How to Create Financial Projections for Your Small Business in 2023

How to Create Financial Projections for Your Small Business

As a small business owner, preparing financial projections may seem like a herculean task; however, if you can create financial statements for your business, making financial projections will not be daunting. Financial projections are crucial to managing your business.

A financial projection refers to a form of bookkeeping of the expected revenue, cashflows, and expenses of a business over a specific period. A financial projection can make a good basis for budget creation or be presented for external use. Financial projections are essential for every type of business to help them forecast their finances. 

This article will discuss how small businesses can create financial projections in 2023. 

Types of financial projections 

The different types or methods of financial projections are arranged under two categories, which include the following:

Quantitative financial projection techniques 

Quantitative financial predictions are those that are based on previous data. There are several quantitative projection methods, such as the following.

Pro Forma Financial Statements 

A Pro forma financial statement is a financial statement preparation that is based on the previous sales and expenses history of the business and its future financial goals. This method of financial projection is applied in mergers, acquisitions, or in opening a new business. 

Cause-and-effect method 

The cause-and-effect method of financial projection utilizes the cause-and-effect of variables to make financial predictions. Variables like rise and fall in demand, changes in tax rates, and the unemployment rate among many others can be used for bookkeeping to predict the business’s finances. 

Time-series forecasting 

Time-series forecasting involves the collection of data over a period. The collected data can be used to determine trends and predict the finances of the business. However, this method is more effective for short-term financial predictions. 

Qualitative financial projecting techniques 

Unlike quantitative financial projecting techniques that are based on previous financial knowledge, qualitative techniques are based on advice and predictions from financial experts. Qualitative financial projecting techniques include the following:

Reference class forecasting 

This method of financial projection refers to predictions made based on similar occurrences at a different times or places. Reference class forecasting is adopted to counter predictions that are completely based on human opinions. 

Salesforce polling 

This method of financial projecting depends on sales insight obtained by salespersons from direct contact with the consumers. 

Scenario writing 

In this method, predictions are made based on different scenarios written by a forecaster to predict the business’s finances from different starting points.

Executive opinions 

This method of financial prediction is based on the executive opinions of experts in various departments of the business, such as production, sales, and much more. These opinions are gathered and reviewed before they are adopted. 

Delphi technique

The Delphi method involves the preparation of a questionnaire that is presented to several experts independently. Following the response to the questionnaire, another one is created to allow experts to reevaluate their previous opinions. This process continues until a suitable prediction is made. 

Consumer surveys 

This method of financial projection is obtained from the consumer survey results. This could be in the form of telephone conversations, online forms, emails, and many other channels.

How to create a financial projection for small businesses in 2023

You can follow these simple steps to create a financial projection for your small business in 2023. 

Create a sales projection 

Data from the previous performance of your business can be obtained from the bookkeeper to create a sales projection. A sales projection would make predicting future sales and is an important part of a good financial projection. You can create a sales projection with the following steps: 

  • First, start by listing the goods and services you sell 
  • Measure your sales 
  • Make the necessary adjustments 
  • And subtracting costs from the estimated sales forecast

Create an expense projection

An expense projection can be created to predict the future expenses of the business. An expense projection makes provision for emergencies and is also an important part of a good financial projection. 

Create a balance sheet projection

Suppose your business has been running for a few months and you use virtual bookkeeping platforms. In that case, you can easily create a balance sheet projection highlighting the assets, liabilities, and the like for a specified period.

You can create a balance sheet projection with the following steps:

  • Choose a preferred format for your balance sheet projection
  • Get data from previous bookkeeping sources 
  • Review all assets and liabilities, both past and present 
  • Make a projection of your fixed assets 
  • Make an estimate of your business debts 
  • Predict your business equity 

Create an income statement projection 

You can create an income statement projection using your current income statement data. The income statement projection shows the predicted net income of the business after all expenses have been deducted. 

Create a cash flow projection 

The final step in creating a financial projection is a cash flow projection. The cash flow projection predicts how money is being spent.  

You can create a cash flow projection with the following steps:

  • Decide on the time frame for the projection
  • Highlight all your business income 
  • Highlight all your business expenses 
  • Workout your operating cash flow 

Benefits of virtual bookkeeping services for creating a financial projection for your small business 

Financial projections have been made easy with virtual, outsourced bookkeeping services, and here are some benefits of employing these platforms for your financial projections: 

  • It is accurate: if your bookkeeping is already done on virtual platforms, making a projection is more accurate than doing it manually. This is because necessary data can be easily pulled out and computed correctly. 
  • It is credible: your financial projection is more credible if it contains the necessary financial statements. It makes your business more credible to investors and other external parties
  • Data is readily available: with virtual bookkeeping platforms, data is readily available when required. You can easily access the necessary books or statements when creating your financial projections. 

If you’re looking for a good virtual bookkeeping service for your business, you can reach out to Edge Capital. The Edge Capital offers accounting and consultation services for small businesses, including bookkeeping, financial statement preparation, financial consulting, and many other accounting services. Contact The Edge for bookkeeping assistance today to learn about how we can assist you.