Financial Projection: Creating a Financial Forecast For Your Small Business

August 27th, 2013 by

Much like a recipe helps you plan what your next action in the kitchen will be, a financial projection (or forecast) can help you achieve your goals for your business. A financial projection is a tool that helps you to determine where your available resources are most needed. Knowing this critical piece of information can help you to control the cash flow of your business. By being in control of your money, you are more likely to achieve your financial goals each year. In order to get started in creating your financial forecast, there are few topics you should discuss with your CPA to get the most out of this essential tool.

 

What Is A Financial Projection?

In order to adequately utilize a financial projection, it is important to know what one is and what elements comprise it. At it’s most basic level, a financial forecast is a budget for your business. A financial projection can best be described as your best guess as to what will happen to your business overtime including an estimate of future income and expenses in the coming year. Having your accountant help you put together an effective financial forecast can assist you in contriving a more accurate profit and loss statement (a summary of a business’ financial performance over time,) and an accurate balance sheet (a tool used to determine a business’ liquidity).

 

How Often Should I Prepare A Financial Projection?

The frequency with which you prepare a financial forecast strongly depends on the circumstances of your small business. Some factors to take into account when trying to determine how frequently you should prepare your financial forecast include the age of your small business, potential plans to sell your small business and the rate at which your business is growing. You may need to create weekly or monthly forecasts when you are just starting out your small business, or if your company is experiencing a period of rapid growth. By keeping regularly updated forecasts, you will be better equipped to keep a close eye on your figures and develop a plan to solve any cash flow problems that may become a larger issues. If your business has hit a stable plateau in growth, quarterly or monthly forecasts may be more appropriate. Talking to your CPA can better help you determine how often you should prepare your forecast materials.

 

What To Include In Your Financial Projection

A financial forecast is comprised of a few different components. In order to develop an accurate account of how your business will fare, it is important to thoroughly research relevant markets. Knowing the market trends in your particular industry will help you to better understand what goals are feasible for you to meet. It is important to make sure that your financial goals coincide with what is included in your business plan. For example, you cannot plan to sell more product than your production limits will allow. To get an accurate financial forecast, you and your CPA should combine your cash flow forecast, your establishment costs, your sales forecast and your expenses forecast. Though this may seem like a daunting set of numbers, your accountant can help you to assemble these figures in the conventional way. Though you do need to do the research yourself, having a CPA available to guide you will ease the pressure you feel when it comes time to estimate how you expect your small business to grow in the coming months. As you continue to assemble these numbers over time, the process will become less intimidating.

Creating a financial projection is one of the best ways to keep track of the health and potential longevity of your investment in your small business and one of the accounting services we offer here at Clark & Chamberlin. Contact your CPA for guidance in preparing and utilizing this tool.