Predicting the Future: What do Projections Mean in a Business Valuation?
How Financial Projections and a Business Appraisal Go Together
Your business is constantly growing and evolving. When looking to determine the true value of your business, your past cannot always accurately represent your future. Expansion is in your sights, and it is important to understand the full potential of your business’s future growth. Here, projections come in as a critical tool to understand the true value of your business.
A Future Revenue-Based Business Valuation
Projections are forward-looking estimations of the future benefits that a business will provide and will act as a guidebook for a company’s potential future. They are most typically based on historical performance, market trends, business strategy, and realistic assumptions. When determining the future value of a business, these aspects combine together to begin to paint a clear picture of your business’s true value.
From you and your people, we need solid data for a company valuation based on future revenue. We understand this is not an easy task, but it is important for the veracity of your finished company valuations based on projections of your revenue growth.
Each business scenario is unique, and there is no one-size-fits-all valuation method. Projections take each unique aspect into account to provide the most accurate value possible. We will also look at similar businesses to yours.
Understand more with our article what is a business valuation.
Why Use Future Projections When Valuing a Company?
Future Cash Flow Insight
Projections will offer a look into a company’s predicted path, estimating financial elements like revenue, operating costs, recurring expenses, and cash flow over a period of typically 3 to 5 years. These predictions will allow stakeholders to have a balanced look into the company’s potential growth and profitability, providing a more complete understanding of the company’s direction.
Know the true benefits of a business valuation with our article the top 7 benefits of getting a business valuation.
Future forecasts provide an in-depth understanding of a company’s path, empowering potential stakeholders to make informed decisions. Accurate financial projections will demonstrate the potential returns and risks of investing in a company, and they can show stakeholders whether investing in the company at hand is a good choice for them.
Identifying potential risks
Business Owner’s Projections predict not only growth but risks too. When creating financial projections and pro-rata financial statements, predicting, and identifying potential risks and financial challenges will provide a more complete picture of a business’s potential path. For example, the creeping cost of goods sold in the company’s financials must be watched and attacked.
It provides an opportunity to assess any challenging situations and accordingly create risk mitigation plans, helping the business prepare for any best or worst-case scenario. Stakeholders can also assess these risks and determine if the reward outweighs the potential cost.
When a significant time has passed after the initial projections, these projections can be used as benchmarks to compare the projected financial performance against the real performance. By analyzing and comparing these values, it can be determined if the company is on the predicted path or is deviating from this path. If business has not gone according to the plan, a company can decide whether they want to adjust their projections to the new data or work to get back on track with the original projections. Use your profit and loss statement as feedback to see how you are performing to your plan.
Means of communication
Current data can only show so much, and projections communicate to potential investors, partners, lenders, or buyers a company’s ideal vision, growth prospects, and what they hope to achieve. Transparent and realistic projections assist in building trust and credibility with potential stakeholders.
What is Important to Consider for Business Valuation Projections?
- Historical comparisons
Considering your past by analyzing cash inflows, expenses, and net income trends can help predict your long-term future. It is also helpful to compare your projection to your historical financial data, as it can demonstrate whether or not your sales forecast projections are realistic and that you are not over or underselling.
- Marking the date
As a business is constantly changing and growing, so do business projections. Many companies may complete this process on a consistent basis, so it is important to always clearly mark the date on your projections to prevent potential confusion when reviewing.
Also, read our article on navigating unsolicited offers to buy your business.
- Company plans
New projects, products, or expansions? What new endeavors is your company planning? Plans for the future impact where your business is going to be spending and making money. Considering these upcoming cash flow projections and how it will affect financial performance is essential.
- Revising projections
Often, not everything goes as expected, and new, unpredictable opportunities and challenges will present themselves. No existing business working on its growth will remain stagnant, and projections are not set in stone. Adjusting and revising these predictions is essential as your business grows and changes. Keeping it up to date will help your company predict the future in the most accurate way possible.
- Justifying assumptions
Projections are based on assumptions, and ensuring these assumptions are supported accordingly is crucial. Provide background and strong reasons for assuming where the operating expenses, profit margins, and sales increases might go. A solid background helps build the story behind your projection’s numbers and credibility and trustworthiness for your business. Potential stakeholders will find increased value in well-thought-out, realistic balance sheet projections and adjustments to income with good backup data.
Learn what counts as an add-back with our article, understanding add-backs when selling a business.
Read our article on the different business valuation methods.
Predicting Your Financial Future with Financial Projections.
While the calculation for projections may be complicated, the experienced and efficient valuators of Business Appraisal Florida are here to help you with all the nuances. With over twenty years of experience evaluating and assisting small businesses like yours, our expert accredited valuation analysts are ready to help you with your financial forecast.
Rules of thumb, raw numbers, and book value never truly represent a company’s real value. Business valuations dig deeper than the surface, and as a dynamic and involved process, business valuations will assess the true, most accurate value of your company. We will help you provide your potential stakeholders the most clear picture possible.