• Creating A Projection For Your Small Business

    Why Create A Projection?

    Forecasting revenue & expenses for the year is crucial for your small business. Projections serve as a yardstick, which helps business owners plan and budget as the year progresses. The goal is to estimate Income & expenses for each month of the year. Once this is laid out, you will get value from the projection by comparing actual results to estimated. Norton Financials recommends business owners compare actual results to projections within 1 week of month-end. For example, January results should be compared to January projections within the first week of February. This process of comparing actual vs. estimated helps keep the expenses in check, and will alert you if income is below (or above) expected for any given month.

    Business owners can then take this information and adjust the business accordingly. For example, if advertising expenses seem to be getting out of control, you will see this and adjust the advertising budget for the next month. If Income is picking up faster than expected, you may need to consider hiring another employee in the near future. If so, your payroll budget should be updated to reflect this change. These type of events will be clear when you actively monitor the performance of the business.

    How To Create A Projection

    Set aside about 30-45 mins to sit down and create a projection. The first step is to look at a month-by-month profit & loss statement for the prior year. If you use QuickBooks (or any other accounting software), It’s helpful to export this report directly from QuickBooks into Microsoft Excel. You should use this as a reference when creating a projection for the year ahead.

    Sales Forecast

    There are two aspects to the PnL projection. The first is Income (or Sales). Review the prior year Income, and project for the year ahead by factoring in expected growth. For example, if your business made $575,758 in revenue for 2017, and you believe revenue will increase about 7.5% in 2018, the below table shows 2018 revenue is projected at $618,940.

    If you’re a new business, projecting income may be more difficult. However, you will just need to estimate to the best of your ability.  

    Expense Budget

    The next step in creating a projection is to estimate expenses. Again, you will want to refer to the prior year PnL statement to understand where the money went in order to project for the current year. Once you have prior year expenses, which can be pulled from your accounting software, you will want to consider changes that may occur in the year ahead. For example, if you hired another employee, you will want to increase payroll expenses to factor in this additional expense. If you plan to cut advertising costs, it would make sense to reduce your advertising budget to consider this reduction. Once you have factored in these changes, lay out the expenses by month so you can review and align with the sales forecast.

    Putting It All Together

    Now that you have estimated Income & expenses, you will want to combine these into a projected PnL Report similar to the one within QuickBooks. This will help you see the full picture to understand net income for your projection. When looking at net Income, determine if this is sufficient. If not, you need to adjust either Income or expense expectations to arrive at your desired net Income. Lastly, give all the figures in your projection a second look and make sure you are not projecting unreasonably. The goal isn’t to make the projection look perfect, but to be realistic. The more realistic you are in your expectations, the more value the projection will have for your business.

    Need Help Creating A Projection For Your Small Business?

    If you’re having difficulty putting this together, or don’t have the time, Norton Financials can help you create a projection. While you can do many of these things to help stay on top of your financial goals, it’s important to rely on a professional to make sure that everything is squared away and in good standing. For help with your small business’ local accounting and bookkeeping services, contact Norton Financials {215.385.1238 or email BNorton@NortonFinancials.com for an assessment of your business’ needs}. You definitely won’t regret it!