As a small business owner, understanding how to expertly manage your finances is as much an art as it is a science. It's a balance of numbers and intuition, understanding how to predict your financial future based on your current earnings and potential investments.
Preparing financial projections may feel overwhelming if you've never attempted them. A small business accountant can help you understand financial projections and equip you with the tools and resources you need to save money, and offer professional tax-planning advice.
What are Financial Projections?
Financial projections are an essential component of managing a successful small business. What may seem like a challenging task is, in reality, significantly beneficial for any small business owner as these projections allow you to predict future expenses and estimated revenue.
There are two types of financial projections businesses can make - short-term and long-term. Short-term financial projections are typically a year of data and can be broken down monthly. Long-term projections are commonly covering the next three to five years and are often used when entrepreneurs need to attract new investors.
What to Include in a Financial Projection
In any business plan, there should be a detailed financial section outlining predicted sales, expenses, current profits and more. These details are essential to show your investors, partners, or your accountant the future of your business.
1. Create Sales Projections
Your sales projections are one of the key components of any financial projections. If you have an understanding of your current market and your competitors, you can develop an accurate sales projection using current industry pricing and any past sales you have.
Realistically, your sales projections should be divided by monthly sales. There should be sub-entries included detailing the types of items or services being sold, price points, and the amount you expect to move each month. As you acquire more sales, you'll be able to transfer your sales projections to quarterly earnings rather than month-by-month.
2. Predicted Expenses
If you have previous months to refer to, predicting your expenses will be easier than small business owners going into their first year. The important thing to remember is to look at customer buying patterns and industry trends, so you can predict how much inventory you'll need as accurately as possible.
Creating an emergency fund is also a helpful tool that you can include in your expenses - this will help ensure you're not dipping into other accounts to cover any unexpected damages or inventory changes.
3. A Cash Flow Statement
Depending on how long your business has been running, your cash flow statements may include more projections than hard data. The idea is to break down how much revenue is coming to your business monthly and compare it to the amount of money going out. Your sales forecast and predicted expenses will help you determine the appropriate number.
4. Create a Profit and Loss Statement
This data includes the findings from sales projections, your expenses, and your cash flow statement. With this information, you can project how much profit your business will likely bring in and any projected losses. Ideally, it's important to create a figure for your yearly projections and for long-term, three-year periods.