Updated: Jan 16
Your financial statements are not the same as a financial plan or projections.
Historical Financials are important and may serve as a baseline. Financial projections will serve as an early warning system, assist in anticipating dips in cash flow, determining the requirements for financing, and determining the ideal project timing. Without a good financial planning, the company ends up getting lost in the middle of sales and investment operations, which creates problems such as indebtedness and lack of meeting deadlines.
Additionally, it provides you with a financial monitoring tool, allowing you to evaluate your progress and quickly avoid problems. Follow these six steps as you prepare your financial projections.
1. Gather Historical Data
One of the components of financial forecasting involves analyzing past financial data, as explained. As such, it is important to gather all relevant historical data and records. This allows the team to set up baselines as well as identify ongoing problems that requires recalibration as you create the projections.
It's important to ensure that you gather all required information as your financial forecast's results will be inaccurate if you exclude relevant data.
2. Strategic Plan Review
At the start of the new year, you should consider what you want to accomplish and ask yourself the following questions:
Are there expansion opportunities?
Do I have the necessary tools and resources to make the opportunities happen?
Do I need to hire more employees?
Do I require additional equipment or capex?
How will my plan affect my cashflows?
Will I require financing? If so, what is the magnitude and timing
The next step is to estimate the financial impact over the next year, including major capex or working capital requirements to be spent.
3. Create Financial Projections
Build up from your most basic elements - quantity and pricing by product or channel. A deep understanding of unit economics is key to be able to plan for the future.
Create monthly financials by recording your anticipated income based on sales forecasts and anticipated expenses for labor, supplies, overhead, etc. You may want to consider weekly projections if you anticipate the businesses to demonstrate very tight cash flows. Enter the costs associated with the projects you identified in the previous step.
Top line growth is always attractive, but without gaining efficiencies down the P&L a business cannot be sustainable over the long run. Don't assume that sales will immediately result in cash, make sure to incorporate receivable days according to your historical tracking.
Also, make a projection for the balance sheet and a statement of projected income (or loss). Include probabilistic, optimistic, and pessimistic scenarios in your projections to help you anticipate the effects of each one.
Be aggressive but realistic!
4. Arrange Financing
By utilizing your financial projections, determine your requirements for financing. Discuss your options in advance with your financial partners. Capital providers will feel more comfortable with your solid financial management if your projections are well-prepared.
5. Contingency Planning
What would you do if your financial situation suddenly got worse? It's a good idea to have cash on hand in case of an emergency before you need it. You could keep a large cash reserve or use your credit line, if available, to your advantage.
Throughout the year, monitor and contrast actual results with projections to determine whether you are on track or need to make adjustments. Monitoring enables you to identify financial issues before they escalate and prioritize actions to address or reverse issues.
7. Appropriate Help goes a long way
Hire an expert to assist you in creating your financial projections if you lack expertise.