6 Reasons Accurate Financial Projections Are Important
Every business needs data to inform decisions and, more importantly, forecast the future. Our 6 reasons accurate financial projections are important will remind you of the importance of this work. Data can come from accounting systems, sales figures, customer surveys, or any other source of information. But no matter where data comes from, it’s vital that it’s accurate. Therefore, accuracy is paramount if you use data to generate a financial projection.
1. Determining Your Budget
You will use your financial projection to create the following year’s budget for the business. But, of course, if you don’t have accurate information to rely on, your budget won’t be accurate, either — and this will result in significant financial ramifications for your business. You may end up overspending and jeopardizing your business’s bottom line. According to the Chamber of Commerce, ineffective budgeting is one of the most common causes of business failure, so this should be a significant concern.
2. Creating Your Report
Accurate data is also important because it will make creating a financial projection more straightforward. There are many ways to calculate financial projections. Still, you can start by using a spreadsheet for accounting for all your expected revenue and predicted expenses, explains Resolve. If you’re using inaccurate data, you might notice that these figures don’t look right, complicating your calculations.
3. Determining Tax Liability
Another important application of financial projections is determining your business’s tax liability. As you know, business owners must budget for taxes throughout the year and pay quarterly taxes when they’re due. If you inaccurately approximate how much you will earn, you could be underpaying or overpaying your taxes. If you underpay, you may face fines and penalties.
4. Complying With State Requirements
Some states also require that businesses file an annual report documenting their earnings and predicting profits for the coming year. In many cases, a financial projection is part of this requirement. You don’t want to file a report with the state containing inaccurate data — at best, this is unwise, and this could be considered fraud. It could also put your business license at risk if you don’t comply with this requirement.
5. Compiling Other Financial Statements
Financial projections are not the only document your business will need. You’ll also need your profit and loss statement, balance sheet, cash flow projections, inventory audit, and other documents detailing your business’s assets and financial transactions. These reports will be essential if you seek out investors or are applying for a business loan.
If your clients are new to these sorts of documents, consider recommending they return to school for a business degree or a similar focus. Online programs can be substantial time savings, and the additional knowledge you’ll gain can be invaluable. Otherwise, you may want guidance with advisory and client accounting services. Again, there are different focuses to choose from, so you can bolster whichever business-related ability you feel will be most beneficial to you and your clients.
6. Using Technology Effectively
Finally, you need to ensure that your financial forecasts are accurate so that you can use technology effectively. Many software programs can simplify creating a financial projection, but if you’re using inaccurate data, this software will only be so helpful. CPA Firm Technology also offers a variety of accounting programs that can help with taxes, audits, 1099s, and billing. Projection software or financial planning and analysis (FP&A) recommendations are at Accounting Software World.
Grow Your Business With Accurate Financial Projections
When calculating financial projections, it’s important to audit your data and review your conclusions before you finalize and submit the statements. You will likely be sharing the report with stakeholders, investors, and possibly even the state — so you must make sure that it’s a realistic projection of your business’s expected earnings.
Need help learning how to solve your business’s accounting technology needs and selecting the right software for accounting or CPA Firms? Visit us at k2e.com, where we make sophisticated technology understandable to anyone through our conferences, seminars, or on-demand courses.