The secret of a good financial projection is knowing your business.
Creating financial projections is an important and often overlooked, part of small business ownership. It’s an essential component for managing your company’s growth and for determining what changes you need to make. Financial projections are also a crucial part of any startup’s business plan. Here are some tips on creating them accurately and effectively:
i. Know your numbers
Run financial reports to take stock of your current situation. You’ll most likely need the following information when forecasting future profits:
Revenue, broken down by product or service line if appropriate. Fixed expenses, usually consist of office rent, admin payroll and other fixed sum, recurring payments. Variable expenses, such as cost of labor, cost of goods sold and utilities. Finally, gross margin and operating profit margin.
ii. Know your market
Look for industry data and trends from which you can forecast regarding your expected level of sales. This is very important for startups that do not have historical data upon which they can build their financial projections.
iii. Build your forecast model
The secret of a good financial projection is knowing your business. Utilize the knowledge of your business processes and past financial data to create your forecast model. Using a spreadsheet or off-the-shelf business software such as QuickBooks will allow you quickly and easily build and run forecast.
vi. Run multiple scenarios
Running multiple scenarios is an excellent way to help you make strategic business decisions in the upcoming year. Consider multiple scenarios with different variables for pricing of your products and services, marketing and advertising spend, and staffing needs.
Developing new business strategies is useful for the business owners who are willing to invest in their business to make it more profitable in the new business environment.
Costa Shepin CPA, a regular contributor for WSBC Chicago weekend radio show, covering various tax related topics and answering audience questions.
