Use Expense Management to Simplify Financial Projections
Managing a successful business means going beyond the daily to-do list. Financial projections draw from your past performance to give you insight into your future potential. The more confidently you can outline next steps for your business, the more secure you’ll feel about planning new developments or approaching investors with confidence.
Analyzing the data you already have is your best starting point to build a future model. Uncovering the secrets in that stack of expense reports could take you one step closer to a plan that guides your next year.
What Are Financial Projections, and How Do Businesses Use Them?
A financial projection is a data-based estimate of your business’s future costs and revenue. Some projections, such as sales forecasts, focus specifically on a particular category (e.g., projected sales revenue). The more information you can gather to predict both incoming and outgoing cash flow, the better prepared you’ll be to have a successful quarter, year, or more.
A company-wide financial projection can be useful to shape the course of the next 1-3 years. Financial projections are also smart to use in a more targeted way. You can create projections for a specific department, or a project or program that will need medium to long-term attention. Measuring and predicting future performance for specific areas in your business helps you make more well-informed decisions.
You may attract more investors for your business, too. Lenders and investors want to feel confident that you have a realistic, well-structured plan to keep business performance on track. Thorough financial analysis, including data-based projections, provides a solid basis for prospective investors to see how you intend to turn your next goals into accomplishments.
How to Build a Financial Projection
Depending on your resources, you may choose to produce financial projections internally or hire an outside firm to prepare them for you. In either case, some basic elements stay the same:
First, gather your financial documents:
- Income and revenue statements
- Expenses (recurring expenses are the most important)
Analyzing this data is your opportunity to identify past financial patterns. From there, connect past performance with planned growth and upcoming launches for your business to build an estimate of future finances.
Why Expense Management Matters for Successful Financial Projections
Predictions like sales forecasts may rely heavily on leads in the pipeline, or new products gearing up to launch. If you’re hoping to solidify a business plan or catch investors’ interest, you need a more comprehensive plan. Evaluating what expenses come out of your business can be key to get the best new opportunities coming in. Here’s how expense management strengthens financial projections.
Cleaner (and cheaper) books
A typical business spends $26 or more completing a single expense report. Research from the Global Business Travel Association found that 19% of expense reports contained errors, which cost $52 on average to fix.
Taking advantage of automation slashes costs and minimizes errors on expense reports. A fully automated system can process an expense report for less than $7. Some research suggests automation can reduce expense reporting errors by as much as 60%.
Properly categorized spend
If you’re leaning in on growth in a particular department, you’ll need to scale expenses for that department appropriately. Clear organization of spend categories can help you assess which budgets need to grow to let your business flourish.
Fuzzy numbers are a red flag for many potential partners and investors. Only about 3% of startup companies succeed in getting funding through venture capital or an angel investor. If you’re planning on seeking a round of funding, you need to be at the top of your game. Data provides concrete support to back up the plan you’ve outlined for where your business is headed.
Identify one-off and recurring expenses
Especially in the early stages of your business, one-off expenses can take up a sizable chunk of your spending. Planning for future growth requires a clear view of which expenses will remain steady, which should increase, and which costs won’t come up again. Clean, well organized books make it easy to review recurring vs. one-off expenses.
Complete financial projection
A predictive report without thorough expense information cannot be called a real financial projection at all. It’s not that it’s unhelpful to predict future revenue, of course! But understanding the expenses that fuel your business is an essential component to achieving the progress you’re working toward this year.
Preparing financial projections is part of leading a successful business. Take advantage of every resource at your disposal, including a sophisticated, thorough expense management program, to derive the best insights possible to envision your bright future.