No business plan is complete without financial projections. But if you’re confused about the difference between Financial Modeling and financial projections, you're not the only one. Both are based on assumptions and predict potential financial outcomes. However, while initially, they may seem one and the same, they are most definitely not. In order to have the most precise financial forecast, you need to have the most accurate financial model of it. You simply can not have Financial Projections Business Plan without financial modeling.
What are they?
Financial projection or forecast is an assumption of a business’s future financial outcomes. It serves as a guidance and a reference point on a business’s path to success. They need to be revised and monitored regularly, in order not to lose track of progress. Financial forecasts can be long-term or short-term projections, and depending on the type of business, they can be done on a monthly, quarterly, or yearly basis.
However, any good financial projections in a business plan require accurate numbers and models to adequately forecast business’s progress and revenue. These numbers are gathered either from a company’s history in sales or through market research, and then used for making financial models. Financial modeling is presented in the form of a spreadsheet and is a process in which a company’s numbers are put through a mathematical equation to calculate a business’s potential financial outcome.
How do they work?
Financial models can be used for determining a company's market value or to better define its financial projections. This is because the nature of Financial Modeling allows for making multiple calculations. Changing the variables in the model's equation can produce different outcomes. Through this process, a financial projection can be made, and it is why it is the basis for financial projections in any business plan.
For example, if you calculate your expenses and compare them to your expected revenue, you will be able to see if you can break even, make a profit, or maybe prepare for short-term losses. If your earnings do not cover your expenses, naturally, you will be looking for ways to lower your business's costs in order to make a profit.
On the other hand, if your business is able to make a considerable profit after its expenses, you will have room for additional investments to increase, or speed up growth. Changing or adjusting these numbers will provide different results every time. This gives you many options to consider when making strategies for your business’s development, and therefore you will be able to make the most optimal financial projections for your business plan.
Why are financial models necessary?
Financial modeling is all about choosing the right path for your business, and formulating the best Financial Projections Business Plan. It is a crucial aid in making informed decisions for your business. And not only that, it is there to help you decide what your business goals are, and formulate a precise plan to achieve them.
If your financial projections represent your businesses road map, your financial models are the tools you use to evaluate different routes and plan your trip! It is the base for your business’s financial forecast, and there can be no Financial Projections without financial modeling.
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