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How to make financial projections for your business

Updated:
October 31, 2022
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If your business is looking to acquire funding or gain a more detailed understanding of its cash flow, it may need to produce a financial forecast. This guide explains everything you need to know about projections, from what they mean and why they’re important to how to produce them. We also outline which statements are required to make sure you’re as prepared as possible.

No business owner knows what tomorrow holds. But in the face of an unpredictable business landscape, there are steps you can take to prepare your small-to-medium-sized enterprise (SME) for the unknown. If you’re interested in gaining a clearer overview of your business’s financial affairs, one of the best measures you can take is creating a financial projection.

Financial projections allow you to anticipate the future of your company’s cash flow. In turn, this helps you to assess your SMEs financial viability, plan for its years ahead, and identify if extra funding may be needed to get you on the right track. Critically, most loan providers and investors require financial projections to assess your business’s trajectory. Therefore, if business financing is on your horizon, it’s a good idea to set up a forecast ahead of time.

For business owners looking to gain deeper insight into their finances, this guide will outline everything you need to know about making a financial forecast. From outlining what documents are required to walking you through the process step-by-step, read on to gain a tighter grasp of cash flow forecasting.

WHAT IS A FINANCIAL PROJECTION?

In simple terms, a financial projection is a prediction of your SMEs future cash flow. It includes a month-by-month forecast of your future revenue and expenses, and it's typically based on your business's previous financial data. This forecast is then used to help you, and external lenders understand how financially viable your business may be in the short and long term.

No matter what stage your business is at in its lifecycle, financial forecasting is important because it helps you to plan your budget and work out contingency options throughout financially challenging times. This is particularly useful for SMEs dealing with low or fluctuating demands or those recovering from the impact of Covid-19.

However, while financial projections are intended to produce fairly accurate insight, there’s no way to reliably predict the future. Therefore, business owners should bear in mind that these forecasts should be used to guide decision making, not to make massive, company-wide changes. What statements does it require?

Now that we’ve given you a rough overview of the practice, here are the three pro forma statements your company will need to produce its projections:

1. Balance sheet

Otherwise referred to as a “financial portrait”, a balance sheet is an overview of how much capital a business has, its net worth and its outstanding debts. It’s an invaluable way for business owners to take stock of their income and expenditure. The financial statement includes information about a company’s assets, liabilities and, if relevant, shareholders’ equity. Standard balance sheets are split into two parts, with asset reports on the left and financing on the right.

2. Income statement

Also known as a “profit and loss statement”, an income statement displays a company’s incomings and outgoings over a particular time period. To be specific, the document reports a business’s revenue, expenses, gains and losses to generate its net income. Income statements stand as a general measure of profitability and are typically created monthly or quarterly.

3. Cash flow statement

A cash flow statement is a document that summarises the amount of money leaving and entering a business. They usually cover three things: a company’s operating, financing and investing activities. We break down these distinctions further below.

  • Operating activities - Typically being featured in the first section of the cash flow statement, a business’s operating activities indicate the amount of capital a company earns from regular business activities. These activities include daily undertakings like the sales of goods and services.
  • Financing activities - This is a section of the cash flow statement which presents the net flows of cash that are relied upon to fund a business. Common examples of financing activities include equity dividends and debt transactions.
  • Investing activities - Finally, investing activities refer to any cash generated or lost from a company’s investments. This may include the sale of investment securities, any money lent, or any capital expenditures.

HOW DO I MAKE A FINANCIAL PROJECTION?

Now that you’ve got all your relevant documents, it’s time to get creating. Follow the steps below to produce a financial projection for your SME.

1. Project your sales

When making a financial statement, projecting your future sales should be your first port-of-call. This is because once you’ve created your sales projections, it’ll be easier to produce all the other documents you need for your final financial projections.

To create a sales forecast, you should record all the products and services you sell, note down the price of each product or service and calculate how much of each you expect to sell over a given period. Then multiply the number sold by the price of each unit.

Separately, you should estimate the price of producing each product or service and multiply this by your projected sales volume. You then subtract this figure from your total sales estimate, and this will give you a rough forecast of your future sales.

Since your sales projections are based on estimates, you aren’t required to have any historical financial data. However, if your business has been up and running for a reasonable amount of time, it makes sense to use previous transactions to forecast your future sales.

2. Produce an income statement

After you've projected your future sales, it's time to produce your income statement. As previously stated, your income statement is a financial document that displays your company's incomings and outgoings. To create your business's statement, you first need to decide on what period you'd like it to cover. This reporting period should depend on how long term your goals are.

After you’ve established this time frame, you need to come up with your gross profit by subtracting the total cost of goods or services sold from your SME’s total revenue. Then, you calculate your total income by taking your operating expenses from your gross profit. Once you calculate your total income, you simply take away the cost of interest rates and taxes over the given time period, and this will leave you with your net income.

3. Calculate your fixed costs

Now your income statement is nailed, you should work out your company’s fixed overheads. To calculate these regular business costs, you total the price of frequent outgoings like rent payments, mortgage payments, utility bills, insurance costs and operating expenses like marketing, accounting, licence and legal fees. If your business is already established, you can just simply use your previous financial data to create your future total.

Alternatively, if your business is in its early stages or has not yet launched, you can base your calculations on your competitor's figures, as long as their venture is a similar size and style to yours. You should, however, account for general variables, including interest rates, rent prices and general inflation.

4. Be realistic

By following the three steps above, you’ll be able to create detailed financial projections for your business. However, as we’ve already stressed, no financial forecast is completely accurate. Therefore, if your numbers sound too good to be true, it’s likely they are.

To avoid falling short of your future projections, it’s always best to air on the side of caution and be realistic about your figures when you’re pitching your business to lenders or investors. By keeping your figures realistic, you’re also more likely to pursue the right amount of funding for your business’s needs.

A good way to root your forecast, in reality, is by sticking to data as much as possible and by making conservative judgements when guesswork is involved. This should limit the number of variables and prevent potential disappointment down the road.

5. Update your projections regularly

If you’ve used our tips to create your initial forecast, most of the hard work has already been done. Your projections shouldn’t be understood as static statements. They should be dynamic calculations that respond to developments in your business.

Therefore, if your financial data changes significantly, it’s a good idea to revise your projections accordingly. This way, you’ll be able to gain a richer insight into the financial affairs of your company, and potential lenders and investors will never be presented with outdated or irrelevant financial documents.

PREPARE FOR THE FUTURE WITH KRIYA

Whatever stage of growth your business is at, financial projections can give you a clear insight into where you’re heading in the future. By equipping you with informed estimates, they take the guesswork out of cash flow planning and allow you to identify any areas where your SME might need work. This makes them a useful tool for any small business owner.

If the results of your financial forecast concern you, don’t worry. By recognising potential cash flow issues early, your business can put financial safeguards in place before funds dry up. For business owners looking to protect their SMEs cash flow ahead of time, Kriya might be able to help.

Kriya offers a range of solutions from flexible loans to invoice financing to help you take control of your business’s funds. We don’t believe in unnecessary fees, and our amazing customer service team is on hand to guide you through every step of the process. If you’re curious about how we could support you and your SME, learn more about our financing options here.

FREQUENTLY ASKED QUESTIONS (FAQ)

What is a financial projection? In simple terms, a financial projection is a prediction of your SMEs future cash flow. It includes a month-by-month forecast of your future revenue and expenses, and it's typically based on your business's previous financial data. This forecast is then used to help you, and external lenders understand how financially viable your business may be in the short and long term.

Why are financial projections important?

No matter what stage your business is at in its lifecycle, financial forecasting is important because it helps you to plan your budget and work out contingency options throughout financially challenging times. This is particularly useful for SMEs dealing with low or fluctuating demands or those recovering from the impact of Covid-19.

What is a balance sheet?

Otherwise referred to as a "financial portrait", a balance sheet is an overview of how much capital a business has, its net worth and its outstanding debts. It's an invaluable way for business owners to take stock of their incomings and outgoings. The financial statement includes information about a company's assets, liabilities, and, if relevant, shareholders equity.

What is an income statement?

Also known as a “profit and loss statement”, an income statement displays a company’s incomings and outgoings over a particular time period. To be specific, the document reports a business’s revenue, expenses, gains and losses to generate its net income. Income statements stand as a general measure of profitability and are typically created monthly or quarterly.

What is a cash flow statement?

A cash flow statement is a document that summarises the amount of money leaving and entering a business. They usually cover three things: a company’s operating, financing and investing activities.

How do I make a financial projection for my small business?

To make a financial projection for your small business, you need to create a sales forecast that includes an estimation of how many products and services you're expected to sell over a given time period. Then, you should create an income statement that should declare your company's net income. Finally, you should calculate your business's fixed costs and update these figures whenever necessary.

How can I make a sales forecast for my business?

To create a sales forecast, you should record all the products and services your business sells, note down the price of each product or service, and calculate how much of each you expect to sell over a given period. Subsequently, you multiply the number sold by the price of each unit. Separately, you should estimate the price of producing each product or service and multiply this by your projected sales volume. You then minus this figure from your total sales estimate. This will give you a rough forecast of your future sales.

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