Business Financials are essentially documents for which Merchants compile information that describe, in detail, their operation in terms of financial transactions. Business Financials that cover a long-term period of, say, over three years, can be used to create what is known as a Business Financial Projection or an estimated future of how the business may roughly perform financially given a merchant’s circumstances.
When a projection of this kind is created from numeric financial statements and worded estimations of a merchant’s business performance, Business Financials can ultimately justify and convince a banking institution or investor as to the viability of the business, and therefore the solidity of the overall investment. Often a Business Financial in this case is presented in a traditional business plan that comprehensively summarizes a merchant’s business, trends in the market at large and what kind of earnings they will make. Business plans that include these conclusive financials also importantly assess some of the risk involved with the business to loan officers or investors. Of course, a company business financial projection forecasts revenue and sales totals and inform a merchant’s ability to repay a loan.
Within a business plan, a company’s business financials should encompass a cash flow statement and an income statement so that figures are rendered can help gauge a company’s performance level. To help concisely gather up this information, either a financial analyst and accountant may help, or, of course, an organization that writes professional business plans. Most lending institutions require a three or five year financial projection. There are over a dozen different items to include that support a merchant’s financial projections. Within these items, the projection should be broken down on a monthly basis for the first year, a quarterly breakdown for following two years, and an annual breakdown for the last two years that are being projected.
The list of items to include in a merchant’s financial projections are: accounts receivable collection plan, accounts payable schedule, administrative costs, capital expenditures, depreciation schedules, gross margin by product line, income tax rate, interest rates on debts, inventory turnover, production costs, sales costs, sales increase by product line, sales revenue estimates, and the usefulness or depreciation of assets.
Income projection enables a merchant to develop a preview of the amount of income generated each month and for the business year, based on supportable industry predictions of monthly levels of sales, costs and overall expenses. When a merchant determines, say, total net sales, that merchant will determine units of products and services expected to sell at the prices projected. This should include rough of returns, allowances and markdowns expected. Final sales costs needs to be calculated for all services and products used. These costs should include commission paid to sales representatives, transportation costs, rand direct labor contract costs.
A merchant can determine their company gross profit by subtracting the total cost of sales from total net sales. To determine a gross profit margin a merchant simply divides the gross profits from the total net sales. This is expressed as a percentage of total sales or revenues that the merchant has made.
When a merchant computes business financial projections there are a few things that must be kept in mind when seeking accuracy, which ultimately assist the chance of being approved for business financing or loans.
The first consideration should be a merchant’s sales potential. Is it possible to achieve the sales levels that are being predicted? For example a sales representative can only visit a certain number of clients monthly or a manufacturer can only a specific number of products over another specific period of time. When these projections are realistic and based on supportable recorded evidence, it is relatively easy to maintain an accurate assessment. It is imperative to also make sure that merchant sales assumptions are linked directly to sales forecast to prevent this information from contradicting itself. Most banking institutions and loan officers depend entirely on bottom line numeric totals and averages, all of which can approve or deny a loan.
There are a few other things to do when projecting your business finances. Once target numbers are set, it is best to stick to these rough figures. Many merchants neglect to ask the opinions of the sales people who know the buyer’s intentions about what they think the projected sales should be. It is important for a merchant to make sure its sales force agrees on any sales targets that will be set. Most importantly, when working on financial projections, business owners should receive regular and comprehensive feedback on the projections from an experienced accountant. This is key to creating an accurate, unbiased and true reflection of the state of a merchant’s overall business.