Most people have probably heard the grim statistics about how many new businesses fail, often without a guide to realistic financial projections. However, you may be less aware that according to data, about 50% of small businesses fail after five years and only 30% survive the 10-year mark. Understanding where your business is at and where it is likely to go in the future is critical for avoiding this fate. Realistic financial projections are an important decision-making tool for any business owner. QUIK Websites + Hosting presents some information that you need to know.
What Is a Financial Projection?
A financial projection is a document that details plans and predictions for future business outcomes. These documents are usually created as spreadsheets and include a forecast of expenses, income, and operational strategies for a specific period.
Short-term projections usually cover a year at a time and are broken down month by month. Long-term projections cover three to five years and are often used for strategic planning, obtaining financing, and attracting investors.
Guide to Realistic Financial Projections
A realistic financial projection can help you maximize resources, minimize waste and prepare your company for growth. An accurate financial projection makes it easier to predict what your annual tax burden will be and avoid penalties by paying the correct amount of estimated taxes throughout the year. It also helps you meet state compliance guidelines and file your annual report.
Some states may impose penalties, such as revoking your right to do business in the state, or issue fines if your business fails to file an annual report or meet other compliance requirements. Some third parties, such as lenders and investors, may want to see several years of financial forecasts as part of their decision-making process to lend you money or invest in your company.
How Can I Create a Guide to Realistic Projections?
Creating accurate financial projections is a multistep process that should not be taken on by anyone with limited experience. You can enhance your business and finance skills by obtaining an online Master of Business Administration degree. Pursuing a degree online allows you to continue to operate your business and take care of your family while completing your education.
Alternatively, you can hire a financial professional to complete your projections for you. However, even if you decide to hire outside help, it is important to have an understanding of the underlying principles, so you know how to best utilize the projections to improve your business.
Which Financial Projection Statements Should I Include?
Your financial projections should include your balance sheet, income statement, and cash flow statement. To make this process easier, you can use accounting software, such as QuickBooks, to build a financial forecast from the data you already have in your system. Many spreadsheet programs also have financial forecast tools and templates for creating financial projections.
If you want to go beyond these basic tools, you can purchase software designed specifically for financial forecasting. These programs can save you the time and effort of having to manually enter data into a spreadsheet. Pulse, Jirav, and PlanGuru are three examples of popular forecasting software packages that integrate with QuickBooks and other accounting packages.
Whether you are trying to get financing, attract investors, or plan your business strategy, accurate financial projections are an important tool. The better you understand how to create and analyze these projections, the more they will help you reach your business goals.