Now that we are into the new year, have you set out your business goals? Have you created your sales targets and financial projections for 2018?
As is well-documented, we are much more likely to reach our goals if we simply write them down. With the act of committing pen to paper and writing down specific goals, we dramatically increase the likelihood of meeting our goals, whatever they may be.
What are Financial Projections?
Financial Projections are a model which shows the future financial picture of your business.
They can help you clearly see the financial condition of your business and help you make good decisions on where to spend your budget and when you will spend it. Projections are a way of keeping track of what is coming in the door of your business (revenue or sales) and what you are spending (expenses), and making sure you are not overspending what you have or can generate in terms of revenue.
With experience, you will find that your projections will soon begin to very precisely reflect the day‐to‐day financial life of your business. There will always be unexpected bills and costs, but with some experience and a few tricks, you will develop the skill to be surprisingly accurate more often than not.
What components are included in good financial models?
What are the 5 key elements of projections?
How do you make a realistic forecast of future revenue?
How Do Financial Projections Benefit Our Organization?
By working through this process, you will find that there are many different benefits from this exercise.
Specifically, here are 5 benefits you might appreciate. Good financial forecasting:
Leads to more profits
Helps get the most from the money you have
Helps anticipate future decisions
This is an important skill that improves with practice
Helps you predict and measure profitability (and cash flow) in a reusable model
There are several specific ways that forecasting helps you manage your business.
Help you budget purchases (investments) and costs (expenses)
Communicate vision of future (and expectations) to partners, staff, investors and lenders
Plan additions to staff, product development and marketing spending
Reduce stress by having a view of money owed to others and how much cash is (or will be) available to make payments
Reduce money surprises.
The first and biggest hurdle of beginning this process is a reluctance or uncertainty in trying to predict the future. How can we possibly know what is going to happen in the future?
This is no secret, you can’t predict the future. However, that is missing the point entirely. Projections are a tool to reflect on paper your goals, plans, strategy and your vision of your business.
There is real value in going through this exercise. You may be surprised at the insight gained during the process and what the numbers reveal to you.
While projecting operating expenses is relatively straight‐forward, developing revenue projections is more of an art.