Starting a business involves a steep learning curve. In the first five years of startup life especially, entrepreneurs have to master a lot of new information, from how to manage a team to how to market their goods and services. One important skill every business owner should acquire is how to make financial projections. While this task may seem tedious, financial projections can help you make smart strategic decisions about your business’s future. Discover the benefits of creating financial projections and what the process entails below, presented by the Solano County Black Chamber of Commerce.
Understand the importance of financial projections
Financial projections allow new business owners to make strategic business decisions regarding practicalities like pricing, inventory, marketing, and more. Additionally, financial projections help you estimate future taxes you’ll need to pay at state and federal levels. This information is further relevant for your annual report, which you may need to file with your state to keep your business in good standing. Failing to file this document can result in financial penalties or even the loss of your right to do business. Check your state’s requirements.
Learn how to create financial projections
Financial forecasting is a detail-oriented process that will require you to examine many aspects of your business accounting. First, you need to determine your income versus your expenses. Then, you should project your sales as well as the cost of goods sold, COGS. From this, you can create a balance sheet and identify potential cash flow issues. Lendio has a comprehensive how-to guide that provides additional details about each step. Once you finish these tasks, it’s critical to go back and review your numbers. You don’t want to let any details slip through the cracks.
Know what financial statements to include in projections
You need a lot of financial documentation to create financial projections for your business. Relevant documents include cash flow statements, balance sheets, income statements, capital expenditures budgets, COGS overviews, and gross margin according to product line. The most important documents are the balance sheet, income statement, cash flow statement, and shareholders’ equity statement. The U.S. Securities and Exchange Commission has a handy guide to each of these documents, explaining what their purpose is and what information they include.
Invest in software to make the process easier
If you’re not great with numbers to begin with, the thought of creating financial projections can be downright daunting. Don’t worry. There are many handy tools to help. Technology that helps monitor your budgets can make accounting easier, so you can quickly create the financial statements you need for your projections. There is even software specifically geared to create financial projections. Bare Metrics has a list of financial projection software, including Vena, Jirav, and Prophix. With these tools, you’ll find it’s simpler and faster to get the job done, saving you stress.
Get the education you need to master this and other business processes
Making financial projections is just one of the skills you’ll want to master as a business owner in the first five years of startup life. From leadership to management, human resources, and marketing, there are many areas worth learning about to ensure long-term success. You might consider going back to school to sharpen your business skills and get the knowledge you need to thrive. For example, you can get an online accounting degree to learn the essentials needed to make financial projections, like creating balance sheets. An online degree offers great flexibility, as you can study when and where you want.
Learning how to make financial projections may seem tedious at first. However, it’s well worth the effort. With this skill set, you’ll be able to make more strategic business decisions, improving the odds of lasting success for your entrepreneurial venture.