How to Make Realistic Financial Projections for Your Business
The Financial Statements You Need to Create Financial Projections
As a small business owner, you need financial statements to create financial projections.
These forecasts take into account current trends and your expectations to make ambitious
yet attainable financial goals for your business. At the very least, you need to produce
projected financial statements that summarize your projected balance sheet and income
statement.
Typically, you derive financial projections from the following documents:
• Sales forecast
• Payroll costs
• Operating expenses
• Balance sheet
• Income statements
• Cash flow statements
• Financial ratios
• Amortization and depreciation costs
• Cost of goods sold
These documents are all closely related, so changes in one document will affect others.
They're all essential in creating comprehensive financial projections that include elements
such as a statement of cash flows, growth projections, and expense projections.
How to Create Financial Projections for Your Small Business
You need estimates or existing financial data to create financial projections that
realistically forecast your business’s future revenue and expenses. Good projections often
feature multiple scenarios that let you determine how making certain changes, such as
reducing operating costs (including labor), will affect your business’s profitability.
At its core, a financial projection is an educated guess. Nonetheless, researching extensively
and seeking expert advice improves the accuracy of the forecast. Potential research sources
include government sources, industry associations, and publicly available financial data
from similar businesses.
Periodically compare your projects with your actual financial statements to see if your
results match your expectations. If your projections were too pessimistic or optimistic,
adjust them accordingly.
Using Proper Inventory Management to Create Financial Projections
Small business owners eventually learn that proper inventory management affects their
business’s success. It improves margins, safeguards brand reputation, and ensures
customers are satisfied. Inventory forecasting—as a part of the inventory—is also an
essential factor in your financial projections.
Proper inventory management ensures you have enough inventory to fulfill future orders.
It also reduces the cost of warehousing and labor. Today, business owners use inventory
management software for such tasks as forecasting labor needs and automating reordering.
Good inventory management also makes your entire production cycle more efficient.
Choosing the right software ensures proper inventory management because it centralizes
your inventory data across multiple sales channels. Consider the size, complexity, and
product catalog of your business when selecting inventory management software. A stand-
alone inventory management software is adequate for some businesses, while others may
need an end-to-end fulfillment solution.
Periodically review trends such as your stock counts and inventory turnover to improve
the accuracy of your inventory forecasts. Doing so lets you make more accurate financial
projections in the short and long term, as well as determine if you need to secure additional
financing. For the latter, look into MasterPayUSA’s Biz2Credit program.
Learn Accounting Skills to Improve Your Business’s Financial Health
Accounting skills facilitate the success of your small business. With these skills, you can
forecast your company’s financial health, monitor its cash flow, identify growth
opportunities, and ensure you’re tax compliant.
These skills let you interpret the financial statements you need to create financial
projections. Furthermore, accounting skills ensure you get the best out of any software you
use for inventory management or general accounting. Even though the software automates
these processes, you'll understand the concepts behind the calculations.
The most effective way to learn is to take an online accounting course, preferably one that's
tailored to helping small business owners manage their business accounts effectively.
Proper accounting keeps your financial data accurate and up to date. It also ensures your
financial projections are realistic. In turn, these projections inform intelligent growth
strategies. Work with MasterPayUSA to stay on top of payroll and tax reporting and keep
your financial projections healthy throughout. Learn more here.
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