How did the company perform? Did the company execute its strategy successfully? How would the new capital expenditure contribute to the bottom line? How should the company fund its operation? What’s the best financing source, equity or debt? Should the investment be made? What are the possible scenarios the company might be facing? What needs to be changed and improved? What actions need to be taken?
“If You Can’t Measure It, You Can’t Improve It.” by Mike Brooks.
Financial forecasting is the process to obtain a view or decision by quantifying a company’s future performance based on its past financial performance and future strategies. The process provides the opportunity to identify the strengths, weaknesses, opportunities, and risks a company might face under different scenarios and assumptions. With a better understanding of the company’s future financial performance, actions taken based on the decisions or views become measurable and quantifiable.
Financial projections are essential in a variety of fields. For example, with financial projections, lenders can gain a better understanding of the borrower’s ability to pay back its debt in the future, investment bankers can advise clients on the optimal timing for specific transactions, investors can measure their ROI, and management can identify areas of improvement for its operation and any future funding needs.
In a nutshell, financial projections are the transformation of data that can be precisely measured regardless if it’s for financing, investing, or operation. The goal is to discover the financial impact of a company so that better decisions can be made.
The following are the primary benefits of financial projections:
Recognize the optimal funding source, timing, the ability to pay, and potential dilution.
Gain a detailed view of the business and identify the potential risks at an early stage.
Determine the feasibility of an investment with a bird’s-eye view of the company’s past and future.
Discover opportunities by simulating different scenarios and performing what-if analysis under different assumptions.
Financial projections serve as a standard against which future performance can be measured. With each subsequent financial forecast, more knowledge of the company is acquired for continuous improvement of the company’s performance.
That being said, a proper financial projection and forecast require proper financial modeling. Without a correct financial model would potentially lead to the wrong decision and actions to be taken and defeat the purpose of having a financial projection analysis at the first place. In other words, “Garbage in, garbage out.”
However, building a detailed and accurate financial model is a complex, timing-consuming, and error-prone task on top of writing the Excel formulas and a deep understanding of the interaction among all the different accounting items.
With PRJ Analytics, a cloud-based financial analytics software, you can create an accurate financial projection analysis in just minutes. Visit our website to learn more about PRJ Analytics and how our financial projection analysis allows you to create error-free projections with integrated financial statements and real-time collaboration.