How to Make Accurate Financial Projections
After all, you’re an entrepreneur — things change.
For example, a seemingly small project takes longer than expected, or you could experience an unexpected spike or lull in sales. The key to making accurate financial projections, though, is to understand the big picture to get better at anticipating the effects of unexpected events.
Fortunately, that’s not as hard as you think – especially if you read this post, which will cover the steps you should take to make accurate financial projections for your business.
4 Tips for Making Financial Projections for Your Business
1. Compile and Categorize Upcoming Income and Expenses
The first step in making financial projections is to compile all your current income and expenses, then categorize. This should include rent, taxes, insurance, inventory, and other consistent costs. The best way to categorize will depend on your business, but we’ll run through a few best practices.
Included in your incomes and expenses should be money that you’ve earned which hasn’t come in yet and expenses you’ve incurred that you haven’t paid yet. This is known as accounts receivable and accounts payable, respectively, and should be categorized as such. By categorizing this way, you’ll be able to project cash flow more accurately.
Depending on the nature of your business, you may have several different streams of income from, for example, various clients. If you do have different sources of income, you should categorize that income by source. That way, you’ll have a clear idea of what would happen if one of those sources of income was lost or negatively impacted.
Finally, you should organize expenses based on whether they’re fixed or variable. For example, if you sell products, you have certain costs that go up or down depending on how many products you sell. Those costs would be variable. Fixed costs, however, are what you pay regardless of anything else, such as rent and insurance.
2. Factor in the Effects of Seasonality
Even if you don’t typically think of yourself as a seasonal business, look back on your time in business and you’re likely to find patterns in sales volume.
While you should remember that past performance is not a perfect indicator of future performance, it’s worth considering. This is especially true if you have a relatively long track record that you can review. By doing so, you’ll be better educated about your business, which will help you make important assumptions about unforeseen expenses or income.
3. Calculate Debt
The cost of your debt may fluctuate based on cash flow, so it makes sense to make income, expense, and cash flow projections first. Once those aspects are accounted for, you can project how much of your balance you’ll be able to pay down. For example, if you’re carrying a balance on your credit card and your cash flow only allows you to pay a portion of the balance, you’re going to have to pay more interest. For accurate projections, you’ll need to consider the expense of any interest accrued on your debts.
4. Leave Room for Unforeseen Expenses
At this point, you’ll have absorbed a lot of information about your business’s income, expenses, cash flow, and seasonal fluctuations. That information is important to have in the back of your mind because it’ll help you make assumptions about unforeseen expenses. After all, you can’t predict exactly what’s going to happen, but you can predict with relative certainty that something will happen.
Depending on what you’ve seen in your projections, you can make your best guess as to how much you project unforeseen expenses to cost. To give yourself even more cushion, run your numbers based on a variety of different scenarios so you have a range of projections.
Conclusion: Don’t Expect Perfection
The best financial analysts in the world get projections wrong all the time.
The fact is, so will you, but that’s okay. The point is not to be perfect, but to make projections that help you make well-informed business decisions. If you follow the steps outlined above, you’ll get close enough that your projections will serve this purpose well.
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