Looking to the year ahead involves some forward thinking. This means brainstorming, planning and envisaging the most likely scenarios that your company will face in the next year. From a financial perspective, it starts by making financial projections. According to the businessdictionary.com, financial projections are defined as a forecast of future revenues and expenses for the company. Embarking on this task will include the following steps.
1. Financial projections will take into account internal information such as historical income and cost data.
Financial projections start by looking backwards. What was the company’s income over the past year, and the past five years? Where did it incur its biggest expenses? Did the company carry over a large cost burden from the previous year? How is it servicing its debt, and what debts are outstanding? A cost accounting exercise should be carried out or reviewed in this preliminary phase of the financial projections. By that, we mean that your company should analyse and classify all the costs incurred by the various functions of the business to see whether selling prices are appropriate, and whether costs could be saved in certain areas. This first step is a retrospective one, and allows you to move forward in an informed, focused manner.
2. Financial projections will estimate the development of external market factors over the projected period.
Like it or not, your company does not exist in a silo, and the environmental factors that develop over the next year will affect how you do business. Your financial projections require you to think broadly about what will happen to the following: a. The economy. South Africa’s economy has seen a growth slump over the past year, with GDP growth predictions being revised downwards several times to finally arrive at 1.9%. Predictions for 2015 are slightly higher, but institutions such as the International Monetary Fund (IMF), which recently adjusted its GDP growth outlook for the country down by 0.2% to 2.1%, remain bearish on their outlook. How will this translate into business for your company? Your financial forecast needs to translate this into the expected number of units sold. b. Infrastructure and related events. If your business relies on location, then the building of new roads and buildings could either boost or hinder sales. Related events such as the advent of e-tolling could hurt companies that are either on affected routes, or those that use the routes frequently to conduct their affairs. And then there’s the question of electricity. With Eskom having signaled that load-shedding will continue at least for the first quarter of the year, your business needs to determine the extent to which it will feel the knock from a regular four-hour power outage. c. Laws. How do new labour laws affect your company? Do you need to comply with the new BBBEE requirements, and to what extent will this affect new business? What about industry-specific laws? Companies in the mining industry should think about the proposed amendments to the Mineral and Petroleum Resources Development Act, for example.
3. Financial projections use this information to forecast the general financial condition of the company.
This forecast is a wide-ranging prediction that includes estimations of key financial figures in the business. The net profit of the business, the sales volumes and expected margins should all be included in your financial projections. A sound financial projection will help you plan effectively and maximize profits by meeting inventory and cash expectations accurately. If you are looking to compile your financial projections for the year, but need some guidance carrying the task to completion, The Finance Team can assist. Our network of qualified, experienced finance executives can provide part-time or ongoing financial assistance, according to your company’s needs. Image credit: http://bizco.co.za/