Many business owners do not fully understand the value of financial projections. For start-ups, new business divisions or new product introductions, financial projections are largely guesstimates. Educated guesstimates, but guesstimates nonetheless. But that misses the point and runs the risk of completely ignoring the value of financial projections. The purpose of forecasting revenues and expenses and preparing proforma financial statements is to ensure that you consider as many of the factors that go into projections as possible. This process also relies heavily upon your company’s strategy for achieving its forecasts.
It is easy to be overly optimistic. But a true best case scenario looks at what would happen if your company exceeded its goals by a factor of 2 or 5 or 10. How would you handle that growth? How many more people would you have to hire? How much infrastructure — computer systems, software, phone systems, etc. — would you have to put in place? Would you have to expand your office or move to one or more buildings? How much additional equipment would you need to purchase and for what cost? Many rapidly growing companies fail, not because they are not profitable, but because they run out of cash. Therefore, optimistic financial projections play a key role in identifying potential major pitfalls in advance.
Worst case proforma financials helps your company identify what functional expenses and overhead your business would need to cut if you lost a key customer, the industry entered a downturn or some other scenario which led your revenues to drop more than 10% over the prior year. (Or, for a start-up, if your firm encounters stumbling blocks on the road to ramping up.) This forecasting process aids in identifying how much extra cash you should keep on hand.
The most likely scenario is your best estimate of what the new business will look like. This forms the basis of most of your planning over the ensuing months. What your revenues will be and from what sources and what your costs will be.
The process of thinking of your company’s sources and uses of cash, the timing of those sources and uses and how these may change as your assumptions change provide you with an invaluable tool for achieving your long-term company objectives. We excel in this area — at combining strategy, historical accounting figures and company and market data to build easy-to-understand financial models and create proforma financial projections. Let us help you.