Getting your business off the ground takes time and effort, and it also entails financial costs. That’s why establishing a business plan with financial projections is the key to managing your finances successfully, especially in the first two years.
These projections play a pivotal role in forecasting your financial success; they also show bankers and investors how you will repay your loans and investments and use your money. These projections help you identify your financial needs and address any concerns related to your production plan, major expenditures, and your cash flow.
Initially, give or take, some of your numbers will be guesses because it will be hard to predict your financial forecast when you are just starting. Nevertheless, as time goes by, you will be more adept at forecasting your numbers, especially when your business takes off. So, how can you create successful financial projections for your business? Consider these six practical steps to create a tangible financial forecast for your start-up.
Project your Spending and Sales
Before you launch your company, list your key expenditures that will play an important role in getting your company off the ground. For starters, include things like recurring expenses, i.e., salaries, rent, gas, insurance, marketing, raw materials, maintenance, and so on. Don’t forget to include one-time purchases like website design, vehicles, and machines like computers, and others that you will use. Once you have listed all this on an Excel sheet, you can then create a sales forecast and use it to anticipate your monthly and weekly revenue.
Create Financial Projections
In our day and age, there are software tools specifically designated to help you create financial projections; all that’s left for you is to enter the numbers. You can take advantage of such tools to prepare your annual projected income or to forecast your financial future. It is important to enter these figures as cash only when you expect to get paid based on the industry average or prior experiences of your team.
Determine your Financial Needs
The financial projections you create will play an important role in helping you identify any shortfalls in your business or if your start-up needs more financing. Moreover, these documents that you create will be a vital building block that helps banks gauge whether you are eligible for a business loan.
Use the Projections for Planning
Your financial projections allow you to foresee the financial impacts of your business ventures and the overall impact it has on your start-up. For example, your projections will enable you to analyze different aspects of your business. You can gauge and examine new pricing methods; you can also analyze your billing structures to see the impact of collecting bills more quickly. You can also plug in various numbers to see how such decisions will impact your overall finances.
Plan for Contingencies
The financial projections you create serve another important role; they help you plan in case of a crisis. Creating a contingency plan ahead of time is a wise move in this case. Ask yourself an important question: What if an unexpected event happens that throws my finances off balance? Do I have enough cash for 90 days of operation, including cash in the bank and or in the line of credit? Doing so will save you a lot of hurdles, especially when it comes to paying your employees who depend on your salary.
Monitor
It is imperative to monitor your projections as your business operations evolve, compare them against your actual results, and assess whether any adjustments are needed. This shouldn’t be a one-time task, but an ongoing one. Regularly monitoring your cash flow helps you learn more about your finances and allows you to address any shortfalls if and when they happen early on.
David Messiha | Staff Writer
