Sunday, December 26, 2010

The inside track on financial projections

For new business owners in Thailand, preparing a business plan and financial projections can be an intimidating process. However, it doesn’t need to be. What you need is a good understanding of your business and the market, not a master’s degree in accountancy. A well presented business plan and realistic financial projections will reinforce a positive impression you want to create of your business. This will benefit you and your investors.

It is tough to predict the future trading performance of your business, particularly if you are just starting out (where assumptions will be based on market research and realistic judgement), Business owners should avoid making the mistake of working out the level of sales they will need to make the business viable and then putting this figure in as their forecast. It’s easy to convince yourself that these figures are achievable but can you realistically see that number of clients / customers buying your service or product?  

Profit statement
A profit statement breaks down, on a monthly basis, the turnover, cost of sales, gross profit, operating costs and net profit of a business. By breaking each section down into manageable parts you will stand a better chance of producing an accurate forecast.

Let’s take the turnover for example. Businesses can generate income from various sources depending on the products sold or services provided. Each product or service will have an individual price, cost or demand which should be taken in account when producing your projections.

Cash vs profit
It is important not to confuse cash with profit. You may be able to forecast a good profit for the year yet still face times when you are strapped for cash. A cashflow statement shows the ability of the business to have cash available to pay bills on time. It is all about timing and the amount of money flowing in and out of the business. This is especially important if your business model involves lengthy credit cycles.

A cashflow forecast can be a valuable tool if used correctly to identify potential cash shortfalls and to take appropriate action.  

Realism vs creativity
When reviewing projections, an investor or bank manager will not take things at face value and will be experienced and cutting through ‘fluff’ or speculative information. He/she will ask about how and when the figures were produced? Have the figures been revised recently to take into account the current economic climate? What assumptions have been used and are they realistic? Being positive is fine but presenting sales and profit forecasts that are unrealistic, under-estimating operating costs or taking an excessive salary will not help your business secure the financial backing you are looking for.

Remember you must take ownership of the plan and be comfortable that the forecasts you produce are achievable. Your forecasts may cover a range of scenarios to demonstrate that the business is still viable, for example if overall sales were down 20% on your original projections or your loan repayment commitment was to increase by 50%.    

Economic or industry changes
Changes to interest rates are often overlooked when calculating financial repayment commitments. Rates are unlikely to remain at the same level, so potential increases should be built into your forecasts. In addition to the economic climate you should also consider the impact of changing social trends, improvements in technology and political decisions with may impact on the future performance of your business. This is especially true in Thailand, where political instability remains and future protests or other problems may occur at any time.

Double checking
The financial projections should be reviewed by a reputable accountant before you present them to the bank or investor. This will significantly increase the likelihood of your loan application or investment request being approved.

Additionally, it is prudent to have a contingency reserve fund to fall back on in case the business takes longer than expected to get off the ground.

Article contributed by:

Richard Holden
Head of Franchising
Lloyds Banking Group
Tel: 07802 324018

Richard Holden heads up the Lloyds Banking Group Franchise Unit and is an expert speaker at franchise exhibitions and seminars. He also regularly features in the national and trade press. The Lloyds Banking Group has franchise managers based throughout the UK to offer support to both franchisors and franchisees. Lloyds TSB and Bank of Scotland are affiliate members of the British Franchise Association. 

Article edited by Stuart Blott, General Manager, Sutlet Group


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