Last week, we learned more about trend analysis for small businesses. This week, we will look at its cousin, financial projections. You’ll discover how the two are related and why financial projections are essential. You’ll also get an overview of five different financial projections that can propel your business forward.

Let’s go.

How are trend analysis and financial projections related?

Trend analysis lets you see potential futures across a broad range of business trends. Financial projections do the same thing but are specific to finances and drill down a little deeper.

For example, last week, we discussed how the McDonald brothers created the SpeeDee system using trend analysis. Their receipts told them patrons wanted only a few simple items, and customer experience told them they wanted it quickly.

Of course, that trend analysis was accurate. But they could have taken that trend analysis and put financial projections to it. They could have projected revenue, expenses, and cash flow from the new system.

And that’s the power of financial projections for your business. They let you see into the future and move forward with confidence.

Let’s get an overview of them now.

Historical Data Analysis

Looking into the past can provide insight into the future, at least in business. By looking at past revenue growth rates and expense trends, you can determine trends that help you generate new ideas to make your business more efficient.

Revenue Forecasting

This one is very valuable but also more complex. It requires weighing factors like market conditions, industry trends, consumer behavior, and sales statistics.

Revenue forecasting is best done with the help of a CPA familiar with your industry. They can develop projections and offer insights into growth opportunities. They can also help you avoid potential business landmines.

Expense Projections

Knowing potential revenue is important, but you must also grasp potential expenses. That may seem obvious, but many small business owners gloss over this area.

To get it right, you’ll want to research factors like inflation projections, potential changes in production, and planned investments. Those will let you develop cost management plans to help you move forward.

Cash Flow Projections

Don’t confuse this with revenue projections. All the revenue in the world won’t help if you don’t have the cash when you need it. Cash flow projections tell if you’ll have the money to stay financially viable when needed.

So, consider things like receivables and payables, capital expenditures, and debts. Then you’ll be able to determine any potential gaps in cash flow before they disrupt your plans.

Sensitivity Analysis

This analysis can help businesses understand the sensitivity of their projections to factors such as changes in sales volume, pricing, costs, or market conditions. By analyzing these variables and assessing the potential outcomes, you can gain insight into various financial scenarios and their implications.

The Bottom Line

Financial projections are an investment. They let you pursue good ideas and avoid bad ones. But they can be complex, and many business owners don’t fully grasp them. So don’t be afraid to reach out and get help from mentors and professionals like CPAs. Once you start using financial projections, you’ll wonder how you got along without them.