Planning out and working on your company’s financial projectionseach year could be one of the most important things you do for yourbusiness. The results–the formal projections–are often lessimportant than the process itself. If nothing else, strategicplanning allows you to “come up for air” from the daily problems ofrunning the company, take stock of where your company is, andestablish a clear course to follow.
Regular planning also helps your company deal with change, bothinside and outside the company. By constantly reevaluating yourcompany’s strengths, markets and competition, you’re better able torecognize problems and opportunities. You can react to newdevelopments, 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:
- First, the financial plan translates your company’s goalsinto specific targets. It clearly defines what a successfullyoutcome entails. The plan isn’t merely a prediction; it implies acommitment to making the targeted results happen and establishesmilestones for gauging progress.
- Second, the plan provides you with a vitalfeedback-and-control tool. Variances from projections provideearly warning of problems. And when variances occur, the plan canprovide a framework for determining the financial impact and theeffects of various corrective actions.
- Third, the plan can anticipate problems. If rapid growthcreates a cash shortage due to investment in receivables andinventory, the forecast should show this. If next year’sprojections depend on certain milestones this year, the assumptionsshould spell this out.
Depending on your company’s situation and objectives, you’llneed to develop several types of projections and budgets:
- A model that projects either the current year or a rolling12-month period by month. This type of forecast should beupdated at least monthly and become the main planning andmonitoring vehicle. Information in this model can be thespringboard for preparing the other types of plans discussedbelow.
- A long-range, strategic plan looking out three to fiveyears. While the 12-month forecast often reflects short-termexpectation and tactical plans, the long-range projectionincorporates the strategic goals of the company. For startupcompanies, the initial business plan should include amonth-by-month projection for the first year, followed by annualprojections going out a minimum of three years. Some investors mayprefer to see the second year broken out by quarters. It’s fine toappend the projections for years two and beyond to the 12-monthforecast, but the numbers should be more than just a simpleextrapolation of the current year. A strategic planning processshould accompany development of the “out year” projections.
- Budgets, typically covering one year. Budgets translategoals into detailed actions and interim targets. Budgets shouldprovide details, such as specific staffing plans and line-itemexpenditures. Given the detail required, the size of a company maydetermine whether the same model used to prepare the 12-monthforecast can be appropriate for budgeting. In any case, unlike the12-month forecast, budgets should generally be frozen at the timethey are approved. They should also be consistent with the goals ofthe long-range plan.
- Cash forecasts. These break down the budget and 12-monthforecast into even further detail. The focus is on cash flow,rather than accounting profit, and periods may be as short as aweek in order to capture fluctuations within a month.
All projections should be broken out by months for at least oneyear. If you choose to include additional years, they generally donot need to be any more detailed than by quarters for another yearand then annually after that.
The projections should include an income statement and a balancesheet. Expenses can be summarized by department or major expensecategory; you can hold line-item detail for the budget. Cash needsshould be clearly identified, possibly by adding a separatestatement of cash flows. If your financial statements usuallyreport financial rations or expenses as a percent of sales,calculate and report these as part of the projections, too.
