Delusions of Grandeur: Why You Need to Do Financial ProjectionsLinda Jenkins, March 16 2015
If you have been involved with running a small business for any length of time, you already know that things never go as planned. Sometimes sales come easily and sometimes they don't come at all, despite all of your efforts. The point is, you must do your best to guide your business, prepare for possible outcomes and respond to reality effectively. The best way to do this, aside from regularly tracking analytics, is to prepare detailed financial projections anytime you start a business, start a project, or launch a new product.
Why do projections at all? The answer to that is apparent when you don't do projections. If you enter into a project naked, it is more likely that you will end up mid-project without enough money to complete it, or without any plan for getting back on track.
Even if you have a financial background, it is best if you seek qualified help from a reputable accountant or other consultant that has significant experience in this area. This will ensure that your projections are done objectively and aren't just based on your own delusions of grandeur. Professionals that offer these services use a variety of terms to mean the same thing, for example, risk advisory services, benchmarking, forecasting and budgeting strategies. If you cannot afford to hire a consultant, consider using a web-based business planning application.
At a minimum, your financial projections should include:
- Cash flow for years 1 through 3 (and details of month-to-month in-flows and out-flows for the first year)
- Management responses to:
Although no forecasting method is fool-proof, you will be much better off if you plan for various business outcomes. You can bring greater accuracy to your projections by studying your competitors' experience in your market, and by compiling the accounting data you already use in the management of your own business.