In order to be successful, a business must create realistic financial projections. Here are four tips on how to establish this important growth road map:
1. Draw Up an Optimistic and a Pessimistic Forecast
It's in every entrepreneur's nature to be bullish about a venture's likely growth. Take the time to draw up financial projections based on the premise of a best-case scenario, assuming that the coming year will bring strong customer demand, a reliable supply of inventory and weak competition from others in your target market. Of course, this best-case scenario should be tied to realistic factors or the results could be calamitous. For example, you may be driven to buy too much inventory or assume excessive debt.
Next, you should channel your nagging fears into a second potential forecast. This can be particularly helpful, notes Entrepreneur, "if there is uncertainty surrounding major factors that could impact your business, such as government regulations, new competition or even overall economic growth." If your business has an established track record, you should look closely at the "low" years when you faced unexpectedly steep labor costs or an exodus of customers. By being aware of what happened in the past, you can be better prepared to plan ahead.
2. Focus on Expenses
Assuming that you have a strong sense of your fixed expenses, you should put together a financial projection that's based on likely costs for the next quarter and year. Ask yourself: Which expenses do you control? Which discretionary expenses could you reduce if necessary? Which costs are likely to fluctuate if revenues suddenly grow?
In startups, owners sometimes tend to look only at the "necessary" expenses. But, according to Financial Web, there will always "be many things that come up that will require extra money." It's not unusual to find that "necessary expenses are not visible until you get started."
3. Determine the "Rhythm" of Your Company's Annual Performance
When you review your performance from past years, you will likely discover periods of high and low sales. This could simply be because certain parts of the year are more favorable for your business. If so, you should use this information to create a realistic financial projection of the year to come. If you have a new company, consider researching the sales records of similar businesses in your industry instead.
4. Don't Get Stuck With a Static Forecast
It's important to remember that the forecast you devised months ago may not hold up under new developments. As such, you should plan regular comparisons of current operating figures with your predictions, and update forecasts based on this new information.
Just as every traveler with a set destination in mind needs a road map to get there, every entrepreneur must rely upon realistic financial projections to help assure continued growth in the months and years to come.
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