How To Make a Realistic Financial Projection for Your Business
Updated: Mar 17
The ability to predict the future would be a boon to business owners everywhere. Although it’s impossible to know exactly what will happen, it is possible for entrepreneurs to create realistic financial forecasts to help aid in decision-making and increase the chances of long-term success. Does this sound like something that would help your business? Then follow these strategies, presented by Fair Capital.
Understand the Importance of an Accurate Financial Forecast
SCORE reports that 82% of small business failures are the result of cash flow problems. This means that proper budgeting is key to your business’s success. One of the most important aspects of budgeting is creating a financial projection, also called a financial forecast. The more accurate your forecast is, the more likely your business is to succeed.
An accurate financial forecast helps you better predict your tax bill. If you file regularly and set aside enough money to pay your taxes on time, you can save on interest, penalties and payment plan fees and avoid receiving citations or even having your company shut down by the government. Depending on your state’s requirements, you may also need to file an annual report at the same time that you file your taxes. This report will include updated contact information and financial overviews for your business. Not submitting this report has severe consequences, like fees, losing liability protection, and even dissolution, so do not ignore this requirement.
A financial projection can also help in creating marketing strategies, ordering the right quantities of supplies, hiring the right number of employees and making better decisions regarding loans and investments. Investors generally require a detailed financial analysis before putting money into a business.
Use Accurate Information
A financial projection is only as reliable as the information used in creating it. Conduct thorough research to determine the following information:
● Market size
● Growth rate
Research requirements vary based on the age of your business. For example, new businesses may need to conduct market research to determine how much local interest there is and how many potential customers there are, and an established business would likely use historical sales information to predict future sales.
However, all companies can benefit from knowing competitors’ prices. Make sure your prices are competitive. If not, account for potential future price adjustments when creating your forecast. Pay attention to the news. In an inflationary economy, it is important to consider possible price increases when estimating future expenses. Keep in mind any major purchases or other one-time expenses you expect to incur.
You can also benefit from commerce solutions that help you to track online sales and trends. This information can be used to generate reports and make predictions about future ecommerce sales. Look for options with robust data analytics built in to gain deeper business insights.
Detailed record keeping is critical for accurate financial forecasts. Human memory is not always reliable, so you want documentation that you can refer to for information on historical sales and expenses. Consider storing this information digitally in a searchable database so that you can quickly find the data that you need. As time progresses and you have more information available, tweak the data in the projection for a more accurate forecast.
Simplify the Process
Many business owners put off working on their finances because of the time-consuming nature of the task. Fortunately, there are ways to make the process go more quickly. Start by selecting a forecasting method and listing the necessary data you will need to complete the projection. Use a forecast template to stay organized.
Invest in accounting software that can create balance sheets and other helpful documents for you. Depending on the program, you may be able to see outstanding invoices, expense reports and other information. Set aside time every day or week to input new information so that your program can create accurate reports.
Make Time for Projections
Accurate financial projections are important tools for any business. By using high-quality information and helpful tools, like ecommerce platforms, you can create a realistic forecast that gives your company the best chance for success. Keeping up with these projections will also ensure that you are ready to file your taxes and required annual report to the state. Although the process may seem tedious, these projections are helpful in many ways, so dedicate the time to making them a regular part of your business plan today.
If your business is struggling due to unpaid debts from clients, then contact the collection specialists at Fair Capital. We offer fair pricing and guarantee that you won’t pay if we don’t collect.