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Financial Projections

Definition: Estimates of the future financial performance of a business

Planning out and working on your company's financial projections each year could be one of the most important things you do for your business. The results--the formal projections--are often less important than the process itself. If nothing else, strategic planning allows you to "come up for air" from the daily problems of running the company, take stock of where your company is, and establish a clear course to follow.

Regular planning also helps your company deal with change, both inside and outside the company. By constantly reevaluating your company's strengths, markets and competition, you're better able to recognize problems and opportunities. You can react to new developments, rather than simply plugging along.

But what keeps it from just being a number-crunching exercise? Here are three good reasons to project your financials:

Depending on your company's situation and objectives, you'll need to develop several types of projections and budgets:

All projections should be broken out by months for at least one year. If you choose to include additional years, they generally do not need to be any more detailed than by quarters for another year and then annually after that.

The projections should include an income statement and a balance sheet. Expenses can be summarized by department or major expense category; you can hold line-item detail for the budget. Cash needs should be clearly identified, possibly by adding a separate statement of cash flows. If your financial statements usually report financial rations or expenses as a percent of sales, calculate and report these as part of the projections, too.