Businesses don’t succeed by luck. Every successful business has a carefully thought-out strategic plan that is well executed. But how does a business owner know if a strategic plan is worth pursuing? This is where financial projection comes in. It tells you how profitable your strategic plan is and the challenges you will expect to see. Businesses use it as a tool to guide their decisions, and it is a key building block to running a successful business.
Financial projections are forecasts of income and expenses, cash movements and balance sheet. They show what you intend to do with your money and how you will grow. They also help identify financing needs, optimize pricing, plan hiring, time major purchases, and track your cash flow.
It’s normal for some of the initial numbers to be rough guesses since revenue is generally hard to predict. Here are the 5 steps you can follow to create financial projections for your strategic plan.
1. Forecast revenue and expense
As you create your strategic plan, list the key expenditures you will make to get the plan started and the subsequent costs to operate. This would include one-time purchases such as computers, equipment, and webpage design. Don’t forget to include recurring expenses like commercial rent, salary, insurance, marketing, etc. Conducting a detailed research on industry spending will enhance the accuracy of your projection.
For revenue, create a sales forecast and use it to project upcoming monthly revenues. A careful study of your potential market will help you arrive at realistic numbers.
2. Prepare the projections
Plug the numbers into a projected income statement to show monthly income and expenses for the first year of implementing your strategic plan. For the second and subsequent years, you can make quarterly or yearly projections.
Use your projected income statement to create cash flow projection. Don’t assume sales equal cash in the bank right away. Unless you are in the retail sector, there is usually a time delay between sales and cash collection. Enter them as cash inflow only when you expect to get paid based on your company’s credit policy, industry averages, and prior business experience.
The same applies to expenses. Cash do not leave your bank until you pay your vendors and credit card bills. Payment terms and timing of payments should be considered to create an accurate cash flow projection.
3. Figure out your financial needs
Financial projections will help you see if your strategic plan is realistic, whether you’ll have any shortfalls and the financing you may need. The documents will also be vital for raising capital from investors and building a case for business loans.
4. Run different scenarios
Strategic plan usually won’t turn out exactly the way you envisioned. So it’s best to include various scenarios such as optimistic, most likely, and pessimistic. Create a financial projection for each will help you foresee the financial impacts of each scenario.
Financial projections can also be used to analyze the impact of different strategies for your business. What if you charged a different price? How is cash impacted if you were able to collect outstanding invoices more quickly? What if you opted for more efficient technology? Plugging in various numbers shows how each decision affects your company’s finances.
5. Track your progress
As you execute your strategic plan, compare the financial projections against actual results to see if you’re on target or need to make changes. Tracking your progress helps you learn about your company’s cash cycle and identify looming cash shortages early on, when they’re usually easier to resolve.
Don’t implement an idea without having a plan in place. Create financial projections for your strategic plan will greatly improve your chances of success