Learn about the advantages of properly making financial projections to anticipate potential cash flow problems or even to make appropriate investment decisions.
Below, find out its 6 main advantages:
Advantages of financial projections
1. Recognize the balance point
Based on this financial concept, it refers to the ideal level of sales in which costs are completely covered, both fixed and variable.
In other words, it focuses directly on a point where the company's profits are at zero, where it neither loses nor earns money.
In order to identify the appropriate level of balance for a company, one must go a little beyond the current state of the company and also calculate what its performance could be in a given period of time; obviously, in order to do so, a firm financial projection will be needed.
Likewise, it will allow you to project the average expenses that you will use during a certain period of time, as well as the average gross and net income.
As we know, reaching the break-even point is not an ideal time for a company. We must first rely on profitability, since it is a key point to be able to clearly understand how much money is needed to produce and thus be able to withstand the passage of time and achieve stability.
2. Risk reduction
As we already know, financial projections are a very effective mechanism for recognizing potential income threats, as well as those arising from crises and problems with the environment.
With all this, the owners of the company and their work team will be able to obtain advance information on events, making the necessary decisions to mitigate the impacts of crises and environmental situations that affect the commercial sector.
Similarly, in order to detect potential threats and risks, not only must the company's history and its evolution be taken into account when making projections, but one must also be very attentive to the environment in which it operates and the different situations that could arise.
3. High possibilities of access to credits and financing
When you make a solid financial projection , it means that you will be able to access transparent and realistic data about your company, which opens many doors for you, such as access to credit and financing.
Banks and the vast majority of financial institutions take into account the accuracy of data, as well as the accounting and administrative planning of a company before lending money to provide specific support for an investment or expansion project.
Likewise, having precise planning and transparent numbers will be of great help if you are looking to establish business alliances, partner up for a specific project or include new shareholders.
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4. Better management of the client portfolio
Just as it provides the possibility of knowing which products are the most profitable, a solid financial projection will also make it easier for you to know and understand which clients generate the greatest benefits for your business.
Thanks to this, you can make the best decisions to optimize the management of your user portfolio, strengthening all those business relationships that will make your business viable, as well as increasing opportunities for growth and expansion.
5. Optimal distribution of the product portfolio
The data that a financial projection will provide will determine the long-awaited profit that the different products or services you sell will provide.
With all this, you will be able to identify which goods, articles and services represent the greatest profitability and a great opportunity for growth for the business. Therefore, priority should be given to them and distribution channels should be expanded.
Similarly, you will also be able to detect which marketing objectives are not completely profitable in order to determine which ones you will eliminate or if their distribution flow will simply decrease, as well as you could apply the actions or strategies that will allow you to reverse the negative trends.
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6. Possible sustainable growth
As we have already mentioned before, all this leads us to demonstrate that, if the company has plans to grow or expand, it must make a financial projection, since it is completely fundamental for the project in mind to be carried out in a sustainable way.
When you have a solid understanding of the return on investment, expected benefits, and variable and fixed costs, you will be able to execute a growth plan on solid foundations that fit the reality you have and the true needs of the business.
On the other hand, if you do not have the proper knowledge of how to determine the company's performance in the very near future, making investments and modifications to try to grow could represent a great risk that will bring with it very serious financial consequences.
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