How to Calculate Accurate Financial Projections

It’s important to have a clear understanding of your business’s future and current finances. Even if you understand your current finances, it can sometimes be hard to make projections. Financial planning is complicated but with the right steps, you should be able to make accurate projections.

Compile Upcoming Income and Expenses

Your first step is to compile all of your income and expenses. You should compile costs for taxes, rent, insurance, inventory and any other consistent cost that you have.  You should include the money earned that you haven’t received yet and expenses that you incurred but haven’t paid yet. This is your accounts payable and accounts receivable.

Factor in Seasonality

For seasonal businesses, this part is easy. However, even if you don’t think of yourself as a seasonal business, it’s important to look back at your business’s history and find patterns in the sales. Now, past performance isn’t always an indicator of future performance. However, there is some value in tracking it. You will be able to make better, more educated guesses on the future of your business if you pay attention to the history.

Calculate the Debt

Debt tends to fluctuate depending on cash flow. This is why you wait to calculate your debt. With debt calculations, you have to consider the interest. Make sure to account for how much of the balance you can pay down. Debt calculations are an important part of financial planning.

Estimate Unforeseen Expenses

There are always going to be unforeseen expenses. By now, you probably understand a lot more about your business’s income, cash flow, expenses and even the seasonal fluctuations. This is great information to have because this is how you can calculate unforeseen expenses. You can’t predict what will happen but you can always predict that it’s likely that something will happen.

Try to make your best guess on what the future expenses might be. Let yourself come up with different scenarios that may cost your business. While you’re at it, make sure that you give yourself some cushion. Always make sure to run a variety of scenarios.

The more that you know about your current and past finances, the more likely you are going to be able to make financial projections in the future. Financial planning involves looking at your current finances, your past and then looking into the future. This way you can made educated decisions based on your finances. Unrealistic projections can break a business, but thorough planning avoids that.