Use Financial Projections as a Tool to Drive Your Small Business Growth
Your small business growth is tied to your financial projections. They are among the most effective and powerful tools to drive small business growth.
Using these can help you keep your business on track, monitor cash flow, and identify issues before they become major problems.
In this post, OnPoint Advisory will explain why’s it’s important to use projections as a growth tool.
Why Use Projections?
Professional associations, lenders and Governments all tell the same tale as to why most businesses fail within the first few years of operation.
- Undercapitalised – there isn’t enough money behind the owners or being generated to fund the operations.
- Bad Financial Management – generally a combination of no planning (or not sticking to a plan), no proper record keeping or unrealistic expectations.
Using a plan and projections to guide your growth can help you avoid these traps, because you’re using information to guide your decisions rather than “gut feelings.”
When you link your business decisions in with your financial plan, you can avoid costly mistakes that sidetrack businesses and drain resources.
How Projections Help A Business
When you monitor you progress against your projections, you can identify opportunities and areas that require further attention.
Reviewing your projections on a regular basis can make you look at the changing scenarios presented and the impact they can have on your business.
At a minimum this should be done annually, but to be the most effective, it should be done at a minimum quarterly.
Steps In Preparing Successful Projections
- Conduct Market Review & Analysis
- Create Realistic Projections
- Ensure Projections Are Reflective Of Historical Information
Conduct Market Review & Analysis
As you consider your businesses performance, perform a market review that looks at the following:
- Location – are there new competitors in your area, are there changes to market size, etc that can affect your goals;
- Market Size & Target Market- has your target market changed? Do you need to consider new services or products to retain clients?
- Demand – what is currently in demand in your market? Are you able to meet this demand?
- Competition – look at your competitors and evaluate how they are impacting your business. Are there new competitors in your target market?
- What Is Your Competitive Advantage – what sets your business apart from your competitors? Why should clients engage your services? What is your value proposition?
Create Realistic Projections
You have now completed your research into the market. Now it’s time to start your projections.
Depending on the type of business you operate, some key assumption you should consider in your projections are:
- Number of clients;
- Average revenue per client;
- Anticipated growth in client numbers and revenue per client;
- Fixed costs that may have annual increases, such as rent increases linked to CPI;
- COGS; etc
Also look at historical expenditures and the Return on Investment (ROI) you received on those outlays.
For example, you ran an advertising campaign at a cost of $500 that resulted in $2,000 of new recurring revenue, then this would be an area to invest in more in the coming year.
However if it only returned $500, then you would need to focus your spend elsewhere.
Ensure Projections Are Reflective Of Historical Information
It is important to consider prior performance when developing projections.
Any major changes in projections should be backed by well documented plans and funding or should be reconsidered, as they may be unrealistic.
For example, if you’re projecting year-over-year revenue increases of 40% and net profitability increases of 20%, what backs up those assumptions? What changes will you be making to the business to expect such growth?
Some tips to help with your projections:
- Projected GP, Operating Costs and Net Profit as a % to sales should realistically remain consistent with prior years, unless there is a major change to your product mix;
- If your business isn’t yet profitable, it may take more than a few months to ramp up further and become profitable and this should be reflected;
Benchmark & Monitor Your Goals
Having a plan and projections are a solid foundation for your business growth, but they need to be monitored and measured on a regular basis against your actual performance.
OnPoint Advisory have the experience and tools to assist your grow your business and take it to the next level.
Contact us today to discuss your Small Business Accounting needs.