How to do financial projections

July 22, 2009

When making assumptions and estimates the most important thing to remember is to bring the base information down to the lowest common denominator. Nobody can project a sales figure for a year off the top of their heads, but most people could project the sales for a specific week. Here are a few suggestions to start you off:
 Try and project figures over a short period of time and then extrapolate these figures up. For example, work out figures by the week and then multiply up to month and years. In this way it is easier to estimate as most people have a good idea of figures on a weekly basis.
 Try to think in quarters. Remember that there are thirteen weeks in a quarter. Thus in every three month cycle there are two months with four weeks and one month with five weeks. This extra week can make a difference particularly when working from a weekly basis. If you forget to cover this thirteenth week you can get into difficulties as you have thirteen weeks of overheads.
 We don’t work fifty-two weeks a year. You lose time from Christmas or other religious holidays, summer holidays and sick leave. Factor in a number of weeks of non-earning, but remember bills tend to run over the whole year. Therefore leave at least four weeks per year with no income to cover sickness and other eventualities.
 Learn the business cycle in your business. Every business has a business cycle. In any year there are good, bad and average weeks. It usually takes time to find these cycles out, but they are very important, especially when projecting income and cash flow.
 Cash flow is about exactly that, cash! Remember that it is time when bills or receipts are paid from the bank that counts, not when invoiced. Thus if you have to wait sixty days for payment, January invoices do not actually appear in the cash flow until March. If you get credit from suppliers you enter the cash flow payment when the cheques are paid not when the invoice is received.
 On the subject of invoices and statements, remember that few businesses actually pay out on invoices anymore. The norm is to pay out on monthly statements. Thus there are two things to remember. One if you do not send out monthly statements you don’t get paid. Secondly, most businesses will take their thirty days credit from receipt of the monthly statement. Thus to be safe, if you invoice at the beginning of the month and send the statement at the beginning of the next month, the customer will take another month to pay, and it will take several days to draw up invoices and send payments. Therefore an invoice in early January will be sent in the January statement in early February. The customer will look to pay this in early March and will take up to two weeks to get the payment to you. This is now mid to late March. Remember this is quick payment in the modern business environment.
 As a rule be realistic, it is better to be conservative with the sales estimates (slightly underestimate) and liberal with the payment estimates (slightly overestimate).
 Try to compare figures with similar ventures. A shop of a certain size, on average uses the same amount of electricity no matter what it is used for. Thus compare your figures with a similar size shop that is not in competition with you.


One Response to “How to do financial projections”

  1. charming post. simply one detail where I quarrel with it. I am emailing you in detail.

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