5 Small Business Financial Projection Mistakes & How to Avoid Them

Are your financial projections actually guiding your business to success, or are they leading you down a dangerous path?

For existing businesses, getting your small business financial projections right is crucial, but so many get it wrong. Today we're diving into the five most common and costly mistakes existing businesses make with their financial forecasts and, more importantly, how you can avoid them.

Mistake Number One: Forgetting You're an Existing Business

Why is this a mistake? Well, if you're an existing business, you have some history, and using that historical data as a starting point for your financial forecast will put you in the best possible place. You have trends. You have key financial drivers that have already happened. Use that to help project the future of your business. What's been your growth rate? How much have you spent historically on marketing? What is that percentage of spend in comparison to revenue? All these things are going to help you make a more accurate financial forecast. You don't have to start from scratch, and you shouldn't. That's why it's a mistake.

One of the easiest ways to avoid this mistake and be able to bring in those actuals and historical data is to use LivePlan and to connect it to either your QuickBooks Online or your Xero software. If you do that, we'll automatically bring in that history, and it'll be that starting point for you to make an accurate financial forecast for your existing business.

Mistake Number Two: Confusing Profits and Cash

This one happens a lot, and it's understandable. It's easy to confuse profits and cash. The profit every month is going to be on that profit and loss statement. Right after you get the revenue in and you subtract all the expenses and direct costs, you've got a number, and that number is your profit. That's actually the money that you're making in the business. If that number is negative, you have a negative profit. If it's positive, it's positive profit. But that number that you see at the bottom of the P&L—that is not the cash in the bank. That is different because people pay potentially at different times. Maybe they pay every 30 days or every 45 days. You pay your vendors at different times. So it's a little bit more complicated when you deal with cash.

You have to have both financial projections for your profit and loss so that you understand how to make this business profitable or continue to have it be profitable because it's an existing business. But you also have to have a cash flow forecast that's going to tell you how you're doing with the cash in the bank so you actually have the money to make payroll, to pay your vendors, to make rent. Really important for your existing small business.

Mistake Number Three: Painting an Overly Rosy Picture

You don't want to do this. You want to be accurate and realistic because that's what's going to help you make better decisions. If you have increases in revenue without accounting for an increase in cost, maybe that's not realistic. If you've grown for the last three years at a rate of 7%, 8%, maybe even 10%, don't forecast 30% growth unless there's a really good reason for it. Maybe you're opening another location—that's a good reason. What you want is realistic growth, and you can really understand that if you look at the historical growth in your business. That's the beauty of an existing business: you have data. You know what happened in the past. That's going to help you put your forecast together in the future.

Mistake Number Four: Set It and Forget It

Creating your small business financial projections at the start of the year and then never looking at them again—don't do that. Why don't you want to set it and forget it? Well, the biggest thing is that a forecast is exactly that, right? It is a view into the future, so there's no way it's exactly right. The whole point of a forecast is you put it together looking at your historical data, and then as you run the business, you're going to be checking in on it. You're going to look and see: What did I say I was going to do? What did I actually do? And what's the variance? All that information is going to give you data that is going to help you make better decisions.

Then you'll tweak that forecast. Then you'll run your business. Then you'll look at it again. Then you'll tweak that forecast. And this is how you're going to have the information you need to make better financial decisions. And even better, if you're the owner or the CEO or the founder, you're going to sleep better at night.

Mistake Number Five: Operating with Tunnel Vision

By only having one version of your small business financial projections. What if your biggest client leaves? What if a new competitor comes across the street? What if a sales boom happens unexpectedly? This could be a major issue for you. So what are you going to do? You're going to do some what-if scenarios. You're going to put together that forecast, and then you're going to use a tool or an Excel spreadsheet or a Google Sheet. You could use something like LivePlan, and you're going to do a what-if scenario. This is important to think about because it once again gives you the data you need to make better decisions for your business.

The Benefits of Well-Constructed Financial Projections

By avoiding these five common mistakes, nothing will stop you from creating realistic financial projections that leverage your historical data, account for cash flow, and include scenario planning to help you develop a powerful business analysis tool.

The projections can become the foundation of an effective business plan that can help you secure bank loans or attract investors.

Plus, they give you a clearer vision of the financial health of your business. You can compare your projections to your actual results as they come in, which helps you identify trends, spot potential problems early, and determine opportunities to make strategic changes to your business so it will perform better.