GUEST ARTICLE BY LAWRENCE MAGER
The Importance of Financial Projections
Having financial projections is one of the best ways for small business owners and leaders to pave the way for their business success. Without them, it can be difficult to know for sure if you're on track to achieve success or not. If you encounter any issues, you can make changes to your projections to be more effective. If everything looks like it will go according to plan, you can see what further growth opportunities may exist for your company. Financial projections are a great tool that can help your business in multiple ways. There are certain steps needed in creating these financial projections, and whether you are currently a business owner, or have a goal to become one, the following three categories will be your foundation:
Inventory Management and Financial Projections
Inventory management can play a big role in your financial projections. Small businesses often underestimate how much they can save by implementing inventory management systems for their business. According to David Pyke, professor of operations and supply chain management at the University of San Diego, “owners of small and emerging businesses would be stunned to see how much money they can save by wisely managing their inventory. Many small businesses are not rolling in cash, and much of their funding is tied up in their inventory. Good practices balance customer demand and management of inventory in the smartest possible ways.”
Advanced Inventory Software
There are many software tools for tracking inventory, all of which can integrate with existing software and are scalable. Advanced software can also apply analytics and filtering capabilities that use barcodes to pinpoint relevant sales information at each step in the supply chain—information used to launch additional sales opportunities. Using automated barcode software gives a quick return on investment (ROI) by lowering operating expenses. This advanced software can now be acquired at affordable prices.
What to Put in Your Financial Projections
A financial projection is organized into three financial statements, namely:
Cash-flow statement
Income statement
Balance sheet
Let's take a closer look at what these financial statements are.
Cash Flow Statement
You can see a cash flow statement as an itemized income and expense list. There are three main items on a cash flow statement:
Operating activity: Key factor is the inflow and outflow of cash daily.
Investing activity: Key factor is the inflow and outflow of cash long-term, for investments, sales of property, or equipment assets.
Financing activity: Sources of cash from banks or investors. At the end of each period, total it up to show either a profit or loss.
Income Statement
This focuses on the company's revenue and expenses for a particular period. The net income is the measure of profitability. The four key items for an income statement are:
Revenue
Expenses
Gains
Losses
Balance Sheet
A balance sheet shows a general overview of the company’s financial health. The components are measured at a specific point in time (usually the end of a fiscal year). The key items for the balance sheet are:
Assets: Have economic value and provide future benefits, such as generating cash flow, reducing expenses, or enhancing sales. Assets usually include inventory and property.
Liabilities: Business liabilities are debts that accrue during normal business operations, such as short- or long-term accounts payable or loans.
Owner's equity: This is your profit, which may also be called net income. It’s the amount left over after paying all expenses.
A balance sheet can show you what your business owns and what it owes, with the difference being equity. The formula for a balance sheet is assets minus liabilities plus equity (Assets - Liabilities + Equity).
Accounting Skills for a Better Business
If you want to learn more about financial statements, audits, and accounting principles, there are online degrees in accounting available. If you pursue higher education, choose an online accounting degree that can work around your busy work and home timetable.
Taking better control of your inventory is one of the best ways to increase profitability and overall financial stability. Making financial projections is essential for all small businesses and will benefit you by allowing you to take better control of your business and its finances.