A Business Owner’s Guide to Creating Accurate Financial Predictions
Accurate financial projections lay the groundwork for successful businesses. Creating a financial projection involves reviewing past performance, creating future goals, and developing a roadmap for continued business growth. In this article by Thrive Directories, we’ll explore in-depth the importance of financial projections for your business and the best techniques to create them.
Why are Financial Projections Important?
Financial projections are important for internal and external stakeholders. For instance, reviewing past financial projections will provide a clear idea regarding business performance and the completion of goals. Additionally, it will highlight underperforming areas from which resources can be diverted toward profitable projects. Moreover, all businesses are required to file an annual report which should include accurate calculations of their revenue, expenses, and tax liabilities. Failure to file an annual report can lead to fines being levied on the business and in some cases cancellation of licenses.
Creating an annual report single-handedly can be a cumbersome process, hence, consider working with professional annual report services who will ensure your business meets all legal requirements.
How to Create Financial Projections?
Before you start work on creating statements, compile the following details:
- Inventory turnover ratio
- Operating costs
- Depreciation schedule
- Accounts receivable and payable schedule
- Interest rates on debt instruments
- Capital expenditures
- Income tax rate
Using the abovementioned metrics, you can start preparing the three main financial projection documents for the business, which are:
1. Income Statement
An income statement (also known as the Profit & Loss statement) presents the revenue generated by a business in comparison to the expenses incurred, over a fixed period. Key metrics to include are operating expenses/income, non-operating expenses/income, pre-tax income, administrative expenses, and gross margin. An income statement can help owners and lenders determine whether the business is profitable or incurring losses.
2. Cash Flow Statement
As the name suggests, a cash flow statement tracks the in and outflow of cash for a business. As reported by Chron, this statement helps businesses to maintain optimum levels of cash to manage daily expenses, make necessary investments and safeguard from unforeseen circumstances. Metrics to include are divided into 3 categories:
- Operating Activities: Net income, depreciation, accounts receivable/payable, and inventory.
- Investment Activities: New acquisitions (machinery, office space, and other assets) and capital expenditures.
- Financing Activities: New debt, interest payments, and dividends paid (if applicable).
3. Balance Sheet
As reported by SCORE, a balance sheet provides a summary of your business’ worth at a given point in time by comparing the following:
- Assets: Equity and debt securities, inventory, accounts receivables, and cash and cash equivalents (treasury bonds, certificate of deposits, and other investments)
- Liabilities: Debt payments, wages, and other expenses such as rent, utility bills, and taxes.
Publicly traded companies will need to include shareholders’ equity and retained earnings as part of their balance sheet projection as well.
How to Simplify Business Finances?
Creating projections is not a one-time activity, and as a business owner, you’ll need to revisit finances whenever needed and make prompt changes. For instance, if your business is bleeding cash, creating a cash flow statement will be required to adjust expenses, and improve receivables. Additionally, balance sheets and income statements are key documents of your annual report which need to be accurately updated depending on business performance.
If finance is not your forte, consider developing expertise by pursuing an online certification in accounting, business finances, or financial modeling & valuation analysis. An online degree will not only be cost-friendly but provide the benefit of a flexible schedule and allow you to strike a balance between being a student and an entrepreneur.
Additionally, rather than spending hours creating financial forecasts by hand, utilize an accounting software that has the functionality to:
- Handle complex calculations to create metrics
- Automate the process of managing invoices to improve accounts receivables
- Calculate tax liabilities
- Create financial statements on demand
Financial projections are a great medium through which businesses can ascertain not only where they stand in the present, but also in the future. Creating financial statements provides insights into all facets of the business and helps stakeholders make informed decisions and remain compliant with reporting requirements.
Guest Blog Post Author: Kelli Brewer