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Prepare Financial Projections

Use of Projections

Financial planning is a critical activity for every business irrespective of its age and size. For new enterprises, the preparation of financial projections is integral to the business planning process. For larger companies, financial planning forms part of annual budgeting and plays an important role in long-term planning, business appraisals, corporate development etc.

Used effectively, projections can help prevent major planning errors; identify or evaluate opportunities; attract external funding; provide strategic guidance; evaluate financial and development options; monitor progress etc.

Basics of Modeling

Central to the task of preparing a set of projections is the construction of a mathematical model to reflect the finances and activities of a business. Sales minus Costs equals Profits (i.e. S - C = P expressed as a formula) is an example of a very simple model for deriving projected profits from assumptions about future sales and costs.

In practice, financial planning models are much more complex as they must accommodate multiple time periods (months, quarters and years) and handle hundreds of variables relating to sales, costs etc. The volume of data mounts up very quickly when each variable is multiplied by the time horizon, for example, by twelve months. The table below lists typical assumption variables used to generate a set of financial projections.

A comprehensive model can contain many thousands of formulae with functions ranging from simple addition to complex conditional statements (e.g. if projected cashflow is positive, reduce the overdraft before adding any residual balance to the cash account).

Financial models are used to compile forecasts and budgets; to assess possible funding requirements; and to explore the likely financial consequences of alternative funding, marketing or operational strategies. They can also be used for business planning, raising finance, investment or funding appraisals, financial analysis, corporate planning etc.

Software Tools

Our Exl-Plan range of Excel-based planners are ideal for financial modeling and planning. Based on a user's assumptions, they generate fully-integrated projections for up to five years ahead.

Also, Cashflow Plan produces fully-integrated cashflow projections for 12 months ahead and incorporates a roll-forward facility to simplify updating of projections.

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