The Importance of Making Financial Projections

Business will be very closely related to budgets and finances. This budget must be made in detail and interconnected with the business plan. Therefore, you need financial projection before starting to run a business.

Creating a business budget over a period of time can also be very tricky. There will be many factors that affect the size of the funds needed. Not to mention there are unexpected things when the business has started running.

Knowing what financial projection is about will help you be better prepared. Find out more about matters relating to budget projects within a company below.

Definition of Financial Projection

Financial projection is a budget plan related to future income and expenses. In making the design, you need to look at internal data about all transactions that have occurred.

This budget plan will provide an overview of the financial turnover of a company. In addition, you also need to predict expenses by looking at all external factors. This is so that businesses are better prepared to deal with unexpected things later.

You need to make budget projections in two timeframes, namely short and medium. In short-term protection, you need to make a budget in one year and subdivide it into monthly budgets. On the other hand, medium-term financial projections can be budgeted for the next 3 years. Later, you will need to outline this budget by year.

The Importance of Making Financial Projections

A new business or company will need to make these budget projections. This financial projection will provide a big picture of the company's performance in the future. With the right budget projections, your business will be more focused and you will also avoid bankruptcy.

This financial projection report is also needed by many parties in the company, both internal and external. So business owners can simultaneously predict developments and profits that will be obtained. On the other hand, this report can also convince potential investors about the business they will support.

Elements of Financial Projection

There are three elements that must be included in the financial projection. Here's the explanation:

1. Income statements

The income statement will provide information and projections of income and expenses that need to be issued. In financial projection, you can predict the estimated profit that will be obtained from the business being undertaken.

2. Cash flow projections

The cash flow projection report will provide information about the amount of income collected in the form of cash. this report will tell you that you need to add capital to it or can set aside for something else. Cash flow projections will also provide information to investors about the risks in providing loans to companies.

3. Balance sheet

The balance sheet report will provide an overview of the net worth of your business for a period. The balance sheet projection includes the assets, liabilities, and equity of a company. Assets are assets owned by the company. Meanwhile, liabilities are debts that need to be paid by the company. The difference between assets and liabilities is called equity.

How to Make a Financial Projection

There are several stages that you have to go through in making financial projections. The following are the stages of making budget projections:

1. Estimated income and expenses

Determine the amount of money your family will spend to run a business. This is what needs to be done at the beginning long before the business starts running. Then, calculate the expenses in one period. Enter salaries, rent, production costs, and other things. After that, calculate the amount of revenue you expect from product sales.

2. Make a balance projection

The balance sheet must include assets, liabilities and equity. Then, record future expenses or payments. Also calculate the estimated increase in the value of your assets in the future.

3. Make a profit and loss statement projection

Making a profit and loss projection is also fairly easy. You just need to reduce your income with expenses. This profit and loss projection report will also provide information about how much profit will be obtained after everything is calculated. Don't forget to factor in interest and taxes.

4. Make cash flow projections

Also estimate the amount of cash that will be used for routine shopping. Also calculate the amount of cash you will have at the end of each month. If the amount is large enough, the money can be used to help settle unexpected costs.

5. Checking the projections that have been made

Because this report will be used for one period ahead, you need to do repeated checks. You can provide these projections to the company's internals for re-checking. After that, then provide this budget projection to investors or other outside parties.

6. Projection monitor

You need to periodically compare the financial reports of all budget projections that have been made. This will make you more proficient in making financial projections. In addition, you can also provide an analysis of predictions of expenses and income for the coming period.

Those are the things that need to be understood in making financial projections. It's a good idea to be very careful in designing and making it. Also use your financial analytical skills to make better budget projections.

You can deepen your financial skills by participating in the Financial Analysis Program from Prasmul Eli. The purpose of this training program is to understand the benefits of financial statement analysis results. That way, you can draw accurate conclusions about the financial condition of a company.