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Financial projections are a must at every step in your business!

by , 30 April 2015
Financial management means a lot of changes at many levels of its development. When it comes to your business plan, you must be willing to modify yours at any given time and must include certain basic financial projections. The domain of your business' activity doesn't matter. The financial projections will prove extremely helpful when it comes to health of your cash flow and budget.

Almost all finance and accounting functions deal with three fundamental financial statements:

These are: The income statement (also called profit and/or loss); the balance sheet; and the cash flow, explains Entrepreneur.com.

However, while accounting mainly reports on past transactions, when you put them into these three statements (which you could also call tables), states the source, your business planning looks to the future  and uses estimated guesses of monthly results to try project how  your statements will look in the future.

Here are the three fundamental financial statements to use and why

The Projected Income Statement

A projected or historical income statement refers to profit and/or losses and it expresses your  financial performance over a specified time, like a month, quarter, or year, explains the source. Keep in mind that the format for a projected income in your business plan is the same as for income statements in accounting.

From sales to costs (cost of goods sold, or direct costs of delivering the service), you subtract direct costs from sales and you get gross margin. In this way, you can compare your business' performance to industry standards and it can be useful if analystis, bankers or investor need to look at it.

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The Projected Balance Sheet

A balance sheet, on the other hand, is a statement of your company's financial position at a specified moment in time, such as the end of the month or end of the year. It shows assets, liabilities and capital.

"Assets are normally cash, money owed to the company, and business property and equipment like chairs and tables, the espresso machine, vehicles, etc. Liabilities are debts: money the company owes as accounts payable, and loans to be paid. Capital is money invested in the company, which usually includes initial investment and retained earnings. Recent earnings are normally included in capital, so they provide the link back to the profit or loss", states the source.

In other words, this is a guess about what your assets, liabilities and capital will be in the future. The assets must always be equal to the sum of liabilities and capital.

Projected Cash Flow

The main thing to keep in mind about the cash flow statement is that it extracts information from both the projected income statement and the projected balance sheet, and ties them together.

According to Entrepreneur.com, business cash flow is important because the income statement doesn't necessarily reflect all the money, nor does the balance sheet and the cash flow brings the two together.

For a business in balance, be a wise employer and don't neglect these three elements!

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