How To Calculate The Financial Projections Of A Business Plan
Financial projections help you and your investors see where your company’s heading. For a more accurate and complete picture, you need to determine a best-case and worst-case scenario when calculating your predictions. Even if you’re a new business, you can anticipate possible outcomes by researching market and industry trends in your sector.
There are several ways you can create a good estimate of your future projections. If you ensure you have accurate information, you should be able to make a clear case in your business plan to present to your investors. In this guide, we show you how to calculate financial projections for your business plan, step by step.
Create a sales forecast
Whether you’re a new or established company, you should be able to forecast sales. Previous sales can inform how much you’ll make in a year for existing businesses, taking into account month-to-month or seasonal changes.
If you’re a new organisation, make sure you have a good understanding of the market you’re in, and try and seek out trends that could benefit or negatively affect your company. Then outline the nature, price and quantity of products you hope to sell or service contracts you hope to fulfil every month. This will help you work out the revenue – the amount of money you’ll receive from your goods or services.
Forecasting sales will allow your company to reduce spend through accurately calculating the amount of inventory, team members or tools you need – saving on storage space and staff and shipping costs.
Organise your expenses
One of the most important aspects of calculating your financial projections is getting your expenses organised and accurate.
You can break down your expenses by separating them into ‘variable’ and ‘constant’ expenditure. Constant costs consist of rent and insurance, whereas variable costs include extra help over the seasonal months or advertising fees.
By doing this, you can see clearly what your average expenses are throughout the year.
Calculate your income
Your income takes into account how much money is coming into your business (sales) and how much is going out (expenses) each month.
You’ll need your revenue and expenses to calculate your income accurately, so it’s imperative that you organise them beforehand. Subtract all costs, expenses, interest and taxes from your sales. This is then used to create profit, loss and income statements, and determine the point at which you’ll break even.
Build a balance sheet
A balance sheet is a clear breakdown of all your assets and liabilities, which you can use to calculate your overall business net worth. It allows you to determine if your working capital is enough, as well as creating a visual aid to see if your company can sustain future projects.
- Unsold inventory
- Outstanding invoices owed to you
- The amount you owe on a business loan
- Invoices you haven’t yet paid to other people
To calculate your business net worth, you need to find the balance difference between the two by subtracting your total liabilities from your total assets.
Use a financial projections calculator
If you need help forecasting your business finances, it’s a good idea to use a financial projections calculator or template.
Microsoft Excel is a useful tool to create a clear projection. You’ll be able to calculate and create, among others:
- Revenue and expenses
- Cash flow
- Income statement
- Balance sheet
Excel is designed for everyone, so whether you’re a novice or a fully-fledged accountant, you’ll be able to navigate it with ease. If you find Excel difficult to get to grips with, however, don’t worry. There are a range of free templates online to help you organise your finances.
Develop short, medium and long term projections
Having clear financial projections can help when making important decisions about your company. It’s important that informed plans are then put in place to allow businesses to grow.
When compiling your forecasts, focus initially on making an accurate prediction for every month of the first year. Then roll this out to the second and third years (either completing a monthly or quarterly forecast), taking into consideration any investments you wish to make or new service offerings to implement. Fourth- and fifth-year financial projections can then be made on a quarterly basis.
Receive specialist support
Knowing how to calculate your financial projections can be tricky. But by investing in a franchise, you’ll receive specialist support when bringing together and evaluating your business plan.
Rainbow International will make sure you have all the information you need so that you can then make successful business decisions easily and quickly.
If you have any questions regarding our support for franchisees, get in touch today!