An important component in any business is financial projection. Basically, it is a prediction of future expenses and revenues. That projection uses either historical or internal data to predict what the business will look like financially.
It is important that both short- and mid-term financial projections are made. Typically, this covers year one through year five. By making projections, businesses can make adjustments where necessary to help their budget or bottom line.
The income statement is the single most important part of financial projections. The income statement includes revenues (and potential profits), expenses, total income, taxes owed, net income (if applicable), and more.
Simply put, this is the statement that tells the business owner precisely what is coming in, what is going out, and what the company is making when all is said and done.
Projecting Cash Flow
This projection is mostly for landing investors or lenders. The purpose here is to demonstrate a good credit risk and show that, if a loan is granted, it can be paid back as promised. There are three main areas to the cash flow projection.
The first is cash revenues. This is the estimated sales over a certain period of time. It is important to not include credit in these revenues. The second area is cash disbursements. List out all of the cash expenditures that the business had that month. Finally, take the disbursements and subtract it from the revenue to give you the total cash flow.
This is a greater overview of the business’ net worth at any given time. Basically, it summarizes the three main categories in a business’ finances: assets, equity, and liabilities.
A company’s assets are any of the tangible things that have financial value that the company owns. Liabilities are generally debts owed to creditors or lenders. Equity is the difference between the two. If more is owed than owned, then that is negative equity.
The balance sheet is a great way to see where a business stands at any given time. It should also be understood that the balance sheet takes time to make substantial changes to.