SMEs: Four reasons to improve your future-oriented financial statements

SMEs: Four reasons to improve your future-oriented financial statements


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Financial statements
Published on 21 January 2019
Reading: 3 minutes

SMEs: Four reasons to improve your future-oriented financial statements

During your business start-up phase, it may seem hard to create a projected statement of your financial position. But if you think this is an unnecessary exercise, think again! These reports are crucial because they forecast your cash inflows and outflows. Here are four reasons for creating projected financial statements worthy of the name.

1. Make clearer decisions

You’ll find that financial forecasts are useful for predicting the course of events. They’re important allies when the time comes to make a big decision. For instance, if the holiday period is fairly lean in terms of sales, an SME operating in a cyclical sector could choose a better time to launch a new product.

Once you predict future sales based on previous results, you will be able to optimize purchase management. How many items will you need? When will you need them? This exercise will enable you to ensure you have sufficient quantities of merchandise to fulfill customer orders at the right moment.

2. Facilitate the acquisition of financing

If you foresee that you’ll need more inventories during a certain time of year, you will require more capital in order to finance their purchase. By knowing this in advance—hence the importance of the financial forecast—you can undertake negotiations with your bank manager at the right time in order to obtain the liquidity you’ll need. Well put together financial projections show bank managers how you plan to repay your loans, make use of your capital and grow your business. Additionally, if you’re searching for a partner or outside investor, financial forecasts will allow that third party to evaluate your company’s future performance over the coming two or three years.


3. Plan for the coming year

Without financial forecasts, it’s really hard to set down your plan for the upcoming year in writing. To give your strategic plan free rein, you must create a financial plan. These projections will help you foresee, month by month, whether you need to hire new people, deploy new projects or take on major expenses.

While you might obviously prefer to set in motion several strategies at once to ensure your growth, you still need to have the financial means to realize those ambitions! First you need to evaluate the cost of each of your activities. For each objective identified in your strategic plan, state the financial resources you can allocate to it. Play around with the numbers and see what’s possible given the available capital. Sometimes the pieces of the puzzle fall quickly into place, while other times you need to juggle your priorities.

4. Predict whether your company can survive a future economic slowdown

As an entrepreneur, you need to think about the economic risks associated with your sector of activity. Would a future recession lead to a reduction in your revenue? What if an unforeseen event affects your bottom line? Be realistic when creating your financial forecasts. You can also draw up forecasts based on two or three different scenarios, one that’s more optimistic and others that are more pessimistic.

A final tip: If your forecasts show that your company will struggle to make ends meet at the end of every month, you’re better off tackling that liquidity problem now!

With all the above information in hand, you’ll be ready to roll up your sleeves and do a great job of fine-tuning your financial forecasts.

A few things to keep in mind

Projected statement of income:

• What profits or losses do you foresee in the future?
• What is the annual budget allocated to each department?
• What are your planned costs for raw materials?
• Can some expenses be optimized?

Projected cash flow statement:

• When are cash inflows and outflows predicted to occur?
• Have your liquidity requirements been adequately evaluated for the upcoming year?
• How will you finance upcoming projects?
• Are you properly prepared for the eventual economic recession?

Projected balance sheet:

• Is your financial situation healthy enough to handle the loan you’re planning to take?
• What is your debt capacity?