FINANCIAL PROJECTIONS: HOW TO DO THEM, IMPORTANCE, EXAMPLE - DUDAS - 2024

The financial projections are a forecast of future revenues and expenses. Typically, the projections will take into account internal historical data and will also include a forecast of the factors involved in the external market. In general terms, financial projections should be developed both in the short and medium term.

Short-term financial projections represent the first year of business, typically described month by month. Medium-term financial projections generally represent the next three years of activity, which are summarized one by one.

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Creating financial projections for a business startup is both an art and a science. Although investors want to see cold and hard numbers, it can be difficult to predict financial performance in the next three years, especially if funds are still being raised.

In any case, short- and medium-term financial projections are a necessary part of the business plan if investors and lenders are to pay close attention to the business.

How to make financial projections

When preparing financial projections, the most important thing is to be as realistic as possible. The revenue the business will generate should not be overestimated or underestimated.

All projections must be broken down by months for at least one year. If you choose to include additional years, they generally do not need to be more detailed than by quarters for the other year, and then annually. All financial projections must contain these financial statements.

-Statement of income

It shows the income, expenses and earnings for a particular period. If these projections are being developed before starting the business, it is in this state that you will want to perform most of the projection. The key sections are as follows.

Income

It corresponds to the amount of money that will be obtained with the services or products that are going to be provided.

Expenses

Make sure to take into account all the expenses that the company will encounter, including direct ones, such as equipment rental, materials, employee salaries, etc., in addition to general and administrative expenses, such as legal and accounting fees., advertising, bank charges, insurance, office leasing, etc.

Expenses can be summarized by department or major category of expense. Line item details can be kept for budget.

Total winnings

It is the amount corresponding to income minus expenses, before paying income tax. Subtracting the income tax from the total earnings will yield the net profit.

-Cash Flow

It serves to demonstrate to a loan entity or investor that it has a good credit risk to be able to pay a loan granted to the company. The three sections are as follows.

Cash income

Make sure that only cash sales that will be cashed are counted and not those that will be credited.

Cash disbursements

The general ledger should be reviewed to make a list of all cash expenses expected to be paid in the period.

-Balance sheet

This projection presents a photograph of what the company is worth at a defined moment. All the financial data of the business are summarized in three classes: assets, liabilities and equity.

Make sure that the information on the balance sheet is a summary of the information that was previously presented in the income statement and also in the cash flow projection.

Assets

Assets are all tangible objects that have a financial value and that the company owns.

Passives

Liabilities are all debts, both short and long term, that the company owes to different creditors.

Heritage

It represents the net difference between the total assets minus the total liabilities of the company.

-Final analysis

To complete financial projections, a quick analysis of the information included must be provided. It should be thought of as an executive summary, providing a concise summary of the numbers that have been presented.

Importance

Planning and working on a company's financial projections each year could be one of the most important things to do for a business. The results, the formal projections, are often less important than the process itself.

Strategic planning allows you to "put out" the daily problems of running the business, take stock of where the company stands, and also set a clear course to follow.

A routine screening also supports the company in struggling with change, both outside and within the organization.

By constantly reassessing your competition, markets, and company strengths, opportunities and problems can be better recognized. There are three good reasons to project finances, which we will see next.

Translate the company's goals into specific goals

Clearly define what a successful outcome implies. Projection is not merely a prediction, it implies a commitment to make specific results happen and to set milestones to measure progress.

Provides a vital feedback and control tool

Variations in projections provide early warning of problems. When variations occur, the projection can provide a framework for determining the financial impact and effects of various corrective actions.

You can anticipate problems

If rapid growth creates a shortage of cash due to investment in accounts receivable and inventory, the projection should show this.

If next year's projections depend on certain milestones during this year, the assumptions should explain it.

Example

The financial projections of the ABC company for the period 2018-2020 are presented as follows.

Sales projection

The sales growth rate for the projected period is entered in order to generate revenues, the cost of merchandise sold, and the gross margin for subsequent years.

Projection of operating expenses

This projection will be calculated using the assumptions for each of the expense items.

Income statement projection

It is created by linking the values ​​in the sales projection and the operating expense projection.

Balance sheet projection

It is constructed by taking the current year's balance sheet and calculating the values ​​for subsequent years using projections of accounts receivable days, inventory days, accounts payable days, and capital expenditures.

Cash flow projection

It is constructed using the figures calculated both in the income statement, as well as in the balance sheet and the supporting tables.

The ending cash balance will be linked back to the balance sheet, which is shown as cash on current assets.

References

1. Megan Sullivan (2019). Understanding Financial Projections And Forecasting. Intuit Quickbooks. Taken from: quickbooks.intuit.com.
2. Entrepreneur (2019). Financial Projections. Taken from: entrepreneur.com.
3. Daniel Richards (2019). Writing a Business Plan-Financial Projections. The Balance Small Business. Taken from: thebalancesmb.com.
4. CFI (2019). Financial Projection Template. Taken from: corporatefinanceinstitute.com.
5. The Business Plan Store (2019). Business Plan Financial Projections. Taken from: thebusinessplanstore.com.