Today, we're learning how to
create financial projections.
Forget memory lane, let's take
a walk into the wild mystical world
of the future.
That's right, we're going to
see the future...
of your business.
If you're more of a reader, check
out the article and don't forget
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rest of our series,
"Ready, Set, Goals."
A strong financial projection tells
you the essentials of where your
business is headed.
Like how much money you'll make and
when you'll make it.
Financial projections are key, not just
in deciding whether you can afford to
go see your favorite band's 2031 reunion
tour, but also for securing lenders.
More than that, financial projections
are an important part of any
healthy business.
They inform you about sales trends,
incoming risks, opportunities, and
really fundamental stuff like will
I be able to pay my employees and
cover my bills?
There are two types of forecasts that
make a complete financial projection.
One, a sales forecast.
How many units of your product or
service are you going to sell over the
next three years?
Also include how many customers you expect
to have and how much profit you'll make.
Two, an expense budget.
Make a prediction about any and all
expenses over this three-year span.
There are going to be fixed costs like
paying rent on your office, but also
variable costs like marketing campaigns.
Don't go crazy here.
Just make an educated guess.
Okay, that's the pudding.
Now it's time for the proof.
We need to include financial statements
that help give your sales forecast and
your expense budget some credibility.
These statements contain invaluable
information on how your business is
actually doing, otherwise known
as your actuals.
Like flipping over tarot cards, each
statement helps build the case for your
financial future.
Behind card number one, an
income statement.
She represents growth, desire,
setbacks, and by that, I mean the
statement shows your profits and
losses to date.
Income statements show four elements.
Revenues, expenses, gains, and losses.
Card number two is a cashflow statement.
Concern with the divine fluidity of
being, and also what you do with your
money, cashflow is all about money going
into your business, cash in hand, and
money leaving your business, cash
outlay for bills.
Cashflow matters because it shows
the most realistic view of how your
business is doing.
For example, say you've made a ton
of sales this month.
Yay!
But all of your clients haven't
gotten around to paying their
invoices, and unpaid invoices mean you
won't have the cold, hard cash you need
to pay your bills.
Make sure your cash flow statements
cover three things.
One, operating activities.
These are the daily expenses of
running a business.
Two, investing activities.
Any investment in your
long-term future.
Three, financing activities.
Shows any investments from financers
or any payment to shareholders.
The third card is your balance sheet.
It's about balance of assets and liability.
Make sure your balance sheet shows
off three things.
One, assets.
This is any resource of economic value
that you own.
This could be cash, inventory,
or property.
Two, liability.
These are generally debts such as
payables and loans.
Anything that will cost you money.
Three, owner's equity.
After all liabilities are paid with
assets, any leftover amount is considered
owner's equity.
Balance sheets are split between
assets on one side and liabilities
and owner's equity on the other side.
The total dollar amount of assets
must equal the total dollar of liabilities
plus equity.
So the formula for an annual balance
sheet looks like this: assets equal
liabilities plus owner's equity.
So now that you have your three financial
statements— cashflow statement, income
statement, and your balance sheet— put
it all together and you have an informed
sales forecast and expense budget.
To be clear, the first time around
won't be as easy as making instant
coffee, but with a little practice
and you should practice and revise
throughout the year, it's totally doable.
Last thing I'll say, when creating
your projection, be optimistic
but realistic.
Look around your industry and use your
existing knowledge and your actuals
to make sure your projections paint
a good picture of your business
without overstepping.
Looks like you're well on your way to
creating your first financial projection.
Give yourself a big high five,
Nostradamus.
You've earned it.