You can see in black and white how successful your business and your strategic plan can be by putting all your revenue and expense assumptions together and projecting them over three years. Projecting also allows you to grow the business without running out of cash. Growth in sales always incurs additional cash requirements to generate and support the additional revenues.
When used properly, financial projections can help you determine what additional assets you need to support your increased sales and what impact those assets and sales have on your balance sheet. In other words, the financial projections indicate how much additional debt or equity you need to stay afloat.
All commonly used financial and accounting system packages come with functions to create financial projections. Use these tools to create your financial projections by plugging in assumptions based on your strategic plan.
Your financial projections include forecasting all three of your financial statements. Create projections by month for year one and then by year for the next two years. Follow these steps:
Use the estimated revenue for each target market group that you determine when you estimated revenue and expenses. Plug in the expenses related to your goals and action items and your operating expenses, to determine your net profit (hopefully) or loss.
Project the balance sheet.
As sales go up, so do other areas of the business — variable assets (accounts receivable, inventory, and equipment), variable liabilities (accounts payable and accrued expenses) and (hopefully) net income.
If your net income plus the increase in variable liabilities equals or exceeds the increase in variable assets, the company has the resources to finance itself. If not, you must bring in additional debt or equity. Use your current balance sheet to determine the various asset and liability accounts in your business.
Using the information in Steps 1 and 2, project how these numbers impact your cash flow, paying special attention to how much new debt or equity you need to inject into the business and when you need to inject it.
Even the best of the best don’t project their financial future with 100 percent certainty. Protect your business by building in a cash flow cushion in case things don’t go according to plan. This cash flow cushion, or compensating balance, is the act of borrowing or saving slightly more than you need and keeping it in a rainy-day account.
Maintaining a compensating balance is a good business practice and can protect you from seasonality, economic swings, and other changes in the business climate.
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Source:http://www.dummies.com/how-to/content/strategic-planning-how-to-project-your-financial-f.html
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