por The financial projections They are a forecast of future expenses and income. Normally, the projections will take into account the internal historical data and will also include a forecast of the factors that intervene 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, which is typically described on a month-by-month basis. Medium-term financial projections generally represent the next three years of activity, which are summarized one by one.
Creating financial projections for a start-up business is as much an art as it is a science. Although investors want to see cold, hard numbers, it can be difficult to predict financial performance over the next three years, especially if funds are still being raised.
In either 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 company.
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How to make financial projections
When preparing financial projections, the most important thing is to be as realistic as possible. You should not overestimate or underestimate the income that the business will generate.
All projections must be broken down by months for at least one year. If additional years are chosen to be included, they generally do not need to be more detailed than quarterly for the other year, and annually thereafter. All financial projections must contain these financial statements.
-Statement of income
It exposes the income, expenses and profits for a particular period. If these projections are being developed prior to starting the business, this is the state that you will want to do most of the projection with. The key sections are as follows.
Income
Corresponds to the amount of money that will be obtained with the services or products that are going to be provided.
Bills
Be sure to account for all expenses that the company will encounter, including direct ones such as equipment rental, materials, employee salaries, etc., as well as 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 maintained for the quote.
total earnings
It is the amount corresponding to income minus expenses, before paying income tax. Subtracting the income tax from the total profit will give you the net profit.
-Cash Flow
It serves to demonstrate to a lending entity or investor that you have 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 collected and not those that will be credited are counted.
cash disbursements
The general ledger should be reviewed to list all cash expenses expected to be paid in the period.
-Balance sheet
This projection presents a photograph of what the company is net 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 contained in 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 are owned by the company.
Passives
Liabilities are all debts, both short-term 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 the 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 submitted.
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 “air out” the daily problems of running the business, take stock of where the company is, and also set a clear course to follow.
A routine projection also supports the company in dealing with change, both outside and inside the organization.
By constantly reassessing the competition, markets, and company strengths, you can better recognize opportunities as well as problems. There are three good reasons for projecting finances, which we will discuss below.
Translates company objectives into specific goals
Clearly define what a successful outcome entails. The projection is not merely a prediction, but involves 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 an early warning of problems. When variances do 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 cash shortage 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 that.
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 to generate revenue, cost of goods sold, and 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 in the operating expenses projection.
Balance Sheet Projection
It is constructed by taking the balance of the current year and calculating the values of the following years using projections of days of accounts receivable, days of inventory, days of accounts payable and capital expenses.
Cash flow projection
It is built using the figures calculated both in the income statement, as well as in the balance sheet and supporting tables.
The ending cash balance will be linked back to the balance sheet, which is shown as cash in current assets.
References
Megan Sullivan (2019). Understanding Financial Projections And Forecasting. Intuit Quickbooks. Taken from: quickbooks.intuit.com. Entrepreneur (2019). Financial Projections. Taken from: entrepreneur.com. Daniel Richards (2019). Writing a Business Plan—Financial Projections. The Balance Small Business. Taken from: thebalancesmb.com. IFC (2019). Financial Projection Template. Taken from: corporatefinanceinstitute.com. The Business Plan Store (2019). Business Plan Financial Projections. Taken from: thebusinessplanstore.com.