Monthly projections have a dual role for entrepreneurs 1) as an important part of a financial pro forma (Income statement, cash flow, balance sheet) that a person would fill out in an application to a bank to obtain debt financing (i.e.: a bank loan), 2) as an information resource to estimate/anticipate how to spend the company’s capital over a year.
What kind of things might a monthly projection be used as a resource for? Some things might be:
- I anticipate my sales will go up; can I afford another person to help around here?
- I found a great deal on some piece of equipment; can I allocate my capital to this without negatively affecting my operation?
- I need more inventory; how do I know I’m buying the right amount – I don’t want to end up with too much or too little.
- Over the year I expect I’ll run out of space and maybe I should move or take on more space here, can I afford to do that?
Monthly projections combine anticipated revenue and expenses for future periods and may be analyzed to assess the potential health of a business. VtSBDC has two resources to help build monthly projections:
Templates for building projections using the format of a profit and loss statement:
An existing business can use its prior year’s expenses as a baseline to anticipate future periods. The templates above are ideal for this purpose once future assumptions are considered.
Further assistance:
- Enlist a CPA or bookkeeper to assist if needed.
- Our VtSBDC Advisors can also help with developing the monthly projections.
What else can be done with the monthly projections? Once the projections are developed, they can be used to assess cash-flow requirements or the business’s resiliency due to unexpected interruptions from external inputs. Monthly projections are of course guestimates, all projections are.
Projections can also be used to develop what-if scenarios. Consider these four categories:
- Maintaining: under this scenario use the same income and expenses from a prior period (i.e.: quarter or season, or ½ year or full year, etc.) over the projected period.
- Growth: this scenario assumes sales go up and possibly the business enters new markets where it realizes new and additional income from those markets or products. (don’t forget that when sales go up, usually expenses do as well).
- Decline: this scenario is for recognizing when the entire business economy gets worse, or impacted by an industry that faces external challenges. It’s smart to anticipate how those conditions impact the business. Reduced sales mean reduced expenses too, this requires business owners to make hard choices about their largest expense item (often this is labor).
- Create your own based on your specifics and potential plans…which could be a mix of the above.