By V. Lee Henson
Guest Contributor: Jennifer Scott
August 16, 2023
Financial projections are important. In fact, they are crucial to your survival. According to data from the IFAC, only one in three small businesses makes it to the 10-year mark. Low financial literacy, lack of financial discipline, and an inability to identify key metrics contribute to this failure. Having realistic financial projections on hand allows business owners to better control their money, make informed business decisions and, thereby, continue to thrive.
Below, AgileDad explains why you need accurate financial projections for your business and offers some advice on how to create them:
Why Financial Projections Matter
Financial projections are a realistic estimate of your business’s future financial revenue and expenses, short-term and long-term. They are based on existing accounting data. This information is useful in various ways:
- Budgeting: You can better budget for expected expenses. You can identify problem areas and limit cash flow crunches.
- Growth opportunities: Auditing existing data and understanding future revenue projections allows you to identify areas where you could expand (like a high-performing sales channel).
- Wooing investors: For investors, money matters. You can use financial projections – specifically highlighting the expected growth – to sell your business to them.
- Applying for loans: If you’re applying for a startup business loan, the first thing financial institutions like banks want to see is your financial projections as part of your business plan.
How Do You Create Financial Projections?
First, understand that there are different types of financial projections. Bedford Consulting lists the four most common types: sales forecasting, cash flow forecasting, budget forecasting, and income forecasting. To create said financial projections, you need three financial statements: a balance sheet, a cash-flow statement, and an income statement.
Financial projections are made monthly for the upcoming year and then quarterly or by year for the next two. For established businesses, you use existing (historical) data to create projections. For instance, you check sales figures for the preceding three years, check activity month-over-month, and then create a sales forecast short-term and long-term. For yet-to-be-established startups, you rely on market research for data (by studying other businesses in your niche).
To create a “realistic” projection, you need to account for multiple factors – the health of the economy, local market conditions, the competition, changing client expectations, your growth initiatives, and more. It may be a good idea to estimate the growth rate both conservatively and optimistically. This would allow you to account for multiple scenarios – such as your forecast being too optimistic, too conservative, and on the money.
You Can Use Software to Simplify the Process
You likely already use bookkeeping software or financial software of some sort for your business. Most small business apps aren’t capable of creating financial projections. However, they can give you the raw data you need to create projections – such as conveniently producing a balance, a cash-flow statement, and an income statement for any given period. Furthermore, you can use spreadsheet software like Excel or Google Sheets to organize, note down, and, finally, share your forecasts. Last but not least, you can use data visualization features (like graphs) to better understand and present your findings.
Utilizing or Moving to a Dedicated E-Commerce Platform Can Help
When you’re operating an e-shop or offering online transactions, moving to an e-commerce platform can give you access to advanced financial data-gathering tools. You may be able to gain a better understanding and visibility of your finances to make accurate financial projections. Look for a platform that also has features such as rich content tools, inventory management, powerful analytics and data insights, flexible customization capabilities, and secure payment processing. Here are some options for commerce software.
Sharpen your accounting and financial skills
Successful businesspeople tend to have practiced accounting and financial skills – such as budgeting, understanding credit, bookkeeping, and responsible borrowing. It helps them build healthier businesses. You could learn as you go or, potentially, go back to school to earn a degree in accounting. The latter option would help you develop your business acumen and cover critical aspects like accounting, balance sheets, and making accurate financial projections. If you choose an online program, you could learn while working.
Making accurate financial projections is a skill you will have to hone with time. Using software and potentially moving to an e-commerce platform can make it easier to project accurately. Note financial projections are dynamic – meaning you should ideally update your forecasts as time goes by. Having up-to-date data will allow you to keep your stakeholders happy, not to mention make better business decisions for continued growth.
V. Lee Henson
V. Lee Henson is the President of AgileDad and has been recognized worldwide for his inclusive, pragmatic, humanized, psychology-based approach used to help organizations & teams achieve true business agility. Lee is the host of the Spotify award-winning “Agile Daily Standup – Business Podcast” and is the inventor of Rapid Release Planning, The Team John Concept, The POBAFATA Grouping, and Objective Stack Ranking Technique.
He has authored many white papers including The Seven Deadly Sins of Technical Debt, The Agile 12 Step Programs, Nine Powerful Ways to Keep Agile Teams Motivated, and The ART of Agile Estimating & Forecasting.
Disclaimer: The ideas, views, and opinions expressed in this article are those of the author and do not necessarily reflect the views of International Institute for Learning or any entities they represent.