How To Create Meaningful Financial Projections
Ditch the crystal ball and use these tools to help you predict the future.
Financial projections are like a report card for businesses. They tell you where the business has been...and more importantly...where the business is going. Having meaningful financial projections will help you make better strategic decisions in your business, and can help you secure the funds you need to carry out those decisions.
So how do you create financial projections? Many people think the process involves glancing into a crystal ball and interpreting whatever picture appears. But there's a lot less voodoo involved, and much more science.
Some aspects of the projections are easier to predict. For example, you probably know how much your insurance payments and facility rent will be every month for the foreseeable future. Payroll costs can be tricky if you're on a high growth track ; but if you're not, then this is also easy to predict - just use your current figures and move along. Knock these low-hanging-fruit numbers out right away. Now you're getting somewhere!
If you sell products at retail, or have any "raw material" inputs (e.g. food for a catering business), then just estimate these at 30% of your sales. It may not be entirely accurate, but that tends to be a great figure to start with. Then, look back at your historical costs and adjust the numbers to make them more in-line with your reality.
Sales can be the toughest to estimate. How much will people buy? Taking an average of your sales over the last six to twelve months is a great place to start. Then see how much your sales has increased month-to-month, on average, and use that to increase the monthly amounts. Make sure to adjust for any seasonal variations. It won't be perfect, but it will give you a fair estimation of how your business will look.
These are some of the the tools that we use when preparing financial projections for clients. The creation of projections is definitely a solid combination of art and science, and we are experts at doing this. If you need help creating your projections, don't consult your crystal ball. Contact us today for a free consultation.