What's Financial Projections ?

Definition: Estimates of the future financial performance of a business

Three Good Reasons to Project Your Financials

First, the financial plan translates your company's goals into specific targets. It clearly defines what a successfully outcome entails. It implies a commitment to making the targeted results happen and establishes milestones for gauging progress.

Second, the plan provides you with a vital feedback-and-control tool. Variances from projections provide early warning of problems. And when variances occur, the plan can provide a framework for determining the financial impact and the effects of various corrective actions.

Third, the plan can anticipate problems. If rapid growth creates a cash shortage due to investment in receivables and inventory, the forecast should show this. If next year's projections depend on certain milestones this year, the assumptions should spell this out.

Types of Projections and Budgets

1. A model that projects either the current year or a rolling 12-month period by month. This type of forecast should be updated at least monthly and become the main planning and monitoring vehicle.

2. A long-range, strategic plan looking out three to five years. While the 12-month forecast often reflects short-term expectation and tactical plans, the long-range projection incorporates the strategic goals of the company. For startup companies, the initial business plan should include a month-by-month projection for the first year, followed by annual projections going out a minimum of three years.

3. Budgets, typically covering one year. Budgets translate goals into detailed actions and interim targets. Budgets should provide details, such as specific staffing plans and line-item expenditures. Budgets should also be consistent with the goals of the long-range plan.

4. Cash forecasts. These break down the budget and 12-month forecast into even further detail. The focus is on cash flow, and periods may be as short as a week in order to capture fluctuations within a month.

All projections should be broken out by months for at least one year. If you choose to include additional years, they generally do not need to be any more detailed than by quarters for another year and then annually after that.

The projections should include an income statement and a balance sheet. Expenses can be summarized by department or major expense category.

Read more: 6 Ways to Make Financial Forecasts More Realistic

Edited by: 浪子

Bibliography

Financial Projections. (n.d). Retrieved from https://www.entrepreneur.com/encyclopedia/financial-projections