Financial Projections
Putting together financial projections for your business is a good exercise and tool for business owners to help manage and monitor the financial health of your business as well as for fiscal year business planning and budgeting. In this post, we’ll focus on revenue & income projections.
Now you may say, “I don’t know anything about creating financial projections.” Well, the good news is creating financial projections isn’t overly difficult, but it requires some work on your part. Even if you work with a financial professional, you’ll need to provide estimates/projections of your anticipated revenue and expenses. You don’t need complex software to do financial projections. An Excel spreadsheet (or other comparable spreadsheet application) will suffice.
If you’re in your first year of business, you won’t have any historical information to rely on so it may be a little more challenging but not impossible. You will have to project/estimate your monthly revenue based upon committed revenue streams (ex: signed client contracts/agreements) and potential revenue streams (ex: a good amount of certainty the revenue will be committed to).
Avoid “blue sky” scenarios meaning don’t include potential revenue from revenue sources where you don’t have a high amount of certainty the project will be committed to. For instance, you’re in early negotiations for a project that will result in substantial revenue, but you are far from a firm commitment and/or signing a contract/agreement. This is considered “blue sky.” You don’t want to include revenue from “blue sky” scenarios as it will artificially inflate your revenue projections and you risk planning and budgeting around revenue expectations that may not come to fruition.
It’s also a good idea to break out your revenue projections by client. You can break out the projections further by project if you want that granular information but it’s not necessary. Breaking out your revenue projections by client will make it much easier to compare and analyze your projections vs actuals and will help you identify your primary revenue streams and provide information for future historical analysis (ex: how does revenue from client A in 2022 compare with 2023).
Once you determine your projected revenue, you’ll need to do the same with expenses breaking out expenses by their respective categories (ex: advertising expense, dues & subscriptions, payroll & payroll related expenses, rent, utilities, office supplies, local transportation, telephone, etc.).
As you start putting together the projections, it should resemble an income statement (P&L). In essence, your financial projections are a projected/estimated annual income statement (P&L) broken down by month.
That said, if you have historical information (ex: you’ve been in business for at least a year), you can review your actuals on your income statement (P&L) from the prior year, back out any one-off sources of revenue and one-off expenses and provided your revenue and expenses will be similar to your prior year, use that information to help populate your current year financial projections and make adjustments accordingly.
Keep in mind that you should be updating your financial projections monthly (at the very least) to adapt to changes in information (ex: gain/loss of new client and/or revenue, addition/reduction in anticipated expenses). As you have updated information, you should make it a point to update your projections, so the projections align with the then current information available. This is crucial for business planning and budgeting needs and to monitor the ongoing financial health of your business.
At the end of each month when you close your books and run your monthly income statement (P&L), compare your financial projections with actuals on your income statement (P&L) to see how you tracked and then populate the actuals for the month into your projections so you can see how you are now tracking for the year.