Financial projections are a tool used to forecast the financial aspect of your business. It used existing and estimated data to project revenues and expenses. Financial projections also include different scenarios to assess the changes e.g., increase or decrease in sales and revenue, and how it will affect the business forecast. Startup businesses would find the financial projections useful in preparing the startup costs, projected sales and expenses, and the benchmark to achieve the financial goals. Existing companies can utilize this as a guide in the day-to-day operation and see to it that they stay on track in terms of the finances. When you need to get additional financing for your business, you have to prepare a financial projection to convince the lenders and investors to put money into your company. The components of the financial estimates are discussed in detail below.
Income Statement. The income statement is used to assess the profitability of the business by evaluating the capacity to generate profit. Listed below are the accounts in the income statement.
- Revenue. The source of revenue can be from the sale of products or delivery of services. The projected revenue must be able to cover all the operating costs.
- Cost of Goods Sold (COGS). COGS include direct materials, direct labor, and production overhead.
- Gross Profit. By deducting the COGS from the revenue, you can derive the gross profit.
- General and Administrative Expenses. It includes the indirect costs incurred for the business operation, which include delivery expenses, permits & licenses, supplies, rent, etc.
- Earnings before interest, tax, depreciation, and amortization.
- Net Income. By deducting the interest, tax, depreciation, and amortization from EBITDA, net income is derived.
Balance Sheet. The main components of the balance sheet are the assets, liabilities, and equity in which assets = liabilities + equity. Increasing total assets and equity would suggest that the business is growing over time.
Cash Flow Statement. This statement is used to project the ins and outs of cash flows. By utilizing the cash flow statement, the business can prepare enough sources to finance the day-to-day operation.
Financial Ratios. The most commonly used financial ratios to assess business profitability include profitability ratios, liquidity ratios, leverage ratios, and efficiency ratios.
Break-even Analysis. The break-even is used to compute for the point wherein the revenue equals cost resulting in zero profit. It is useful in evaluating when the business will recover its costs and earn profit from that point onwards.
Investment Decision Analyses. These include the return on investment, payback period, net present value, and the internal rate of return. These tools will help in decision-making if the project is worth it to pursue.
The financial projections template will give the company a guide in running its business operation. It will see to it that the company is taking the necessary steps towards achieving its goals. There are a variety of financial projections templates that you can use to save the time of starting from scratch.