A prediction of your business’s future income and expenses, also known as a financial projection, is an important tool to help you run your business successfully. Still, many small business owners don’t use them because they don’t know how to create them.
This article shows why a financial projection is important and gives you a step-by-step guide to creating one for your business.
Financial projections help you develop goals and measurements to track your business’s progress. They can help you:
- Focus and prioritize your work and time
- Invest wisely in your business and avoid unnecessary expenses
- Find ways to grow and take calculated risks
- Avoid bad decisions and expensive mistakes that can put your business at risk
How to create financial projections
Step 1: Gather basic paperwork
If you’ve been in business for at least a few months, then gather your business’s profit and loss, balance sheet and cash flow statements.
- Whether you’re just starting out or your business is up-and-running, you should be able to make a list of all business debts, too.
Step 2: Find the other information you’ll need
- What are your expected sales and income this year? These estimates are usually based on past sales and predicted income, if you have been in business already. If your business is brand new, you’ll need to estimate your income based on research you’ve done so far.
- What are your fixed costs? These are things like rent, salaries and utilities that stay just about the same no matter how your business is doing.
- Variable costs can change depending on how your business is doing – for example, for a seasonal business, inventory may be considered a variable cost because it changes a lot between your busy and slow seasons, and so would extra staff that you would hire.
- Sometimes, businesses have expenses that don’t change a lot but also aren’t grouped under fixed costs – these can be direct costs.
- What are your costs that occur once (or once every several years)? These are things like large equipment that you don’t need to buy very often.
When thinking about how to group your expenses, the most important thing is to include all of the business’s costs. You can adjust them as you use and update your financial projections.
Step 3: Plug the information into a spreadsheet
If you’re familiar with computer programs like Microsoft’s Excel, you can make up a forecast spreadsheet on your own. Otherwise, there are free tools available online – like this one from SCORE (the Service Corps of Retired Executives) that has a lot of information to help you.
Step 4: Check your progress regularly
- Decide which parts of your business forecast are the most important for you to follow. These are usually things like income, the costs of your goods or services, and your regular bills.
- Create a check-in schedule that makes sense for your business (monthly works well for most, but some will find that weekly is better).
- Monitor how your business is doing by setting goals and looking at the differences between how you did and how you predicted you would do. Doing this regularly helps you find problems early on.
- Make changes to your business, as needed, to get you closer to your forecast goals. That can include reducing or increasing your inventory, hiring staff or letting some go, or taking out a loan so that you’re ready to grow or have money available to cover bills.
Creating and keeping up with your business forecast takes time but it also helps you make better decisions based on how your business is doing and avoid unnecessary expenses. And because it’s a tool that you’ll use for as long as you run your business, it’s worth the investment.
About Excelsior Growth Fund
Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more atwww.excelsiorgrowthfund.org.