“The idea is to have a reference you can review through the year, so you can make adjustments as needed,” says BDC Business Consultant Jorge Henao, who provides advice to entrepreneurs on financial management. “Without this, you’re basically leaving everything up to chance.”
How to make financial projections
Here are 5 steps to creating and using financial projections to guide your business.
1. Plan your year
First, think about what you want to accomplish over the next 12 months. This should be based on your strategic plan for your business.
2. Make projections
Based on past experience and your plans for the coming year, prepare these three documents.
A projected income (profit-loss) statement—Projected revenues, costs, expenses, taxes, etc.
A projected balance sheet—Assets, liabilities, equity.
- Monthly cash-flow projections—Accounts receivable, accounts payable, investments, financing, etc.
It’s helpful to have different projected scenarios (optimistic, most likely and pessimistic) so that you can anticipate better the impact of each one.
3. Arrange financing
With your projections in hand, determine financing needs for the coming year and discuss them with your bankers and other financial partners.
The start of the year is a good time to arrange any needed credit lines or business loans. Working out your financing ahead of time improves your odds of getting approval and helps ensure the best terms.
“If you come to your banker and tell them you need a $2 million loan next week, most probably he or she won’t be able to help you,” Henao says. “Bankers don’t like surprises. They lend you money when you can show you understand what you’re doing.”
Also, don’t make the common mistake of dipping into your working capital for long-term capital investments because you may end up facing a cash crunch. It’s better to use long-term financing for such projects.
4. Monitor and adjust
Finally, review your projections each month against the actual numbers to see if you’re on track. Variances can flag trouble spots in your business. Take an even closer look each quarter. Make any needed adjustments to your operations or changes in your planning.
5. Get help
Depending on your in-house resources, consider seeking outside help in creating your financial projections and monitoring your progress through the year.