Running a business allows you the opportunity to make many decisions — and the farther into the future you can look, the more profitable these decisions can be. Take into account the following tips from the Kankakee County Chamber of Commerce to make more accurate projections for your venture.
Why Do Small Businesses Need Accurate Financial Projections?
You may wonder why you need to determine the state of your business's finances months or years from now. This activity allows you to do the following:
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Allocate funds and resources. As an enterprising business owner, being unable to follow through with plans due to a lack of resources or inadequate funds can be immensely troubling. That's why it's essential to make accurate projections on what will be needed in order to get the job done right. Having the ability to accurately predict one's budget and assess how much time and money will be required for a particular task allows an entrepreneur to make informed decisions that could prove invaluable down the road. With these kinds of forecasts, you are able to effectively plan ahead and manage finances accordingly, as well as ensure that sufficient supplies and materials are available at any given time. Making accurate projections also gives you a better idea of how your business is performing, allowing you to allocate resources more efficiently.
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Provide investors with accurate data. From predicting outgoing and incoming cash flows to understanding how factors like the economy could potentially affect your business, having an accurate financial projection is vital for showing investors that you have taken steps to prepare for whatever comes. Having such projections will also reveal any discrepancies between reality and expectation, which could give you time to make necessary changes if needed. Being able to provide potential investors with sound financial data that accurately reflects your company’s anticipated performance is an invaluable asset that can provide rewards both now and in the future.
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Prepare for uncertain times. In the face of rising inflation and supply chain issues, having an accurate understanding of your company's current financial position and predicting future fluctuations can be an invaluable tool. Estimating potential income and expenses — not only for the next month, but also for the quarter and year ahead — could determine how best to plan for any changes in the economy or other external factors. By accurately assessing your situation, you are able to make well-informed decisions when it comes to investing resources into new products or services, expanding market reach, or even cutting costs where necessary.
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File accurate tax reports. For entrepreneurs, accurate filing of taxes can be a pivotal factor in the financial success of their operations. Paying quarterly taxes or estimating income and expenses owed at the end of the year can help business owners stay on top of their obligations. Another important step to keeping good standing with state and federal organizations is filing an annual report that details your income and expenses for the year. Such reports are typically required by most states and should include updated contact information.
3 Tips for Predicting Your Business's Financial Future
Forecasting your financial future is similar to creating a good budget — but there are a few important differences. You can think of your predictions as realistic blueprints for how you expect your business to grow.
1. Be Realistic
We'd all love to found a startup that grows into a multimillion-dollar company overnight. Don't put these fantasies into your spreadsheets, though. Look at your past sales and expenses to determine how the next few quarters and years will likely play out, and use both qualitative and quantitative methods to make the best predictions. You can certainly factor in how the onboarding of a new client or the hiring of marketing staff may change your business when you're making your calculations.
2. Don't Use Paper Tracking
Perhaps the most important takeaway here is that you need to digitize your documents. Even if you're used to performing small calculations with paper and pencil, now isn't the time to potentially misplace a document. Right now, starting with a spreadsheet such as Microsoft Excel is likely fine for your small business. You can convert your Excel spreadsheet to a PDF file to make it easier to email to staff members or investors, and then use a tool to switch from PDF to Excel when you need to make adjustments to it (you can also use a PDF editor to make changes as needed directly to the PDF). As your business grows, you will have the opportunity to use more professional software to make financial predictions.
3. Divide Your Projections by Category
Don't try to lump all of your finances into one spreadsheet. According to experts, even if you're running a fledgling startup, you should create an income statement, a sales projection, an expense sheet, and a budget that forecasts your cash flow.
Create a Schedule for Your Projections
Creating and sticking to a schedule can be one of the most important steps in making accurate financial predictions. Having a set timeline for estimating income and expenses for the month, quarter, and year can help entrepreneurs better plan for potential changes in the economy or other external factors. Using an online schedule template to stay organized may also prove beneficial, as this may help with tracking progress and staying on top of deadlines.
Make a Plan and Continue Reviewing
If you want to see growth, the most important thing you can do right now is to create a long-term picture of how you're using your resources and make a plan for improvement. Use this advice as a solid foundation for your future business decisions, and it will help you to compile accurate records for potential investors and for your required annual report. It may feel like a lot of work, but regularly examining your financial position will make a big difference in your business’s future.
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