The Importance of Financial Projections for Small Business Owners

Shareium March 24, 2022 No Comments

The Importance of Financial Projections for Small Business Owners

When managing your small business, it’s critical to regularly revisit your financial projects, which are assessments about a company’s future actions and outcomes, based on existing conditions as well as external market factors. While it is impossible even for the savviest financial analyst to predict the future unerringly, an intelligent assessment of present data about your business and the market, in general, can help you steer clear of potential planning errors and make the best use of your capital as well as your time. Shareium presents some insights.

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Is a financial projection the same as a financial forecast?

You may have heard the terms “financial projection” and “financial forecast” interchangeably. It might be difficult to grasp what the difference is between a projection and a forecast, but each is its own separate thing that serves a specific purpose. While a forecast is a general assessment of future conditions and the financial moves a company might make, a projection is more like a step-by-step “what if?” analysis. A forecast has to do with how likely you are to achieve the goals you’ve established. A projection is more like a storyline in which you and your company make a series of decisions and achieve a series of outcomes. In general, a projection is a little more theoretical and optimistic than a forecast, which tends to be more neutral.

Why are financial projections so important?

Financial projections are important because your plans for the future of your business depend on having a reasonable view of what your financial landscape is likely to look like. A financial projection can help you gauge future expenses for your business. Using different financial projections, you can weigh how certain decisions might affect profitability. For instance, you might make a financial projection based on an assumption that spending more on marketing will pay off. Or, you might make another based on lowering operating expenses. Then you can take an educated guess at how best to invest your time and money in order to raise revenues.

Projections are especially important at tax time.

Business owners need to budget for tax payments or risk having to pay a hefty amount all at one time. And this can really mess up your company’s cash flow. You could even find yourself unable to pay what you owe and getting hit with penalties that will dig you in deeper. Making accurate financial projections will help you to budget correctly and prepare for tax time, as well as pay adequate amounts in your quarterly taxes. Your projections will also enable you to file accurate and prompt annual reports, without which you may not be able to keep doing business.

For all of these reasons, many businesses choose to work with an accounting firm. It’s obviously an extra expense to work with a certified public accountant (CPA), but it’s one worth spending if you’re concerned about reporting your profits correctly and on time to the Internal Revenue Service (IRS). An accounting firm not only comes in handy during tax time, but throughout the year, since tax specialists often have additional skills so they can help you with financial projections, tracking expenses, and more.

Projections help you to meet your goals.

Having a projection will help you to proceed methodically, step by step, so you can chart your progress and see that you are approaching your goals. Your financial projection will help you realize if you start getting off track or if the course you’ve set isn’t working. In that case, you may need to tweak your plans and recalculate your projections.

For example, let’s say you pump a big chunk of your budget into an enhanced marketing plan. Keeping track of its progress as part of your monthly financial projection will help you evaluate whether you should stick with what you’re doing or change course. So if you consistently track this marketing plan and after six months see no worthwhile return on investment (and nothing looming on the horizon), you’ll know you should be shifting your efforts and spend your budget elsewhere.

How do you create a financial projection?

You will need to refer to several financial records when making a projection. These include startup expenses, operating expenses, sales forecast, and a balance sheet. So be sure to keep meticulous records both in the planning phase and once your business is launched. You can work with your accountant in creating a financial projection, or you can use a template. When writing up projections, you should create both best-case and worst-case scenarios for your business’s future.

If the idea of learning more about financial projections, budget forecasting and understanding your tax requirements is particularly compelling, why not take some online courses to learn more about best practices in accounting and business management? By fully immersing yourself in financial concepts, you can position your business to be more successful. Plus, online programs provide plenty of flexibility for busy working professionals.

Knowing how to create your own financial projections can save your business money in the long run since you won’t have to outsource the work to a freelancer or hire a professional to join your company full time. Plus, depending on the type of company you own, you may be able to offer your services to others as part of your business. For example, if you’re a business consultant, having the skills to put financial projections together for other companies is an in-demand service that will build your book of business.

We know how important it is for you to make the most of your time and assets. Your business success depends on your ability to be goal-oriented, patient, and methodical. Having projections to guide you will help with this. Your financial projections make it possible not only for you to set reasonable goals, but also to have a blueprint for achieving them.

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