In our blog post a few weeks ago, we took a look at how you develop initial revenue assumptions for a new business. In this post, let’s talk about an existing business and how we help that business develop financial projections.
Key question we answer a lot: Why bother with developing projections? You know they are going to be wrong, right? Sure. Projections will almost certainly not be exactly correct because so many factors go into what will happen to reach a sales number or expense number. However, letting that uncertainty prevent you from developing reasonable estimates is like not preparing for a rainstorm when there’s a 50% chance of rain since you cannot predict with certainty that it is going to rain. Projections can still help guide your thinking, evaluate your business, and realistically help you anticipate whether decisions you make will result in more profits or less. Projections can also inform you about the goals you need to set with respect to sales and certain expenses to attain your target cash flow.
Where do I start? Existing businesses have existing financial records that are always the first place to start. The more years of records, the more you can see a story from those years that shows the ups, downs, and sideways turns.
Once you have your existing records, how do we know what will happen in the next year? We look at your past growth rate and we talk to you about the plans you are making for your business. Typically, businesses working with us are looking to grow. They have an idea of how many more acres, how many more calves, or how many more markets they are planning. Knowing where they are at now and where they want to go allows you to develop percentages that can be applied to your revenue and cost of goods estimates. We encourage folks to assume a conservative, but realistic growth rate on the revenue.
Why do some expenses change a lot with projections and others stay the same? Once you have sketched out your percentage changes for your revenue and costs directly associated with production (COGS, which we discussed here), you can estimate your operating expenses going forward. These are best taken line by line because some of these expenses will naturally grow somewhat with the growth of your business, but they should definitely not be growing at the same rate. Other operating expenses should not change much regardless of the size of your business. For example, the cost you pay to someone to file your taxes typically grows at a very slow rate year to year unless you begin to add complexity to your taxes. However, the amount you spend on marketing expenses should be increasing as you increase your sales.
The biggest mistake with projections is that people too often want to plan for the best on their revenue side (high) and plan for the best on the expense side (low). If you are making a plan for your business, you want to be prepared for what may come, which means preparing realistic estimates that can help you look into the future and have a realistic picture of what is coming. These numbers can help you anticipate future cash flow needs and bottlenecks.
For assistance in developing revenue assumptions and projected financials for your business, contact us today at kcard@kcard.info or give us a call at 859-550-3972.