How to Make Financial Projections for Your Small Business
Do you want to start your own small business but aren’t sure if it will be successful? Financial projections can help answer that question and show you how your business might do under different scenarios. But creating realistic financial projections takes time and knowledge that many small business owners don’t have. If you’re interested in understanding financial projections and using them to run your business, then this article presented by Goeins-Williams Associates will give you what you need to get started on the right track.
Why Create Financial Projections?
One of your main goals as a small business owner is to stay in business — to be profitable and avoid losing money. And financial projections can help you do that. They show you what might happen in your business over time, providing a realistic picture of how your company is likely to perform and whether it’s on track (or not) for success.
What Information Goes Into Financial Projections?
Financial projections are predictions of your company’s income and expenses over time — usually three years. In your projections, you’ll include everything from revenue and expense projections to important metrics like cash flow and break-even points. The three main parts of a financial projection are:
- A cash-flow statement
- An income statement, and
- A balance sheet
Below is a closer look at these three financial documents.
Cash Flow Statement
A cash flow statement tracks where your money comes from and where it goes. It’s a financial snapshot of your company’s liquidity — how much cash you have (or don’t have) at any given time. The three main elements to cash flow are:
- Operating activity
- Investing activity, and
- Financing activity
This financial statement shows how much money your business will make, spend, and earn during a set period (usually a year). The income statement shows whether you’re likely to make money or lose money in that time frame. The four key elements here are:
- Gains, and
The balance sheet is a snapshot of your business’s financial condition at a specific point in time. You add up all your assets and subtract all your liabilities, and then divide by two. The key elements for the balance sheet are:
- Liabilities, and
- Owner’s equity
How Do You Make Your Own?
There are many software programs designed to help you create your own projections, such as Xero, for example. Most accounting software packages come with fairly robust projection features, so be sure to read up on each option and choose one that best suits your business needs.
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Improving Your Business Performance
Financial projections are a picture of what your company will look like over time — and they can also help you determine if your current business plan will work or not. Financial management is essential to overall business performance and long-term sustainability.
This article is written by Maria Perez. Learn more about Ms. Perez by visiting her website at businesspop.net.