Financial Projection Mistakes

Small business owners must generate many reports throughout the year — an annual report, a profit and loss statement, and an inventory report are just a few examples. One of the most important reports that you’ll create, though, is your financial projection report. This document details how much revenue you expect your business to earn, minus your expected expenses. Today, Desert Financial and Tax Services urges you to avoid the following six financial projection mistakes.

1. Inflating Potential Profits

One of the most common mistakes that a novice entrepreneur can make is inflating potential profits on a financial projection report. This can happen if you base your projection on unreliable data or if you base it on ambitious assumptions. Your financial projection report shouldn’t be aspirational — it should be realistic. You may find that reviewing your tax documents and profit statements from the previous year helps you to ground your profit projections in reality. 

2. Downplaying Expenses

Similarly, you are doing your business a disservice if you downplay its expenses in the financial projection report. According to Paycor, labor can account for as much as 70% of a business’s expenses. Even if you do not currently employ a full staff, you should account for the costs of hiring employees if you plan to expand your business in the future. Other expenses such as utilities, inventory, and insurance should also be incorporated into your financial projections.

3. Ignoring Variable Costs

Although financial projections should aim to be as accurate as possible, there are certain variable expenses that cannot be overlooked. Inflation, for example, may have a major impact on the cost of your inventory and shipping expenses. If you fail to account for this when calculating projections, you may find that your budget is stretched thin — and your projections are inaccurate.

An accurate financial projection is vital because it will help you forecast your business’s liability for taxes. It’s also important if your state requires businesses to submit annual reports. Falling behind on taxes or reporting may put your business license in jeopardy or result in fines.

4. Catering to Investors

It’s vital to remember who you are writing your financial projection report for. Although it may be given to investors or submitted to the state, this report is ultimately for you. It should give you a realistic idea of what to expect from your business’s revenue and expenses. For this reason, you should never tailor a financial projection report to investors or any other stakeholder. This can compromise its accuracy.

5. Presenting Assumptions as Fact

Financial projection reports are based on assumptions, and ideally, these assumptions will be based on accurate data. Even if you’ve formulated your projections carefully, though, you can never guarantee that they’ll come true. You must acknowledge this possibility and avoid presenting assumptions as fact.

When possible, provide relevant data from which you are drawing conclusions. This process will show that you did your due diligence and that your projections are coming from data, not assumption. For instance, if you have an ecommerce store, it’s not enough to be user-friendly with a trustworthy payment section. You also need to be able to analyze sales so that you can streamline your inventory; this may help stakeholders better understand the rationale behind your conclusions.

6. Omitting Important Details

Finally, you should be careful not to omit relevant details when you’re writing a financial projection report. Rather than simply listing expected sales, for example, you should list the number of units you expect to sell, the cost to produce each, and the gross profit that each sale garners. Details like these will help you formulate more realistic projections. You can also improve your projections’ accuracy by using software that compiles business reports for you.

Accuracy Is Key When It Comes to Financial Projections

Your financial projection report is an essential forecast of your business’s potential revenue. It’s best to be honest and realistic with your data for internal and annual reports. Falsifying or inflating numbers will only hurt you in the long run. You should strive to generate a report that’s realistic, and you can do so by using software for your business reports.

Desert Financial and Tax Services can help you achieve financial freedom. If you have any questions, don’t hesitate to ask!