MONEY & BUSINESS ENTREPRENEURSHIP
Drawing up the financial projections part of your business plan
D
rawing up a forecast of how well a business will perform over a period of time is a crucial component of a business plan. In order to determine the feasibility of a business and to plan for its success, it is imperative to include a financial projection. The economic viability of a company is of utmost importance because that is often the determining factor as to whether or not it is a rational decision to proceed with such a business venture. Also, most business startups and expansion plans require external funding, and financial projections are used by investors and lenders to decide if it is a good investment to undertake. Period of forecast: The forecast is usually done for a minimum of three years, but most lending institutions and investors prefer to see a five-year time period. Draw up your forecast for a longer period should you realize that if, according to your projections, it will take longer to realize a project. The reason for this is because you will need to show the break-even point by calculating a break-even analysis. Therefore, if the business is already profitable by the second year of operation, then a three-year forecast may suffice. However, in a situation wherein you are starting to break even in year three then a five-year projection will be more beneficial. Financial statements: The financial statements to be completed are an income statement, balance sheet and a cash flow statement. The pro forma income statement, often referred to as the profit and loss statement, is intended to show whether the company is expected to make a profit or a loss. The entries made in this statement are the forecasted income/revenue generated by the business, cost of goods sold and all the expenses to be incurred. To arrive at your revenue figure, you are expected to conduct research into the market to ascertain what your pricing strategy should be and the expected demand or sales for the particular product
How will your business perform? that the assets should equal the total of liabilities, owners equity and retained earnings. The pro forma cash flow statement is used to show the cash inflows and outflows of a business. It gives valuable information about the movements of cash and the overall liquidity of the company. In this statement, you are expected to show cash flow from operations, investment and financing. Though the task of projecting the financials of business may seem very daunting, you can overcome or service that you will be offering. taken or anticipated should be the challenge by understanding the typical entries to be included in the It is also necessary to consider your identified as a liability. hours and days of operation to get a The balance sheet, as the name various statements and base your true reflection of the sales potential. suggests, should balance, meaning numbers on realistic assumptions. If the establishment is already in operation, then the forecast should Sharee Aluko has a Masters in Business Administration and owns be based on previous years’ financial a business consultancy firm. She also teaches business courses at statements. In regard to your cost of goods the college-level on a part-time basis. sold and expenses, there will be a need to make assumptions regarding the percentages to be used. Based on the industry and the type of business, the percentages for projecting Calgary expenses could vary, so you will need Campus to do a thorough analysis to arrive at the most realistic figures. Typical expenses are rent, salaries, insurance, utilities, depreciation, interest, taxes and so forth. The pro forma balance sheet is used to identify the assets, liabilities, owners equity and retained earnings. The fixed assets are land, buildings, furniture and equipment and the prices are best determined by gathering quotes if they have not yet been acquired. Some current assets like inventory and accounts receivables are also based on Developmental Service Workers reasonable percentages of sales. (DSWs) are ALWAYS in high demand! Similarly, current liabilities like accounts payable will also be expressed as a percentage. The DSW Diploma in just 45 weeks; premise is that these figures are not definite and are simply a forecast Starting December 6, 2021 at CLI College, Calgary based on the given situation. The owner's equity or capital is what you have personally injected into the Call 403-475-2985 company and the retained earnings will be profits that have been made 2710 17Avenue SE Calgary (Suite 630) from the business. Any loans already CANADIANIMMIGRANT.CA |
37
