FINANCIAL PROJECTION FOR WORKING CAPITAL
One of the main components and the most difficult financial concepts of a business plan is working capital. It is theoretically defined as the amount by which current assets exceed current liabilities but it is quite complicated to understand and figure out your working capital needs and how to meet them.
Most small and new businesses or start-ups need working capital financing during the first few years as they cannot finance the operating cycle with only accounts payable financing. Consequently, they need to approach potential sources of funding such as various financial institutions or banks and NBFCs for short-term working capital to carry out current business activities. These institutions require projections of business financial statements to assess the working capital limits.
The financial projections forecast your income, cash inflows and outlays, and balance sheet. They help show the bankers and investors what you want to do with your capital, the potential of your growth, and how you will repay the loans. Financial projections also help business owners to identify and monitor financial needs, optimize pricing, plan major expenditures, schedule production, and monitor cash flows.
Since sales are hard to predict and your initial numbers will be based on assumptions, creating your financial projection for your new business is a critical task. Here are some of the steps that are involved in the procedure for creating a detailed financial projection.
List the key expenditures and your subsequent costs to operate as you develop your business plan. Make sure to include recurring expenses such as salaries, rent, raw materials, maintenance, insurance, marketing, machinery, website design, and other one-time purchases.
Project your sales by creating a forecast after a detailed study of the industry and your potential market. Use this forecast to project your anticipated monthly revenues.
Using the tools available in your accounting software, create your financial projection by including your expenses and revenues showing monthly inflows and outflows of cash for the first year of operations. You can make quarterly or yearly projections for the second year of operation.
Prepare your annual projected income statements and balance sheet using the cash flow projection.
Analyze your projection to identify shortfalls, the impact of different strategies, and determine your financial needs.
As an entrepreneur, you should always set aside a cash reserve as part of contingency planning in case some unexpected event throws off your projection. Also, make sure to compare your financial projections against real results once you start your business operations to check if you need to make changes or you are on target. This will help you learn more about your cash flow cycle and identify shortfalls at the initial stage which can be addressed early and more easily.
How can Eaccountspro help you?
Our team of experienced professionals and cost accountants will do thorough research on your business requirements and illustrate your prospects appropriately to facilitate connections to potential investors. We can help provide you detailed fund flow statement, comparative statement of current assets and current liabilities, ratio analysis, and statement of maximum permissible bank finance along with credit monitoring arrangement. Our seasoned experts can guide and assist start-ups and entrepreneurs with the best-in-class financial projection service to scale up businesses in an efficient way.
