Financial projections help companies make the best decisions for the future by providing insight into the expected financial situation. Here we show you why it is so important to prepare such forecasts, which financial projections are essential to include in a business plan, and how to go about preparing them.
Financial projections are predictions about the future regarding the financial situation of a company. Forecasts can be created for many different contexts and variables, e.g.:
- Turnover (total, or for individual products)
Financial projections help managers make the best decisions for the company. They show what a company can expect in the future under the assumed circumstances. This makes it easier for managers to steer the company and take countermeasures if circumstances change or the status quo deviates too much from the plan.
A distinction is also made between short-term and long-term financial projections. Short- term projections are forecasts for the next months to a year. They aim to guide the operational business efficiently so that the long-term goals can be achieved. The long- term forecasts have a time horizon of one to five years and indicate the strategic direction that the company has planned.
The business plan is a very important instrument, especially for start-ups and very young companies. It should show those responsible how they can finance their company, the projects and the plans, as well as convince investors of the company so that they provide capital.
The business plan therefore also contains financial projections, because financiers are primarily interested in concrete figures. Detailed forecasts make a good impression, as they show that the founders have taken an in-depth look at their company, its financing and business model.
A good business plan should therefore include the following financial projections:
- Sales forecast: How many products/services will be sold within a certain period of time and at what price?
- Expenses forecast: How high will expenses be to finance the operating business?
- Balance sheet forecast: What assets, liabilities and capital will the company have at the end of the year? What will it have in five years?
- Income statement forecast: What are the company's expenses and income (after taxes and deduction of operating costs) within a certain period of time - in other words, what is the net income?
- Cash flow forecast: What is the amount of expenditure and income that flows directly from and to the accounts? What do the individual expenditures and revenues actually consist of?
Let's take a closer look at a financial projecion using the example of cash flow management. This involves comparing all income and expenditure recorded in the company's bank accounts. This overview can be done monthly, weekly or even daily.
Income includes, for example:
- Revenue from sales
- Income from financial investments
- Tax refunds
Other revenues Expenditure includes:
- Salary payments and wages
- Expenses for marketing
- General expenses
- Fees for software subscriptions and licenses
- Tax payments
If the cash flow forecast is prepared on a monthly basis, all expected income and expenses are entered into a table, broken down by category. This gives you a precise overview of how much money will be spent each month and from which sources the income is made up.
If you subtract the expenses from the income in each month, you get the monthly result for the expected available cash. This makes it easy to see with the help of the forecast how much cash you will have available in the future to make further investments.
If the result is negative, the plan can also be used to predict a cash shortage at an early stage so that precautions can be taken in good time, for example by applying for a loan to bridge the shortage.
You can download a financial projection template for cash flow management here. You can expand the rows in the table and adapt them to your needs.
In principle, every company benefits from financial projections, because the forecasts form an important basis for decision-making and show opportunities and risks.
However, smaller companies in particular are reluctant to prepare financial projections because they either do not have the right tools and/or do not have enough employees who can deal with this task.
In the meantime, however, there is software that can be used inexpensively even by small businesses. Instead of making financial projections in an Excel spreadsheet where you have to enter all the data manually, modern software automatically brings together relevant data from different sources. This gives managers a detailed overview of their financial situation at the touch of a button.
The financial projections created by special software like Agicap are accurate and always up to date because the data is automatically updated on a regular basis. This means that even small companies can produce forecasts without much effort and become even more successful.