Reason #5 Why You Should Do Business Projections

Apr 13, 2021 by Roger Scherping



Roger recently appeared on the Small Small Business (SSB) podcast. Learn how SSB helps small businesses here.

Roger discussed 10 reasons why you should do business projections. Here’s reason number five.


Roger Scherping: So, speaking of banks, this is one I learned recently. A banker told me that projections are going to be more important in 2021 than they ever have been. And he said that, the reason is, that, well, obviously 2020 was not favorable to most businesses. Most businesses did not do well. And banks know that, and regulators know that. But they’ve got all these clients that have either, maybe they fallen behind in their payments, or they haven’t lived up to their loan covenants, and the banks and the regulators know that.

So they’re willing to kind of give businesses a pass on 2020. They’re willing to do that, but they’re asking for two things. First, the business has to be able to explain what the pandemic did to them in 2020, and be able to explain why it hurt them, and what exactly happened. But second, then they need to demonstrate that they have a plan in 2021 to get back to where they want to be, and, guess what, the bank and the regulator will require a projection.

So the banker told me projections haven’t been this important since 2008, in the depths of the Great Recession.

Steve Fredlund: Wow. Yeah. And that makes perfect sense, right? But if you don’t know that, you don’t know, and so if you’re going to touch on this later let me know, but, you know, I think some people are hearing the word projection, and maybe just to put that in perspective, you know, there’s a wide spectrum, right? There’s the back of the napkin where you go in and say, hey, banker, I think we’re going to sell this much money, or, you know, sell this much in revenue, and then there’s the extreme detailed detail detailed. When you’re talking about the kind of funding that banks are looking for in general, kind of where in the spectrum does that fall? Like, how much anxiety should this cause when I’m thinking about, I need a projection to get funding?

Roger: Well, maybe you’re right. Maybe we should talk about what I mean by a projection. I’ve said the word a hundred times already. So, I don’t mean just a budget. I don’t just mean, well, we’re going to sell X, and our profit is going to be Y. I mean, that’s great if you do that because a lot of businesses don’t. But that’s a good thing. But when I say a projection, I mean all three statements: a P&L, a cash flow, and a balance sheet. Right? So I mean all three of those. So what are bankers asking for? What I’m being told is they’re asking for all three. They want to see a complete financial picture of how your business is going to look 12 months from now.

Steve: I agree. So if I have, like, you know, 30 different revenue sources and 50 different expense accounts, and all that sort of stuff, like, are they going to need … do I like need to like project out how much my QuickBooks is going to cost this year?

Roger: Yeah, OK. I see what you’re saying.

Steve: Yeah, that was good. But how detailed are these projections generally going to have to be?

Roger: Yeah. ProjectionSmart is a modeling program, so it’s done at a high level. So we’ll just put “sales,” and it will just be in as a number. But that doesn’t mean that you can’t – you have to be able to support that, right, with X amount per product line or per region or office or whatever. You have to be able to support it. Likewise, we say what are your overhead expenses going to be, is a number, but you need to be able to detail that as well because your banker will want to know, what makes up those numbers. But as far as the actual modeling process we do it at a high level.

Steve: Yeah, and that’s usually going to be sufficient for a bank, right? They might have questions. Yeah, OK, OK, good.


Listen to Roger’s previous reasons on our YouTube page.


You can hear the entire podcast here.



 

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