How much profit is your business going to make over the coming year?
Will you have enough cash flow to meet your existing obligations as well as plan for the future?
Knowing your profit and cash position is crucial to ensuring the ongoing viability of your business. So, if you don’t know the answer to these questions, it’s time to familiarise yourself with financial projections.
Financial projections are a set of forecasts and estimates that predict your business's expected future financial performance.
You may have heard them referred to as financial forecasting or modelling.
These projections involve using historical data, current trends, and economic conditions to estimate future revenue, expenses and cash flow.
There are two key types of financial forecasting in business: profit and loss projections and cash flow projections.
Profit projections estimate the future revenue and expenses of your business. They’re used to forecast its future profitability and ability to generate income.
Your revenue is generated from the sale of goods, products or services. Meanwhile, typical business expenses include rent, utilities, salaries, maintenance, and the cost of goods sold.
Cash flow projections estimate the future cash inflows and outflows of your business. They’re used to forecast future liquidity (surplus or deficient) and your business’s ability to pay its bills on time.
Examples of cash inflows include sales, investments and financing. Cash outflows include supplier payments, salaries and wages, loan payments, shareholder dividends and money spent on fixed assets.
Importantly, cash flow is typically tied to profit and loss projection as operating inflows (sales) and outflows (supplier payments, salaries, etc.) relate to estimated income and expenses in the profit projection.
Most businesses do financial projections at the start of the financial year.
We recommend you consider rolling forecasts to continually review your projections and stay on top of your future financial position. Most rolling forecasts are updated on a monthly or quarterly basis.
There are also a couple of other instances where it’s a good idea to redo your financial projections:
Now to the hard part: creating those financial projections.
At a very high level, here are the basic steps for both profit forecasting and cash flow forecasting:
As mentioned, these estimations should be based on your historical business data, current trends and economic conditions.
However, making accurate financial projections can be challenging. There’s most definitely a bit of art and science to it.
As well as being able to gather and analyse and adjust relevant financial data, you also need to consider various scenarios that could impact your financial performance, such as changes in the market or unexpected events.
For this, a deep understanding of your business, industry and the broader economic landscape is essential.
Once you’ve created accurate profit and cash flow projections for your business, it’s time to use the figures.
If your projections aren’t what you hoped for, this could be a sign that your current business strategy isn’t sustainable and could potentially lead to financial difficulties in the future.
To improve on your projections, you need to identify areas for improvement and take corrective action to address any underlying issues. This might involve adjusting your pricing strategy, reducing expenses, exploring new business opportunities, or seeking additional funding.
It’s important you monitor actual results to those projected, continually appraise your business performance and adjust your strategy accordingly.
Sharing your financial projections with your bank and other key advisors is smart. They may be able to help you reach your targets, provide support, and also hold you accountable.
Profit and cash flow financial projections really are critical in business as they provide a clear picture of your future financial performance.
With accurate forecasting, you can make more informed decisions—the key to business sustainability and staying ahead of the curve.
If you’d like some help with your financial projections or advice on how to act on them, reach out to your Maxim advisor or get in touch with our team.