If we had a crystal ball to see the future, writing Financial Projections would be so much easier. But, unfortunately we don’t. So, the next best thing is to make educated guesses. Financial forecasts require making a long list of assumptions about the future financial state of your business and all of the conditions and circumstances you may encounter along the way. These can be very difficult to predict, but here is how you can make your list of assumptions for the most accurate forecasts in your Business Plan.
Start by collecting (your) data
First thing’s first, gather your numbers. All of them. Look at your business records, it’s sales history, all of the bills and receipts, cost, expenses and losses you had in the past. But know that, searching through your own company archive is not the only way to collect data. You can either conduct market research, or you can get information from public records. Libraries, government records, and industry associations have plenty of free information available to the public. So, do not overlook these treasure troves of data, because the more information you manage to get your hands on the better. It will guarantee more accurate assumptions.
Asume your expenses and production costs
After getting all the information you need (or can get), the best way to start making assumptions for your financial projection is to predict your costs. Most of them will be recurring. But be aware that these expenses can change in the future. For example, the price of materials can go up, causing your production cost to rise. So be sure to make multiple assumptions, including the worst case scenario. This way you will not be blindsided by an unexpected event, which is excely what makes a good financial projection and business plan.
Assume your sales
For an accurate Financial Projection Business Plan, you will also need to predict sales, or how many units you will be able to sell for a given period of time. This will later be necessary for projecting your income statement and cash flow. Use market research to determine what the demand for your product is, or will be, and just how fierce your competition is.
Price your product
While making assumptions you will need to know the value of your product, the exact need of your product on the market and how much your customers are willing to pay for it. To set the price right you need to take into account not only production cost, but your competition and customer’s needs as well. That is why Market Research will be necessary in determining your products market value. So don't be hasty by setting your product price only according to its production cost, it will be detrimental to your bottom line.
Cash flow planning
Cash flow planning is about predicting how much money you will have at hand for a certain time period. It compares cash inflow and outflow, and helps you make sure you do not run out of money in the future. If you plan well, and have a good cash flow, you will not run out of money to pay your expenses. Predicting cash flow is important for making reliable business plans.
Making assumptions for Financial Projections can be tricky, but it helps if you are well prepared and have all the information you need to make the most accurate assumptions. A business plan cannot be completed if you cannot predict your business’s financial future.
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