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Development of Financial Projections

What does the term Financial Projection actually mean? It is a view into the future based on actual data and facts about a certain organization.  It is the predictions for future profit and expense for an organization. History, internal information, cost data, and other things are considered to get this figure. It generates a picture of where the company will be in the future as well.

In other words, a financial projection is a forecast of the future financial situation of an organization or business based on actual and past data.

You can have financial projections on any imaginable level, everything that you want to do has a certain cost past cost level.

It really does not matter if you do a financial projection on a personal level or on a business level, the projections show the same thing. Usually, projections are made in order to have a reference point into the future of what is going to be.

What is the financial projection showing you?

•  as mentioned earlier, a projection shows a future situation of an organization
• a financial projection shows also what financial resources you need in order to make your plans come true
• a financial projection shows also your yardstick, it shows you the degree of your planned achievements when compared to the actual or past financial data

Creating financial projections is an important part of your business plan. If you’re seeking financing, financial projections help convince prospective lenders and investors that your business will be profitable by offering them a good return on their investment.

To conclude I might say that there is no way to get around a financial projection especially if we are talking about businesses and business plans.

How To Make Projections That Actually Mean Something?

To do any financial projection it is quite easy, you just simply add some revenue and some costs for the future and that’s it. In this case, can you say that the projection makes sense? Does your projection really mean something? Not really…

In order to have a financial projection that means something you should have the following aspects in mind :

• define the audience for your financial projection. As any forecast you should always have in mind the stakeholders of your forecast, it is one thing to have an internal forecast for your use only, it is something different to talk at an executive level and a completely different thing to talk to a bank or a financing organization. Each and every forecast can show something different , an internal forecast will show you all details of your operations, a forecast at executive level will focus more on higher targets like profitability, return on equity, etc; a forecast that will be prepared for a bank or financial organization will focus on cash and cash generation and assurance not so much on detailed department operations
• set SMART targets. Do not overdo it set your targets REALISTIC, it does not help to be optimistic or pessimistic. Write down your forecast assumptions and review them after a first draft.
• get a complete cost picture and do not forget about anything. Indirect costs like taxes, depreciation, insurances, etc. should not be forgotten. Try to get all costs that influence your forecast
• to get a complete and realistic assumption of your revenue. Try to get some answers related to quantities, prices , delivery and production schedule, etc. The more answers you will have the more accurate your forecast will be

For a business forecast focus on the following statements :

• P&L statement , this will show a accurate image of your results
• Cash Flow statement, money makes the world go round , without cash you can not do much . Make sure that control your cash flows to achieve your targets
• Balance Sheet, is more like a still picture that shows what you have done and with what financial means

To make it easy , when you try to do your financial forecast you should start with (1) fixed costs (2) variable costs and only at last try the revenue side.

The first financial projection will probably not very good, the financial forecasting will be better the more often you do them. You will be better the more forecasting you do.

Regardless of the forecasting accuracy try to understand what has happened and try to learn out of it.

You can benefit the maximum from your forecasting only if you do a gap analysis. You should always do also a actual vs. planned analysis.

Do not be shy to get help in your forecasting process, there is nothing more toxic and misleading than an improper and falsely done forecast that gives you unrealistic messages.

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