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How To Prepare Projected Financial Statements

The document provides instructions for how to prepare projected financial statements for a company. It involves analyzing the company's finances, previous budgets, income statements, and current situation to make assumptions. The process requires obtaining the company's business plan, annual reports, comparative balance sheets, and interim statements to examine financial facts and growth. Projections are made for revenue, expenses, assets, liabilities, and cash flow over time and compared to the company's goals to determine if they will be met.

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Namy Lyn Gumamera
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298 views

How To Prepare Projected Financial Statements

The document provides instructions for how to prepare projected financial statements for a company. It involves analyzing the company's finances, previous budgets, income statements, and current situation to make assumptions. The process requires obtaining the company's business plan, annual reports, comparative balance sheets, and interim statements to examine financial facts and growth. Projections are made for revenue, expenses, assets, liabilities, and cash flow over time and compared to the company's goals to determine if they will be met.

Uploaded by

Namy Lyn Gumamera
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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How to Prepare Projected Financial Statements

Projected financial statements provide assumptions about a given


company’s financial situation in the future, whether it is an annual or
quarterly projection. Preparing projected financial statements is a lengthy
task, as it requires analysis of the company’s finances, reading previous
budgets and income statements, and examining the company’s current
financial situation to make assumptions about the business’ financial
potential. The process is the same for smaller, sole-proprietor businesses
and well-established corporations.

Obtain a copy of the company’s business plan. Read through the company’s
short- and long-term goals, as these affect the structure of the company’s
budget. The budget reveals how the company organizes its available funding
and identifies how the funding is spent -- an important part of financial
projection. Write down the short- and long-term goals.

Read through the most recent edition of the company’s annual report. The
report reveals any hardships or financial issues the company has faced in
previous fiscal periods and quarterly periods. For example, a company may
have lost an investor, creating a drop in general revenue or income. Write
down any potential risks outlined in the annual report that have the
opportunity of occurring in the fiscal period for which you are preparing the
projection.

Examine the company’s comparative balance sheet, which shows the its
given assets, liabilities and equities at the end of a fiscal period. A
comparative balance sheet shows how the company has evolved over the
years, revealing how much the company has either increased its value in
assets or decreased in value with an increase in liabilities. Note the rate of
growth to help you in your projections.

Read through the most recent interim statements, which reveal the
company’s financial situation of the past few months. Each interim statement
covers a 3-month period, so gather the statements filed since the last annual
report to get a current financial standing of the company. These interim
statements also include the recent income statements.

Examine the company’s annual projections based on the growth shown in


the comparative balance sheet. Estimate the percentage of growth each
year to get a starting figure for your projections. For example, if the net worth
of the company has increased 2 percent each year due to an increase in
assets or decrease in liabilities, a reasonable estimate is 2 percent above
the most recent comparative balance sheet value.

Apply the risks outlined in the annual reports to see how each risk would
potentially affect the projected financial statement value. If the financial
projection hinges on a set revenue figure or a single investor, then the
increase in value is potentially harmed if the risks become valid. Apply any
recent changes in the company’s financial information as revealed by the
interim statements. For example, a recent boost in income due to a new
product launch may alter the projections, if more products are planned for
release.

Examine your projections based on the company’s financial facts and annual
growth and compare them to the goals set out in the business plan.
Determine whether short-term goals will be met in the following fiscal year.
Do not be ambitious when creating the projections but provide a realistic
estimate.

Financial Evaluation Techniques

The financial department of a company does not deal with the daily cash
flow of the business. Instead, it deals with the long term financial planning
of the company. Financial analysts use certain techniques to determine how
to plan for financial goals and how the company should structure its
budgeting in the accounting department to reach a stronger financial
standing in the eyes of investors and shareholders.

Net Worth

One of the main evaluations the financial department conducts is an


assessment of the company’s net worth, which is highlighted in the
company’s annual report with the hopes of attracting potential investors and
stockholders. The net worth of a business is the total sum of the liabilities
subtracted from the owned asset values of the business. If the company has
a negative worth due to outstanding banking loans and unpaid taxes, the
financial evaluation may lead analysts to create a plan to lower the liabilities
and increase the assets.

Monthly Expense Budgets

A business has a monthly operational budget that shows how much the
business has in income and how much it has in expenses. A financial
evaluation of the company can include analyzing the monthly budget to see
how the business is spending money. To earn a profit, the company must
spend less than it is earning to have a monthly profit. One financial
evaluation technique is to add up everything the company is spending on a
monthly basis and compare it to the income. Financial planning and
adjustment may be needed if the business has a negative income each
month.

Financial Plans and Goals

Another evaluation technique is to analyze the current financial plans and its
goals. A financial plan is constructed around a set amount of financial goals
that indicate what the company wants to achieve. Business owners may set
unrealistic goals, so one financial evaluation technique is to look over the
financial plan and determine whether the goals are realistic based on the
income of the business and overall spending.
Market Growth and Potential

The financial standing of a company can be improved by changing the


company’s approach to the market. Financial analysts may spend time
analyzing the market in terms of its growth potential for the particular
products or services the business offers. If the company already has many
direct competitors on the market, the financial analysts may see earning
potential if the company takes the product development or services in a
slightly different direction. This type of financial evaluation technique is a
pre-planning technique.

How to Write a Five-Year Business Projection

The purpose of a five-year business projection is to provide an indication of


how a company will perform financially over the next five years. It shows the
profit potential of the business, the amount of capital the company needs
and the expected cash flow. Creditors typically require this type of
information before lending money to a business. The document should
feature monthly projections for the first year of the plan and quarterly or
yearly projections for years two through five.

Compile background information. The projections you make must be justified


with historical financial data or background research. If the business is
already established, provide financial performance data from the past three
to five years for context. This includes income statements, balance sheets
and cash-flow statements for each year that you have been in business, up
to five years. If you’re starting a new business, conduct research to back up
your financial projections. For instance, reference industry data from trade
associations and speak to other people in the industry.

Prepare income statement projections to show the amount of revenue you


expect the company to bring in and the expenses it will incur. List all of the
company’s sources of income and expenses, and estimate the amount of
each item for each monthly, quarterly or annual period throughout the five-
year projection period. Add up the income sources and expenses for each
respective period. Subtract the expenses from the income to show how
much of a profit or a loss the business is expected to incur in that period.

Prepare balance-sheet projections to show how the company’s overall


financial position is expected to change over time. List all of the company’s
assets, such as cash, inventory and accounts receivable; liabilities, such as
accounts payable and accrued expenses; and sources of equity, such as
common stock and preferred stock. Calculate the initial value of each asset,
liability and source of equity in the first column of the balance sheet. In
subsequent columns, show the estimated values of these items during each
monthly, quarterly or annual period within the five-year projection period.

Prepare cash-flow projections to show the amount of cash that you expect
the company to receive and pay out over time. List each source of incoming
and outgoing cash. Estimate the amount of cash to be received and spent
on each item during each monthly, quarterly or annual period within the five-
year projection period. At the bottom of each column, show the amount of
cash that the company is projected to have at the beginning and end of the
respective period.

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