Using Financial Statement Projections to Improve Your Business

Financial projections are an integral part of any comprehensive business plan. But, just what are they and what benefit can they provide to your business?

Most businesses are accustomed to traditional financial statements which are "historical" in nature. That is to say that they measure income or present a financial position for past events. The information as reported in historical financial statements is a summarized presentation of the operations of the business during a specific period of time.

While it is certainly important to know where you have been, it is equally important to know where you are going. Thus, the purpose of "projected" financial statements is to show what is likely to occur in the future based on key financial and business assumptions of the present.

When preparing projected financial statements for a company, we begin the process by developing a computer spreadsheet model. These models consists of an interrelated set of equations, formulas and linking expressions that define the key assumptions used in the projections. A full projection will consist of an income statement, balance sheet, cash flow statement, various supporting schedules and notes explaining the key assumptions used to develop the projected statements. Although projections may extend out to five years or more, usually several months to a year is more common due to the decreasing reliability of predicting future events.

Historical financial statements typically provide the starting point to develop the projected reports. By studying the results of past operations we can identify key relationships within the financial results of the company. This information, along with interviews with the business owners, allows us to define the values and calculations that will be used in the projected financial statements.

Developing these financial models can become rather complex. However, once completed, these financial models can be used to run various "what if analysis" whereby a given value change can be entered in the model to see what effect it will have on the results of business operations throughout all the reports.

Financial projections can be used as a "compass" to steer your company toward the future using a variety of possible scenarios. For example, projections can help to highlight and answer such questions as:

• How will my projected growth rate in revenues affect my variable and fixed costs?
• At what level of revenues does my break even point occur?
• What will be the impact of expanding or discontinuing a product line?
• In order to grow revenues by X% per year, what will be the required increase in inventory? How will I finance this inventory increase?
• To achieve my projected growth, what new machinery acquisitions will be required? What is the best means to finance it?
• What would be the financial impact of leasing the equipment rather than purchasing it?
• What impact will inflation have on my business operations?
• How will our key financial ratios change given our expected projected results?
• Will we be able to service our existing debt?

A comprehensive projection is like a road map. It shows you the best course to plot in managing the growth of your business and gives you a clearer vision of your destination.

Our firm has extensive experience in preparing projected financial statements for various industries and purposes. If you’re applying for a bank loan, seeking investment capital or planning a business expansion we are available to answer any questions you might have with regard to preparing financial projections.