Easily Create Financial Projections That You Can Use To Grow Your Business
Creating financial projections is vital to the success of your business. Your financial projections serve as a roadmap, showing you in detail how you will get from where you are today (Point A) to where you want to be tomorrow (Point B).
Business is challenging to be sure. There are many twists and turns that you may take on your journey to success. This is what makes having a roadmap even more important, to help you get back on course when something throws you off track and keep you moving in the right direction. The development of your projections is indeed a critical process that will shape the future of your business.
How do you eat an elephant? One bite at a time. You should approach your financial projections using the same philosophy. It can be overwhelming to look at all the pieces at once, so I recommend breaking it down into five digestible steps.
Each step of the process will pose critical questions to you that you need to answer before moving on to the next step. Do not move on to the next step until you’ve tackled the one before (trust me!). Doing this will help you systematically build your projections.
How to Create Financial Projections
- Sales & Revenue: Start with the top – your sales and revenue. How do you make money (now or in the future)? How big (revenue-wise) do you want your company to get? Think “pie in the sky” here, and do not worry about how to get there just yet. We will start with what you want, and then the next steps will show you how to get there. But if you don’t set a final destination, you will never know how to plot out the course to get there.
- Cost of Sales: Look at your revenue goals and then think about what it will realistically take to generate that revenue. What kind of labor will you need to service that kind of revenue? What raw materials? Don’t think about all the overhead yet – that comes in the next section – so focus here on the direct inputs you will need.
- Overhead: Now we can think about all the overhead it will take to support the growth of your business. Overhead can be broken up into three categories: General & Administrative expenses, Sales expenses, and Management expenses. For example, as you expand, you may need bigger office space, hire an attorney (or accountant!), bring on salespeople, hire an executive coach, etc. Take a moment to think about all the ancillary pieces you will need to support your business.
- Cash: Now that you have your revenue, costs, and expenses plotted out, you know how much profit your business will generate. Translate all of this into how cash will actually flow through your business. Time for a reality check: Is this enough money for you to survive? Businesses often cycle through high profit and high loss times, so it’s not uncommon if the answer is no. That’s okay, it just means that you need to start finding out where to borrow the funds to carry you through.
- Scenarios: We’ve built a solid base scenario. But as well all know, life doesn’t happen in just one set way. There may be a few twists and turns along the way as we plot through our goals. So take a moment to think of one or two other ways that things could happen (for example, if you have different revenue results or costs of your labor increase). Create some new scenarios to have in your back pocket to refer to in case you need them.
I encourage you to discuss the questions with anyone else who may be involved in your business and get input from them – a business partner, spouse, key consultant, business coach, etc. These questions can be challenging and a bit overwhelming as such, forcing you to put on your CEO hat…but I promise that the end result will be very rewarding and truly transform the way that you strategize the building of your business!
We are experts in helping build strong financial forecasts and have done so for many businesses. If you need help in creating forecasts, then schedule a free consultation with us, and let’s chat.
by Oahu Consulting LLC.