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Why Financial Projections Are Important for Your Business and How To Make Them



Owning and operating a company of any size is no small feat. There are dozens of tasks that need your constant attention and only so little time in the day to accomplish them all. For this reason, it’s important that you prioritize responsibilities and delegate duties accordingly. Whether you tackle the chore on your own or hand it off to someone else, you do not want to fail to make financial projections for your business.


The Importance of Financial Projections

A financial projection is precisely what it sounds like — a forecast of your business’s expected expenses, revenues and cash flows over a given time period. Making forecasts on a monthly, quarterly, or annual basis is important for a few reasons. First and most obvious, it can help you better manage your cash flow and plan and make changes accordingly. It can also give you a big-picture overview of your finances, which can enable you to time large expenditures, so they coincide with times of significant cash inflow.


Financial projections can also help you attract lenders, investors, and shareholders. By giving a detailed overview of how and when your company receives and spends money, you may position your enterprise as a responsible and worthwhile investment.


Finally, projections can give you an accurate estimation of how much your business will owe in taxes at the end of the year. Bear in mind that most states require companies to produce financial reports on an annual basis and to pay the anticipated amount of taxes on a quarterly basis. Failure to do both could cause your state to impose fines and levy other penalties, including revoking your right to conduct business.


How To Create Financial Projections

Creating financial projections is more of an ongoing responsibility rather than a one-and-done type deal. However, it requires three main steps:


  • First, gather all your past financial statements to forecast expenditures, income, and balances.

  • Next, decide which method you will use to make projections — the research-based method or the historical approach.

  • Finally, create your pro forma income statements, which should detail everything from your actual income to your sales revenue to your everyday expenditures.


Ideally, you will base your forecasts on all the economic information on your business that you have. Make sure to include important financial reports in your projection, including cash flow analyses, income or profit-and-loss statements, and balance sheets.


Ideally, you will work with an accountant to create your predictions. However, if you do plan to do it on your own, use a template. Or, consider going back to school for your MBA in accounting so that you can grow or sharpen your financial skills, develop business acumen and learn proper accounting methods, such as how to maintain balance sheets. If you attend an online school, you can enjoy ample flexibility to run your company and spend time with your family, all while going to school.


Using Software to Simplify Projections

As with most things these days, software exists to take the headache out of creating and maintaining financial projections. Many programs are free, but those that do come with a fee are often very affordable.


Creating and maintaining financial projections for your business is not the easiest task, but it’s important. Use software, hire help or seek an accounting degree to make it easier on yourself.


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By: Naomi Johnson, lifebasedbusiness.net

Image via Pexels



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