What is the purpose of financial projections?

about financial projection

What is the purpose of financial projections?

By Smith & Smith & Ruiz CPA's

Each year, planning and working on your company’s financial projections could be one of the most significant things you do for your organization. The outcomes, or formal projections, are frequently less essential than the process itself. Strategic planning, if nothing else, helps you to “come up for air” from the day-to-day difficulties of running a business, analyze where your organization is, and design a clear course of action. Regular planning also assists your firm in dealing with change, both within and externally. You can find challenges and opportunities by reconsidering your company’s capabilities, markets, and competition frequently. You can respond to new developments rather than simply trudging along. Contact Smith & Smith CPAs to have a CPA develop up a financial projection for your company in Arlington.

What is a financial projection?

A financial projection, in its most basic form, is an estimate of future income and expenses. Typically, the projection will take into account internal or historical data as well as a forecast of external market conditions. In general, you’ll need to create both short- and long-term financial estimates. A short-term estimate covers the first year of your firm and is often laid out month by month. A mid-term financial estimate typically covers the next three years of business, year by year.

Key elements of your financial projection

Discover why compiling a financial projection is the best way to plan. Financial statements of three categories should be included in all financial projections:

Income Statement

An income statement summarises your revenue, expenses, and profit for a specific period. This is where you will want to do the most of your forecasting if you are making these estimates before launching your firm. The following are the main sections of an income statement:

  • Revenue – Revenue is the amount of money you will make from the items or services you give.
  • Expenses – Make a list of all the expenses you will incur, including direct costs (such as materials, equipment rents, employee wages, your salary, and so on) as well as general and administrative costs (i.e. accounting and legal fees, advertising, bank charges, insurance, office rent, telecommunications, etc).
  • Total income – Your earnings less your expenses before taxes.
  • Income taxes
  • Net income – Your total income before taxes.

Cash flow projection

A cash flow projection will show a loan officer or investor that you are a good credit risk and will be able to repay a loan if one is approved. A cash flow projection is divided into three sections:

  • Cash revenues – This is a summary of your projected sales for a certain period. Make certain that you only account for cash sales and not credit sales.
  • Cash disbursements – Make a list of all the monetary expenses you expect to pay that month in your ledger.
  • Reconciliation of cash revenues to cash disbursements – This one is simple: simply subtract the number of cash disbursements from your total cash revenue. Carryover any balances from the previous month and add them to your overall cash revenue.

Balance Sheet

This review will provide a snapshot of your company’s net worth at a specific point in time. It is a summary of your company’s financial data divided into three categories: assets, liabilities, and equity.

  • Assets – These are the tangible items of financial value that your organization owns.
  • Liabilities– Liabilities are any debts owed by your company to a creditor.
  • Equity – Equity is the net difference between your company’s entire liabilities and total assets.

We hope you have found an answer to all of your questions on why financial projections are so crucial. Financial projections have many benefits if done correctly. If you have any further questions, please contact Smith & Smith CPAs in Arlington, Texas. We are here to assist you to solve all of your difficulties by giving the best service possible.

Related Articles