The financial projection in a business is a tool on which a good part of the health of any project rests. We know that no idea can be carried forward if adequate financing is not found; And the reality is that adequate funding comes from foresight and hard planning.
Therefore, whether it is for the launch of a new product or simply to channel the micro performance of the organization, the financial projection becomes an essential element.
On the other hand, in inflationary contexts such as those currently being experienced in most Latin American countries, financial projection becomes both more difficult (logically, due to the volatility of the values with which we are projecting) and necessary.
Why make a financial projection of my business?
Among the main benefits of executing a projection of the finances regularly and in depth we can list:
- It helps us to clearly read the situation of the operation and, in this way, understand what financial deviations must be corrected, forms of collection, payment, commercial relations, and how processes can be optimized or the same projections adjusted.
- It is an elementary tool to attract investments and show the business to the Management, since we have to show the investor the financial performance of the business and its future possibilities.
- It provides us with information to see how resources should be managed in order to make new business ideas possible, for this it is necessary to project them first, and then make allocation decisions.
- It allows us to analyze positive and negative scenarios. Generally, when talking about financial matters, and even more so in LATAM, we must use scenarios, which allow us to do a general analysis of our business in each of them.
So, we know how valuable it is for our business to project the performance of our operations over time in order to be covered as best as possible in unexpected situations.
Let us now see some recommendations to take into account when planning a financial projection.
Considerations when making a financial projection
The financial projection of your company should be done on a regular basis. This period can be quarterly, semi-annually or annually, according to the needs of the business and its characteristics (size, activity). But no matter what size it is and what you do for a living, reviewing your short-term and long-term finances will help you keep your analysis consistent.
To project in a company, you must have the largest amount of updated business financial data, which generally comes from the ERP. We refer to information related to the organization’s assets, liabilities, income, expenses, etc. The more detailed the information, the more useful it will be, and the easier it is to obtain, the faster we can make a projection.
It is in this sense that the need for efficient support for the process from a technological point of view comes into play. We mean, can you imagine collecting company-wide reporting information on paper, like 30 years ago? No, right? However, it happens to many of us that today we continue to depend on them sending us an Excel spreadsheet before the time of the meeting because otherwise we will have an incomplete evaluation and we will not be able to make a diagnosis. It’s more or less the same…
A Financial Planning software is much more efficient!
Later in this note we will tell a little about the best tools to carry out a financial projection in a simple, orderly manner and with the best user experience for both those who report and those who receive the information.
But let’s not get distracted, we stay at the point of what is necessary. Here, we turn to the sales projection. It is essential that you consider the current situation of the company: how much you are selling and how much you are able to produce. And just as you project estimated sales revenue, you must also include OPEX or operating expenses and cash flow.
Today, with pandemics and wars, markets are more changeable than ever, so a key practice is to frame projections in one or more contexts.
Steps to develop an effective financial projection
We have seen that financial projections help us reduce uncertainty about the company’s behavior in the future market. To achieve this, a projection must be built on the best available data base in terms of quality, quantity, and reliability.
- The first step when we make a projection of the company’s finances is the detailed collection of data. A large updated database is created and these data are processed to obtain information from them.
- Once the data has been obtained, having been processed and formulated in a report format, we can proceed to the analysis of the problem.
- After identifying and analyzing the main case addressed in the projections, it will be time to prepare an income statement or also said the economic projection of the business. This document will reflect the complete map of sales, operating expenses, capital expenses and everything that must be revealed in the sense that it provides valuable information to the question: How will the project perform?
- Many companies, after working together with the Commercial Area, and following the Cost Centers to estimate expenses, convert their P&L to a cash flow projection for the same term, generally one year. Assigning forms of collection and payment, days, averages and other variables, there should be two related reports.
- Fundamental part, make a section for short-term cash flow. When you project the statement of changes in the financial situation, do it based on the flow of funds, since that will establish the state of liquidity with which the business will develop at each stage.
- Finally, it remains to integrate all these perspectives into a balance sheet and financial reporting. In other words, it develops each of the indicators proposed in the presentation. This will allow you to have a complete picture of the state of the situation and be able to communicate it to the team or the board in a more assertive way.
Spoiler alert: don’t forget the context
As we write these lines, in mid-March 2022, Colombia accumulates +1.7% inflation in the January-February binomial. In the case of Chile, the data is +1.2%, Mexico +1.4% and not to mention Argentina, +8.8% (Source: Macro Data, based on official bodies).
This means that a financial projection elaborated in detail in the first days of January or in November or December 2021 must already be updated in cost and income values. What are we aiming at with this?
Although the financial projection is made from within the company and based on the firm’s own organic data, we must not ignore the fact that we will have to incorporate aspects of the macroeconomics in which we are involved: inflation is one of them, as well such as the behavior of the national GDP, the unemployment rate, the interest rates set by the monetary authorities, among others.
In addition, our company is part of a market. This market suffers from seasonality that impacts consumption habits, suffers from the ravages of geopolitical decisions by governments, among other factors that we must keep in mind when planning the finances of a business.
Can you imagine doing all this Financial Projection in Excel? Forget. Lean on an FP&A tool.
The process of preparing a financial projection is long and complex, mainly in its data collection stage and its processing to obtain reports and presentations.
Now, however, many of those tasks of collecting and assembling reports in the background are repetitive and can be automated, freeing the human from that time invested.
For this reason, at Plika we recommend the adoption of specific financial planning and management software. We are convinced that an FP&A type solution will contribute to your planning:
- Greater efficiency and speed in the collection of information from the areas of the company and your accounting system.
- The possibility of automating repetitive tasks, such as the creation and updating of certain analytical reports.
- Scalability in the financial projection process. Through the use of a software system in the cloud, you can operate both just one CFO and a whole team of as many people as required without inconveniences of loss or duplication of information.
- Finally, time optimization. We are talking about a tool specifically designed for this type of work, instead of Excel and flat formats, the time saved will be abysmal.
Excel spreadsheets can be useful for a while in the financial management of a company. And, in fact, you should not banish them if you decide to implement a specific financial management software such as an FP&A.
Our Plika solution is complemented by Excel collaborating and not competing, in order to provide a better user experience.