What is a Financial Projection?

Forecasting your organization’s financial health may seem like a daunting endeavor. After all, no one can predict the future. However, if you take the time to understand how these predictions are made, you will be better able to make accurate forecasts for your own company. Quality Assurance Solutions invites you to explore the following tips and resources to help you make financial projections for your small business.

What is a Financial Projection?

What is a Financial Projection?

A financial projection is exactly what it sounds like: a forecast of your organization’s fiscal future. Most have at least the following three elements:

• Income statement
• Balance sheet
• Cash flow statement

An income statement is also known as a profit and loss statement. This document lists out all of your company's income and expenses to calculate the profit or loss incurred over a period of time. A balance sheet documents the assets and liabilities to show the organization’s fiscal status at a single point in time. The cash flow statement details exactly how money moved through your business within a specific period.

If you are a new company, or one branching out into other products or services, conducting market research helps you make educated guesses about how many sales the business can expect to make and at what price point. Use this information when creating the statements needed for your forecast.

The Purpose of Financial Projections

Data shows that 82% of small businesses fail because of insufficient cash flow. If your company has a fairly accurate financial projection available, then it is easier to make smart decisions and ensure a healthy flow of funds.

Understanding what is a financial projection is necessary when applying for many funding options available to small businesses. Investors and lenders want to know that your company will soon be profitable before they disburse any loans. Creating reasonable predictions based on either past performance or in-depth market research communicates to investors that you are serious and capable.

By helping you estimate how much you will owe in taxes, fiscal projections help your entity stay legally compliant. Most states require companies like yours to pay taxes and file certain paperwork every year to remain in good standing and to continue conducting business. Failure to do so may result in fines or loss of the right to operate within the state.  

How To Make More Accurate Projections

There are several ways to create more on-the-mark forecasts. Using financial planning software allows you to track income and expenses so that the information is readily available. These programs also assist with the necessary arithmetic. By incorporating all relevant data and minimizing clerical errors, software can improve the accuracy of your predictions. The software also helps you create the necessary documents more quickly so you can spend time on other important tasks.

If you struggle to prepare and understand financial documents, you may want to consider returning to school. One of the many benefits of continuing your education is a better understanding of what is a financial projection. As an added bonus, relevant courses and meetings can help you sharpen your overall skills and grow your network to develop a stronger company. Pursuing an online MBA allows for greater flexibility than in-person classes, so you are able to build a schedule that allows you to run your business and spend time with family and friends.

Financial projections are important for all companies. These documents help convince investors of the company’s solvency, and they support smart internal decision-making to ensure the organization continues to flourish.