More than thinking about the success of your business based on its products and services, it is essential to look at the financial side as well, right? But for those who have so many tasks in their day-to-day business, some terms and concepts can seem confusing, such as financial projections .
The truth is, however, that not everything is as complicated as it seems, and this strategy is very important for entrepreneurs who want to create a sustainable business . Ideal for knowing what the next steps to take are, financial projection makes it easier to see the best opportunities.
But in practice, how do financial projections benefit a company? And what are the different types that exist? And even more importantly: what can you do to put this strategy into action? Keep reading to clear up all your doubts on the subject!
What are financial projections?
Financial projections are estimates of a company’s economic conditions, assessing the short, medium and long term . These forecasts are not based on guesswork, but rather on analyses of past and current data, helping to build the future scenario more accurately.
Based on economic, operational and strategic factors, they facilitate company planning and, consequently, decision-making about the future of the business. This makes it easier to see, for example, what the main opportunities and challenges are for the coming months and years.
In short, projections help you visualize in advance:
- Revenues;
- Expenses;
- Profits;
- Cash flow;
- Key performance indicators.
This implies that for the figures to be valid and credible, one has to utilize the same data that is relevant, along with appropriate models of analysis.
The projections should be reviewed and revised to match the altered business environment and strategic objectives.
How important are financial projections for a company?
Much more than understanding the indicators we showed previously, financial projections can provide several benefits for a company:
Strategic planning
Financial projections allow businesses to plan for their future based on early insights into their financial health. They assist in setting realistic goals and objectives , as well as identifying the resources needed to achieve them.
A business can identify through projections that sales are expected to fall in the coming months, for example.
With this advance notice, it is possible to think of strategies that help combat this scenario with offers and promotions or even the creation of other business areas.
Making informed decisions
Financial projections provide crucial information for decision-making at all levels of an organization. They allow managers to assess the impact of different scenarios and alternatives before making important decisions .
Instead of simply hiring more employees, the projection will show whether this is necessary or not. The same goes for identifying whether now is the time to expand your business or whether it is better to organize yourself to protect yourself from potential threats.
Financial control
A fundamental part of the success of any business is having financial control , and that is exactly where projections help. In addition to knowing your past and present earnings and expenses, they help you understand what the scenario should be like in the coming months, for example.
That will be useful for the entrepreneur, who then would have all the indicators at hand in order to compare the given real values with their expectations, to track any deviations and take corrective measures when appropriate. From day to day, it will keep your finances updated and help maintain business sustainability.
Cash planning
A slightly more technical benefit for entrepreneurs is the possibility of planning their cash flow . After all, financial projections will help identify periods of liquidity shortage or excess and what measures to take to manage their working capital .
Based on cash flow projections, the company can make decisions related to investments, financing, supplier payments and payment term management to maintain its stable financial health and avoid major financial problems.
What are the types of financial projection?
It is also important to understand that there are several financial projection models and each of them can be used for specific objectives. Check it out!
Sales projection
Sales projection is a future estimate of revenue generated by the sale of a company’s products or services . It involves analyzing past trends, market data, consumer behavior, and economic factors to predict future sales, which helps in production and target setting.
Cash flow projection
Meanwhile, cash flow projection helps develop an estimate of the company’s cash inflows and outflows over a given period. It makes it easier to predict when the business will have more capital available and when it may face greater difficulties.
Profit projection
Another type of forecast that can be made is based on profit projections , identifying the possibilities of positive financial results based on the analysis of future revenues and expenses. This study will make it easier, for example, to understand whether it is time to adjust prices or reduce expenses.
Balance sheet projection
Thinking about it in a broader sense, the balance sheet projection can also be very useful to understand the financial solidity of the business . Based on the analysis of assets, liabilities and net worth, it is possible to identify capital needs or even plan investments.
Investment projection
A forecast that focuses more on the next strategic steps of a business, the investment projection will make it easier to understand which investments are the most important. Is it time to create a new product line? Or is it better to focus on other strategic initiatives?
How to make a financial projection?
You already understand how financial projections can help your business develop, right? Now, we have prepared a step-by-step guide on how to put this concept into practice.
Data collection
The first step would be to collect all the information one deems relevant to the financial projection . All the historical data, such as previous financial statements, sales reports, and costs and expenses, should be on the lookout. This is what will make the estimate valid (or not), as discussed in the early steps of this chapter.
It becomes very significant to analyze the external factors that would affect the company’s wallet, say in terms of market trend, regulatory issues, economic changes, and fluctuations. In the light of all the data and information, one can easily determine what’s supposed to follow.
Definition of the projection period
Now it is to choose the period for which the forecast is to be prepared. Sometimes the term long term is longer or shorter in industries, always varying based on the business model and segment. However, the finance projection in the next year would normally be most common.
Revenue estimate
It is the most tedious activity because it involves analyzing history sales data and taking into consideration all factors that will dictate future revenues -for instance, market growth, changes in consumer demand, new products or services.
It is interesting to try to use the given forecasting methods, including moving averages or trend analysis, in order to project revenues that are expected for the selected period, thus increasing the accuracy of this process with a more precise final result.
Cost and expense forecast
You also need to look at your expenses , right? The next step, therefore, should be to analyze operating costs, such as raw materials, labor, rent, and administrative expenses. In other words, everything that comes out of your company’s cash flow on a fixed basis.
Additionally, you also need to look at variable expenses, such as sales and marketing commissions, which can change depending on your business strategies. To help with this, you should use historical data, market information, and growth projections .
Cash flow projection
Based on the revenue and expense estimates you made in the last two topics, it becomes much easier to project the company’s cash flow . Analyze payment and receipt terms, considering seasonality and customers’ ability to collect to arrive at the final number.
In practice, this is the moment that will help you understand which periods of cash surplus or shortage exist, enabling adequate financial planning and avoiding unpleasant surprises later on.
Investment analysis
As part of this analysis process, it is also necessary to take into account, for example, investment plans for new projects, expansions or asset acquisitions. Evaluate the expected return on these investments and how they will affect finances.
Review and adjustments
Have you completed all these steps? It is very important to review your financial projection regularly and make adjustments . After all, the market may change, your business may receive investment, or a competitor may enter the sector. Ultimately, the idea is to keep your projection up to date.
Financial projections are therefore essential for any business that wants to stand out in the medium and long term. With so much competition in the market, it is necessary to plan financially to take advantage of the best opportunities and correct any threats in advance .