09/ 02/ 2005
by Jeffrey Moses
Creating a financial projection for your company enables you to not only forecast future revenue levels, but also to organize areas within the company to stabilize increasing revenue and assure maximum profitability.
Financial projection is often more art than science, especially for a young company without a significant financial history. But experienced business advisers and accountants can, in most instances, examine a company’s current level of sales and extrapolate the upcoming three to five years with some degree of accuracy, taking into consideration all aspects contributing to growth. These include:
- Anticipated ongoing marketability of current products and services
- Current and future ability to secure funding for increased marketing, added equipment, expanded facilities, new staff, etc.
- Potential increase of customer base as a result of increased marketing and/or added sales staff
- Expected growth of the general economy and the particular industry
- Projected new product releases and their marketability
- Focus on specific products/services projected to generate greatest profitability
- Growth of existing competition
- New competition entering the field
- Abilities and goals of company ownership and key staff.
Specific projections for a company’s financial growth, based on the above aspects and all others that are applicable, are usually stated in terms of increased percentages of total revenue (for example, 10 percent growth annually). Accountants generally state projected revenue growth as a potential range, with a maximum and a minimum percentage growth over a specified period (between 10 percent and 20 percent annually for the next three to five years, for example). Many small companies grow at a rate of about 15 percent annually. This translates into a company’s revenue doubling in about five years.
This projected range of growth is valuable as a tool for planning, organizing, expanding and implementing operations within the company. Primarily, it allows an accurate allocation of costs (as well as funding/borrowing requirements) for marketing and staff increases, purchases of equipment, new facilities, etc.
Prudent accountants base plans for borrowing and expansion of operations on the middle range of projected revenue growth. It’s risky to assume that a company can grow at the maximum projected level, while it may stifle growth to assume that revenue growth will be at the lowest projected level.
How to begin your financial projection? Work with your accountant or your business adviser––or do it yourself, consulting with a free adviser (such as at SCORE or at your regional Small-Business Development Center).
Comprehensive and accurate financial projections serve as blueprints for growth and inspirations for achievement. They can help show what needs to be done today, while also presenting a goal of what can be achieved in the years to come.
