See Also:
Cash Flow Assumptions
Balance Sheet Projections
Cash Flow Statement Projections
Cash Flow After Tax
13 Week Cash Flow ReportDynamic Cash Flow Projections
Financial statements are the basic building block for understanding how a business is doing. They provide management a way to assess the results and consequences of past decisions. However, because financial statements reside in the past, they are of limited use when used to forecast the future. While there does not exist a fool-proof way to forecast the future, there does exist a reasonable best-guess method to forecast how things may turn out. This is where financial projections come in.
Like historical financial statements, there are 3 basic financial projection reports: Projected
Income Statement, Projected
Cash Flow Statement and Projected
Balance Sheet. A dynamic cash flow projection model is an important tool for managing your business.
Most professionals will produce projected income statements. Some will produce projected cash flow statements. However, few will do projected balance sheets! A complete set of financial projections is very important to keep and maintain.
These financial projections typically cover an entire fiscal period of 12 months and are based on best-guess assumptions. Some more sophisticated companies and practitioners will go so far as to create best case, worst case, and probable financial projections. These in turn are based on best case, worst case and probable assumptions for the company's future business prospects.
Each of the 3 financial projections tells a different story about the company.
Income Statement Projections
A projected Income Statement provides management an idea of how the company's profitability will look 12 months into the future. This projected profitability rests in large part on management's ability to forecast industry and customer demand, costs, as well as many other macro and micro economic factors.
Cash Flow Statement Projections
The projected Cash Flow Statement provides management with an idea of how the firms liquidity will be impacted given the business assumption inputs for the Income Statement projection. The projected Cash Flow Statement seeks to answer questions such as: How much working capital will we have? How much additional capital might the firm need if assumptions for growth change? Will we have enough money to make payroll? Can we make our debt payments?
Balance Sheet Projections
The projected Balance Sheet allows management to know the state of its asset, liability and equity base. As business expands or contracts so too will the firm's
assets, liabilities and
equity. The projected Balance Sheet allows the company to project debt levels and covenants.
Cash Flow Step by Step
In order to successfully create financial projections a variety of information will need to be gathered. It is important to obtain the most recent and up-to-date information as all projections of the future are grounded in the past.
In other words…Garbage In Is Garbage Out! Done correctly, you will only need to do this once. However, if you come to find out that there are pieces of information missing, you may need to adjust accordingly. Someone in accounting, preferably a person who has access to the most current financial statements.
Thankfully, historical and year to date financial statements can be easily obtained if you use an accounting system such as PeachTree, QuickBooks or Great Plains. Since all the future projections will be made in a spreadsheet format, it will be imperative that the historical financial statements also be in a spreadsheet format. Each of the above three programs can export into an Excel format.
Step 1. Historical Financial StatementsMake sure that you get all 3 financial statements from the previous fiscal period and/or year to date into a spreadsheet format such as Excel.
Step 2. Format Financial StatementDouble check that the format is how you want it to be. Make any changes accordingly. The historical financial statement will serve as a template for how the financial projections will look.
Income Statement Projections
After you have finalized the entries for the assumptions page, the next task at hand will be to tackle the Income Statement projections. Of all the projections you do, this is one that receives the most attention. The Income Statement projection can serve as a budget as well as a tool for management to analyze various business scenarios.
Notice how we started with the Assumptions Worksheet. The information there feeds the Income Statement.
The Projected Income Statement will need to be done prior to the beginning of the next fiscal period. You will need to do a lot of research before you can begin. Specifically, the assumptions page will need to be completed. Please see the "Document Assumptions" section for further details.
Projections are an important tool for management decision making as well as for bank reference. Delegation of this task needs to go to someone who is familiar with both finance and accounting. The person also needs to be comfortable maneuvering in Excel.
Formulas for individual cells will need to be created and referenced to the appropriate cells bask in the Assumptions Worksheet. Use the same format as used in the actual financial statement so that you can drop in actual results on a monthly basis.