A Successful Business Financial Projection - Internet Business Digest

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A Successful Business Financial Projection
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A business seeking capital can't afford to
underestimate the importance of business financial
projections. A business financial projection is
simply forecasting your sales and revenue to the
lender. This information is important because it
is a key indicator to your ability to repay a
loan.

If you are unsure about financial forecasting and
how it relates to your business it is best to hire
someone who does know. Most lenders will want to
see a three or five year projection. There are 14
different items to include and fully support in
your financial projections. With these different
items it is best to give a month-by-month
breakdown for the first year, a quarterly
breakdown for the next two years, and an annual
breakdown for the final two years you are
projecting.

The different items to include in your projections
are; sales revenue estimates, administrative
costs, production costs, sales costs, capital
expenditures, gross margin by product line, sales
increase by product line, interest rates on debts,
income tax rate, accounts receivable collection
plan, accounts payable schedule, inventory
turnover, depreciation schedules, and the
usefulness or depreciation of assets.

The income projection enables the owner/manager to
develop a preview of the amount of income
generated each month and for the business year,
based on industry supportable predictions of
monthly levels of sales, costs, and expenses. When
determining the total net sales you will be
finding out how many units of products and
services you expect to sell at the prices you are
projecting. Make sure to think of what returns,
allowances, and markdowns can be expected. The
sales costs needs to be calculated for all
products and services used. Ensure that when
determining the costs of sale that you don't
forget anything such as commission paid to sales
representatives, transportation costs, or any
direct labor costs.

For the gross profit you would subtract the total
cost of sale from the total net sales. To get your
gross profit margin you will divide the gross
profits from the total net sales. This will be
expressed as a percentage of total sales or
revenues.

When formulating your business financial
projections there are five items that will ruin
the accuracy of your projections, and hurt your
chances of being approved for business financing.
The first one is wishful thinking or being
over-optimistic about your sales potential. Ask
yourself: "Is it possible to achieve the sales
levels you're forecasting?". A good example is
that a sales team can only visit a certain number
of customers each week or a factory can only
manufacture a given amount of products on each
shift. Make sure to keep your projections
realistic and even more important to be based on
supportable evidence. It is imperative to also
make sure that your sales assumptions are linked
directly to your sales forecast or your
information will contradict itself. Most lenders
are "by the numbers", so if your numbers don't add
up, you will get declined. A good example of this
is to say that you expect increased sales in a
market that is declining. That just does not add
up.


Another thing not to do when projecting your
business finances is to spend a lot of time
refining the forecast. Try to avoid tinkering with
the target numbers once they are set. Many
business owners neglect to ask the opinions of the
sales people who know the buyer's intentions about
what they think the projected sales should be. It
is important to make sure your sales team agrees
on any sales targets that will be set. One other
fatal mistake made by business owners when working
on financial projections is not getting feedback
on the projections from an accountant.

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