Making Financial Projections

Especially if you are looking to get funding in order to start your business from a bank or investor, but also if you want to have some achievable targets in place for your business, you will need to include financial projections into your business plan.
Back in the good days when the business world was predictable, you would be expected to provide at least 5 years of projections, but now it is too difficult to predict this far ahead (you would be lucky if you could predict the next few months). If you are writing your business plan for yourself then you may not need to go so far into the future but banks and investors will now expect forecasts for the next 3 years. So how do you predict the future as accurately as possible?
1.        Always be clear on your assumptions – Forecasting is largely guesswork, but it should be educated guesswork. Make clear what you are just assuming to be true and why.
2.       Be thorough in your sales predictions – This is the most important aspect and is also where the most mistakes are usually made. Think about everything; where are you going to get your sales from, who is going to buy from you, how much they are willing to pay, how long it will take to get the word out about you. You will also need to consider seasonality and company growth, don’t expect an even income.
3.      Be thorough on your costs – This should be the easiest aspect of your forecast but you will need to consider absolutely everything: marketing costs, distribution costs, employee salaries, employer’s national insurance contributions and so on. There are a variety of costs you may not have thought of straight away. Go through it with a fine tooth comb and then again with a finer one.
4.      Compare with previous accounts – If you have already been trading, compare your forecasts with your previous year’s accounts to ensure you haven’t wildly over or under predicted your success. Include the comparison in your business plan.
Besides all of these tips, it is a good idea to seek professional advice when forecasting, especially if it is in order to gain investment or funding. At FW Accounting, we know how to build financial projections with as much accuracy as possible and know the questions you need to answer. Your bank or investor will also view your forecasting as having more credibility if the preparation has been assisted by financial professionals (that’s us).