Hoping to gain some new business before the end of the year? One of the trickiest parts of growing your business is figuring out how to achieve your goals in a way that’s both realistic and profitable. The most effective way to do this is to create forward-looking income statements, also known as projections. Here’s how they can help you quantify your goals and keep you on track.
How forward-looking income statements benefit your business
When you’re trying to grow your business, everything you need to do is an investment. Sure, you’d love to see instant results, but the reality is that most business decisions you make will help you grow in the future, rather than immediately. This is where forward-looking income statements come in: they allow you to set realistic targets and determine your budget. From there, you can more accurately determine profitability and set your long-term priorities.
Forward-looking income statements, along with forward-looking balance sheets, are also essential in creating another key piece of the projection puzzle: cash-flow projections. These are the life-blood of your business, showing all your projected income and expenses to ensure that you don’t run out of money and can pay all of your bills promptly. Above all, cash-flow projections will show you if you’re actually making money.
When creating financial forecasts, many companies focus only on their sales revenue, which doesn’t show you the full picture. Our Rob Falkner says that when he’s reviewing a set of financial statements, the first line he looks at is if the gross profit percentage maintains or decreases. Frequently you’ll see an increase in sales, but a decrease in profit margins, and it’s important to remember that the gross profit percentage is what’s actually making your business successful.
Before you get too hung up on your projections, however, remember that anything forward-looking is an educated guess, so don’t treat it like gospel. If you get too laser-focused on perfectly meeting every single one of your targets, you’ll struggle to be happy with your results.
So now that you know you need forward-looking income statements, how do you get started? We’re here to help — every business structure is unique, so we recommend you talk to an expert to help create a model for you to use going forward.
When growing your business, you also need to understand the difference between enabling initiatives and ongoing initiatives. We will have the strategy behind both in our next blog.