There are many important steps in creating a new business, but one of the most crucial components is crafting a reasonable financial projection. Although you’ll never know the actual costs and revenues until you dive in, going into a business without a sense of your financial obligations is setting yourself up for failure. But if you're a new entrepreneur, you may wonder where to begin. In this guide, the Blue Springs Chamber of Commerce provides tips for plotting your business's financial future.

Why Do You Need to Make Financial Projections?

Accurate projections allow you to make better budgeting decisions that direct capital toward income-generating activities. When you have limited cash flow or rely on customer credit to keep your operations going, projections are vital to the life of your enterprise. You also need a well-crafted financial forecast for loan approval or interest from investors.

Another area that can cause problems for new business owners is taxes. Underpaying quarterly taxes can leave you with a massive bill at the end of the year. Overpaying taxes means letting the government hold your money interest-free when you could put that cash toward assets and investments that earn you increased revenue.

Many states require annual reports with your taxes to remain compliant and in good standing. Avoid state-imposed fees or penalties by filing your statement on time. If you miss the deadline, your state could revoke your company's right to do business or remove benefits, such as your personal liability protection.

What Financial Statements Will You Need?

Assemble the correct documents to form trustworthy predictions. Your balance sheet, income statement, and cash flow statement give you essential data about your company's financial health and direction.

Your balance sheet shares an overview of your business's financial standing and value by summarizing your equity, assets, and liabilities, explains Excel Capital. Put your equity and liabilities on the right side of your sheet and the assets on the left. The sum of each side should be equal.

Compile an income statement. This sheet outlines your expenses, revenue, and net income. Also known as a profit and loss statement, your income statement helps you monitor spending and the effect of taxes and interest costs.

Track your inflows and outflows with a cash flow statement. Include cash and noncash activities from financing, investing, and operations. Choose the indirect accrual method or the direct transactional method for tracking.

Keep PDF files of all of these statements so you can access them any time, anywhere. Using a PDF scanner, you can use your smartphone or tablet to take photos of your hard copies and automatically upload them to PDFs that you can easily send out to investors and team members.

How Can You Ensure Your Projections Are Realistic?

Even with accurate historical data, an overly aggressive projection leads you astray. GrowThink reports that you should limit your predictions to three- to five-year forecasts and readjust as you gather more information. As you project future revenue, create a conservative and ambitious projection. Reality likely lies somewhere in the middle.

You should also prioritize projected expenses because you have much more control over that part of your budget than revenue. Categorize costs, such as rent, utilities, marketing, license fees, and salaries. Use reliable data to estimate variable expenses, like inventory and labor.

Which Programs Can Help You?

Make your projections come to life by using data visualization tools to present the information in a format easily understood by your team and financiers. Charts, graphs, histograms, and heat maps create a clearer picture than a block of text.

Cloud-based accounting systems let you track expenses and income and coordinate with key members of your team who have input into the budget. With cloud solutions, you don't have to worry about losing your data in case of on-prem system failure or natural disaster.

You will also want to have software to help boost and track your marketing efforts. This could be the ticket to increased sales and revenue. Look for software that blends automation, lead generation, and cloud-based marketing into one effective tool. Then, you can use the data to report on the previous quarter’s efforts and make projections for the upcoming year.

Plan for the Future

You may not be able to predict the future, but you can make realistic forecasts that place you a step ahead of the competition and out of the path of trouble. They can also help you to solicit funding and fulfill your state requirements of submitting an annual report and taxes. Keep financial projections as an essential part of your business strategy.