. Because this is so important for investors, you need to make sure your projections are accurate and realistic. 

Using software tools is recommended even for a straightforward business model because running out of cash or misinterpreting your company's worth could be disastrous in the future. To make better projections, consider adopting a real-time data platform. This may help you by offering the latest data upon which to project your business. Best of all, this tool can scale with your business, becoming more useful as you grow.

Now that you understand the relevance of financial projections, you can start making choices for your company. Remember to refer back to your business plan when you need guidance. You may make changes along the way, but it will keep you on a path toward your career goals.