If every small business owner had a crystal ball to predict the future, making business decisions would be a piece of cake. There would be no need to analyze financial statements or seek professional guidance. All the answers would be right there, gazing back at us through the curved glass. Though in reality, we live in a constantly changing world which is often more like a snow globe that has been shaken.
To prepare for the unexpected, and be in the best position to shape our own destinies, small business owners must make projecting the future of their business a routine practice that is based on data.
A business projection is what you anticipate the state of your business will be in the future based on your financial data and a set of reasonable assumptions that you can make today. Projections can inform long-range planning and help you realize the full potential of your business. Under adverse business conditions, projections can help you identify adjustments that are needed for your business to remain solvent.
It is a wise practice to produce business projections on at least an annual basis. Newly formed startup businesses are counseled to produce projections quarterly.
What are five steps to producing business projections?
1. Project spending
What are your recurring costs to operate? With business growth, what costs are expected to increase? What expenses are rising due to inflation? Are there any one-time expenses your business will need to incur in the coming months? Is there any equipment that you may need to maintain or replace? Will you be preparing to launch a new product? These are all key questions to ask yourself to identify spending projections that are thorough and realistic.
2. Project sales
This is when having a solid handle on historical sales data and your sales pipeline is critical. Does past sales data reveal any trends? What is the probability that those trends will continue? Will any changes in your sales cycle impact future sales? What proposals are in process or pending and what is the likelihood those will come to fruition? Have you set sales targets for the coming months and are there strategies and resources in place to achieve them?
3. Project financials
With projected spending and revenue in hand, you now have what you need to project your financials including projected income and balance sheets. Enter your projected spending and revenue by category and by month into a spreadsheet giving consideration to your assumptions. Working with an account at this stage, like the professionals at Gift CPAs, can make this step easier and they can prompt and answer additional questions you may have. The result of this step will set you up for step number 4.
4. Determine gaps
Next, analyze your projected financials. Are there any months with shortfalls? If so, you may need to consider financing to cover these gaps, either with a business loan or business line of credit. If you do require business financing, having an accountant by your side to navigate the process can be very valuable. An accountant can help you navigate the loan process by preparing your business financial data for lenders, reviewing loan documents with you and presenting your application to your lender.
5. Track against your projection
All this effort is worth much more than creating a document that lives in the cloud without being revisited or sits in a physical file untouched. The projection you produce will become a data-driven guide to measure your business against. Monitor your business’ performance and compare it to your projections on a monthly basis. Comparing the data monthly allows you to re-assess your projections and adjust your business operations as needed, address concerns or capitalize on opportunities. Although you may not have a crystal ball to see what will happen in the future, you can and should continuously scan the business environment and leverage your experience to plan for contingencies in the event that unexpected events take you off course.
Get Connected Today
Need assistance getting started? Contact Gift CPAs for more information on business and financial consulting services, as well as our full scope of accounting and bookkeeping services. We have years of experience working with small businesses to help with bookkeeping, taxes and other business needs. Make an appointment to meet virtually or at one of our five locations in Harrisburg, Mechanicsburg, Myerstown, Ephrata or Lancaster!