4 types of financial projections to guide your small business in 2014
You started your small business to follow your entrepreneurial dreams, but great ideas alone don't ensure a successful enterprise. A key underpinning of success is the ability to make solid financial projections that give an accurate picture of your business’s future and its predicted health. And with the New Year approaching, every small business owner needs to find time to focus on projections.
Financial projections are based on compiling the internal and external accounting data you already use in the day-to-day management of your business. Most accounting software programs have the capability to build out financial projections using items such as your cash flow, sales history and expense spreadsheets. When analyzed together, these sources can help build out several types of forward-looking documents that help guide your company toward its business goals.
Developing and using financial projections is a core tenet of the Goldman Sachs 10,000 Small Businesses program, as it is critical in helping you build a sustainable and thriving small business.
Below are four types of financial projections you should consider creating:
A 12-MONTH BALANCE SHEET
This is a document that looks at the big picture and takes into account factors such as sales targets, cash balance and other key monthly metrics to build out a holistic view of your business, including what you owe and what your business is worth. This is especially important if you are looking to secure a cash infusion from investors or extend credit with your bank.
A SALES FORECAST
Your sales forecast predicts monthly sales for the coming year. It provides a breakdown of each item you sell and an estimation of how much of that product you expect to move. Knowing this can help you better allocate resources. For example, if you are projected to make 30% of your annual sales in September, you may want to proactively increase manufacturing starting in June.
A CASH FLOW FORECAST
Another critical type of financial projection is a cash flow forecast. This is a weekly and monthly breakdown that focuses on the capital coming in and out of your business. It’s the first line of defense against any financial problems your business might face and provides an indication of its financial health. Regular review can help you spot potential issues that may jeopardize your solvency, such as a late-paying customer or vendor, and makes it possible to take action before it’s too late.
AN EXPENSE BUDGET
A projected expense budget predicts how much it will cost you to meet the 12 month targets you have set. It also serves as a valuable marker to ensure that you are not over-spending on one business area at the sacrifice of another. Also, separating out your fixed and variable costs shows you where you can cut costs if needed. For instance, you probably have limited flexibility with your rent payments, but maybe you can renegotiate your vendor payment terms or consider a more economical inventory management system.
Taking the time at year-end to establish financial projections for the upcoming year is a critical step toward making better business decisions and ensuring that you are on track toward achieving your entrepreneurial goals.