Financial Projections and Financial impact

of Strategies

Financial Projections

TO BE GOOD AT YOUR BUSINESS, YOU

HAVE TO KNOW YOUR NUMBERS .Harold
Geneen, Former Chairman of IT&T

Introduction
Financial projections are just the name is- Projections.
Projections relate to future and differ from accounting numbers which are based on the
past.
It is important for stakeholders in the business to have a clear and cold view of numbers
It is important to make projections over a reasonable time frame ( For example to start a
specialty orchard, the financial projections should cover the period from planting to
marketing fruits about 7 to ten years. For making a specialty baked products, it may be
3 to 4 years)
The length of the financial projections depends on the type of business and markets in
which the activity is going to be developed. In mature and stable markets, the projection
periods are lengthier, since they have to span a period inclusive enough as to give a full
image of the business and its operational activity. For instance, energy companies
measures the projection periods in 8-10 years intervals. More flexible or cyclic markets
support shorter projection periods (between 3, 5 and 7 years, which are the periods
most often used

 Any business plan must include a section detailing the financial projections, because these
projections are a forecast of the future economic-financial results of the companys
operations.
In addition, based on the financial projections several scenarios can be generated in which
the company goes through different situations, resulting in different results estimates.
This modelling helps the entrepreneur identify the possible risks that may impact the
business and implement, subsequently, the different strategies that can ameliorate the
negative effects.

Key Questions to Draft the Financial Projection

Macroeconomic aspects
- countrys economic situation and evolution
Sector evolution
- history of the sector
-companys projection against the market forecasts
Business evolution
-exhaustive analysis of the financial statement history of companys business
- realistic projections with appropriate reasonable variations
- impact of different policies and strategies on the financial projections
-consideration of the market agents - competition, client, providers
Historical evolution ( once the business has been launched)
- Is the historical market behavior consistent and/or coherent?
- main deviations of business from the market

Developing Financial Projections

Purpose of Financial projections

To show what the business is capable of realizing in revenues and profits, given the
assumptions about its potential costs, market size, prices etc.
To develop a series of ratios that help us in making economic and financial judgements
about growth pattern, return on investments, return on equity, required investment,
financial methods etc. related to a particular business
The accuracy of financial projections is very important because the organizations future
is going to be influenced by decisions made using these projections
Demonstrate the reliability and stability of the project in terms of obtaining financing
from third parties (banks, credit entities, the state, etc.
Having a financial projection is essential in the business world, especially for the small
and medium enterprises because, provided they can show there is a business opportunity,
it facilitates acquiring the necessary resources to implement the project.
Looking for other partners to launch new projects or expand the existing one.

Assumptions in financial projections

The major aspects of projections is their assumptions
Financial projections are driven principally by the assumptions that are used to develop
them
These assumptions are used to make financial projections like : Income statement,
balance sheet and cash flow statement
Assumptions are influenced by particular market conditions ( prices, quality and volumes,
unit cost of production, market size etc.)
It is important to recognize the impreciseness of the assumptions underlying the
projections and therefore risk of being wrong
The assumptions that are used in projections also include : Sales, equity, interest rate on
long term debt, equipment productivity, wages, number of employees in a specific area of
the value concentrics.
Different software tools are available to facilitate most of the tasks associated with
financial projections
Testing the assumptions against industry condition is always helpful

Some assumption variables used to produce projected P&Ls, cashflows and balance
sheets
Selling prices
Selling & distribution costs
Tax rates for inputs
Research & development
Interest rates
Tax rates for sales
Management/administration
Changes in loans/debt
Bad debt provisions
General overheads
Operating leases & HP

Some assumption variables used to produce projected P&Ls, cashflows and balance
sheets
Target finished stocks
Depreciation rates
Current year debtors/creditors
Opening balance sheetFixed asset values
Intangible assets
Material costs
Accumulated depreciation
Prepayments/accruals
Material/WIP stocks
Capital expenditure

Some assumption variables used to produce projected P&Ls, cashflows and balance
sheets
Share issues
Direct manpower levels
Capital & revenue grants
Dividends
Wage rates
Fixed asset disposals
Corporation tax
Other direct costs
Finance leases
Phasing of opening balances
Operational overheads

Impact of projections on Strategies

In the process of developing the projections, it may become necessary to revisit the
strategies because of incongruity between certain strategies and the projected results

The projections when compared with industry norms, determines how company stands
among its peers. This comparison may lead to review of strategies

Thanks