The Value of Projections

Projections are an important piece to plan for the future of your small business. Projections can take many different forms, and vary in complication depending on the preparer and the nature of the operations. The important part is to make sure that projections are done. Projections can play an important role to:

-          Determine your company’s cash flow needs over a specific time horizon.

-          Determine how changes in operations may impact the financial results of your business.

-          Help make important business decisions based on the anticipated financial results of the business.

-          Help obtaining bank financing for a new venture or expansion.

-          Provide a benchmark against which to measure future performance.

-          Identifies potential risks and cash shortfalls to help keep the business out of financial trouble.

The first step is to figure out a starting point. A good way for owners to start is to look at prior period results. You can look at any period of time, but it’s a good idea to limit the scope to a period that will best reflect the operations going forward. Looking at historical sales, your starting point would be to project sales volumes for a given period. You can project volume by doing something simple like a percentage increase, or by drilling down into actual number of units expected to be sold.

Next, you need to project the costs of the business. To project your cost of sales you can either use historical results and project cost sales using an estimated margin, or build your cost of sales by line item (material, labour, overhead, etc.).

Fixed costs can be projected by looking at historical results, and also being aware of what the cost structure will look like moving forward. The key with doing your projections is to put sufficient thought into what your business will look like moving forward.

Projections have a variety of benefits, as discussed above, and should form part of your overall business plan and strategy moving forward.

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