When it comes to financial projections, many people tend to shy away from the topic, but it’s an important aspect of running a successful business.
And who better to discuss financial projections than a leader who has made her mark in the business world?
Meet Mary Barra, the CEO of General Motors and one of the most powerful women in the automotive industry.
She has been instrumental in turning around the fortunes of the struggling company and has proven to be an expert in financial projections.
Mary Barra’s approach to financial projections is simple:
You need to have a clear understanding of your business, its goals, and its potential.
This means taking a hard look at your financials, including your revenue streams, expenses, and cash flow.
With this information, you can create a projection that outlines where your business is headed and what you need to do to get there.”
One of the most important aspects of financial projections is accuracy.
Mary Barra understands the importance of creating projections that are realistic and achievable. This means taking into account factors such as market trends, competition, and potential obstacles that may impact your business.
But financial projections aren’t just about crunching numbers.
Mary Barra also recognizes the importance of setting goals and creating a plan to achieve them.
This means creating a timeline for your projections and breaking down your goals into achievable milestones.
Of course, financial projections aren’t foolproof, and unexpected events can impact your business’s trajectory.
Mary Barra understands this and advises businesses to regularly review and update their projections to account for any changes in the market or business landscape.
Here are some steps to help you run financial projections for your small business:
1. Define Your Objectives:
Start by clarifying the objectives of your financial projections.
Are you looking to assess the feasibility of a new business idea, create a business plan for investors, or set financial targets for your existing business?
Understanding your goals will help you determine the scope and focus of your financial projections.
2. Gather Data:
Collect relevant financial and operational data for your business.
This may include historical financial statements (such as income statements, balance sheets, and cash flow statements), sales and expense data, customer data, pricing information, and other relevant data points.
It’s important to have accurate and up-to-date data to base your projections on.
3. Choose Projection Methods:
There are several methods to project financials, including top-down, bottom-up, and hybrid approaches.
In a top-down approach, you start with a high-level estimate, such as total market size or industry benchmarks, and then estimate your business’s share of that market.
In a bottom-up approach, you start with detailed estimates of individual sales, expenses, and other financial components and aggregate them to arrive at a total projection.
A hybrid approach may involve using a combination of top-down and bottom-up methods to create a more accurate projection.
4. Project Revenue:
Based on your business’s historical data, market research, and industry trends, project your future revenue.
Consider factors such as customer demand, pricing strategy, sales channels, and seasonality.
Be realistic and conservative in your estimates, taking into account potential risks and uncertainties.
5. Estimate Expenses:
Estimate your business’s expenses for the projected period, including fixed costs (such as rent, utilities, and salaries), variable costs (such as materials, labor, and commissions), and other operating expenses (such as marketing, legal, and insurance).
Consider factors such as inflation, changes in supplier costs, and potential cost savings initiatives.
6. Forecast Cash Flow:
Use your projected revenue and expenses to forecast your cash flow, which is the movement of cash in and out of your business.
Cash flow projections are critical for small businesses to ensure they have enough cash on hand to cover expenses, manage working capital, and make necessary investments.
7. Analyze Profitability:
Based on your projected revenue and expenses, calculate your business’s profitability metrics, such as gross margin, operating margin, and net profit margin.
These metrics can provide insights into your business’s profitability and financial health and help you assess the viability of your business model.
8. Sensitivity Analysis:
Conduct sensitivity analysis by assessing the impact of different scenarios on your financial projections. For example, you can test how changes in revenue, expenses, or market conditions may affect your projections.
This can help you identify potential risks and uncertainties and develop contingency plans.
9. Review and Refine:
Review your financial projections regularly and refine them as needed.
As your business evolves and market conditions change, update your projections to reflect the most current data and assumptions.
Regular reviews can help you track your progress, make informed decisions, and take necessary actions to achieve your financial objectives.
10. Seek Professional Advice:
If you are not familiar with financial projections or accounting principles, it may be beneficial to seek professional advice from an accountant or financial consultant. They can provide expert guidance, review your projections, and help you ensure their accuracy and reliability.
At the end of the day, financial projections are a crucial tool for any business leader.
Whether you’re running a small startup or a large corporation like General Motors, having a clear understanding of your financials and where your business is headed is key to success.
And Mary Barra’s approach to financial projections serves as a shining example of how projections can make a big impact on the success of a business.