your business plan should have financial projections for

• Business Planning

Business Plan Financial Projections

Written by Dave Lavinsky

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

• They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
• Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
• Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

• Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
• Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. Cash Flow Statement & Projection

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

• The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
• It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. Balance Sheet Projection

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to Create Financial Projections

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

• Gross margin ratio
• Operating margin ratio
• Return on assets (ROA)
• Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

How to Create Financial Projections for Your Business Plan

Written by Dave Lavinsky

Financial projections, also known as financial models, are forecasts of your company’s expected financial performance, typically over the next 5 years.

Over the past 25+ years, we’ve created financial projections for thousands of startups and existing businesses. In doing so, we’ve found 3 key reasons why financial projections are important:

• They help you determine the viability of your new business ideas and/or your need to make modifications to them. For instance, if your initial financial projections show your business idea isn’t profitable, you’ll know that changes are needed (e.g., raising prices, serving new markets, figuring out how to reduce costs, etc.) to make it viable.
• They are crucial for raising funding. Lenders will always review your financial projections to ensure you can comfortably repay any loans they issue you. Equity investors will nearly always review your projections in determining whether they can achieve their desired return on their investment in your business.
• They help keep your business financially on track by giving you goals. For instance, if your financial projections state your company should generate 100 new clients this year, and the year is halfway done and you’re only at 30 clients, you’ll know you need to readjust your strategy to achieve your goals.

In the remainder of this article, you’ll learn more about financial projections, how to complete them, and how to incorporate them in your business plan.

Download our Ultimate Business Plan Template Here to Quickly & Easily Complete Your Business Plan & Financial Projections

What are Financial Projections?

Financial projections are forecasts or estimations of your company’s future revenues and expenses, serving as a crucial part of business planning. To complete them you must develop multiple assumptions with regards to items like future sales volumes, employee headcount and the cost of supplies and other expenses. Financial projections help you create better strategies to grow your business.

Your financial projections will be the most analyzed part of your business plan by investors and/or banks. While never a precise prediction of future performance, an excellent financial model outlines the core assumptions of your business and helps you and others evaluate capital requirements, risks involved, and rewards that successful execution will deliver.

Having a solid framework in place also will help you compare your performance to the financial projections and evaluate how your business is progressing. If your performance is behind your projections, you will have a framework in place to assess the effects of lowering costs, increasing prices, or even reimagining your model. In the happy case that you exceed your business projections, you can use your framework to plan for accelerated growth, new hires, or additional expansion investments.

Hence, the use of financial projections is multi-fold and crucial for the success of any business. Your financial projections should include three core financial statements – the income statement, the cash flow statement, and the balance sheet. The following section explains each statement in detail.

Necessary Financial Statements

The three financial statements are the income statement, the cash flow statement, and the balance sheet. You will learn how to create each one in detail below.  

Income Statement Projection

The projected income statement is also referred to as a profit and loss statement and showcases your business’s revenues and expenses for a specific period.

To create an income statement, you first will need to chart out a sales forecast by taking realistic estimates of units sold and multiplying them by price per unit to arrive at a total sales number. Then, estimate the cost of these units and multiply them by the number of units to get the cost of sales. Finally, calculate your gross margin by subtracting the cost of sales from your sales.

Once you have calculated your gross margin, deduct items like wages, rent, marketing costs, and other expenses that you plan to pay to facilitate your business’s operations. The resulting total represents your projected operating income, which is a critical business metric.

Plan to create an income statement monthly until your projected break-even, or the point at which future revenues outpace total expenses, and you reflect operating profit. From there, annual income statements will suffice.

Sample Income Statement

Consider a sample income statement for a retail store below:

Cash Flow Projection

As the name indicates, a cash flow statement shows the cash flowing in and out of your business. The cash flow statement incorporates cash from business operations and includes cash inflows and outflows from investment and financing activities to deliver a holistic cash picture of your company.

Investment activities include purchasing land or equipment or research & development activities that aren’t necessarily part of daily operations. Cash movements due to financing activities include cash flowing in a business through investors and/or banks and cash flowing out due to debt repayment or distributions made to shareholders.

You should total all these three components of a cash flow projection for any specified period to arrive at a total ending cash balance. Constructing solid cash flow projections will ensure you anticipate capital needs to carry the business to a place of sustainable operations.

Sample Cash Flow Statement

Below is a simple cash flow statement for the same retail store:

Balance Sheet Projection

A balance sheet shows your company’s assets, liabilities, and owner’s equity for a certain period and provides a snapshot in time of your business performance. Assets include things of value that the business owns, such as inventory, capital, and land. Liabilities, on the other hand, are legally bound commitments like payables for goods or services rendered and debt. Finally, owner’s equity refers to the amount that is remaining once liabilities are paid off. Assets must total – or balance – liabilities and equity.

Your startup financial documents should include annual balance sheets that show the changing balance of assets, liabilities, and equity as the business progresses. Ideally, that progression shows a reduction in liabilities and an increase in equity over time.

While constructing these varied business projections, remember to be flexible. You likely will need to go back and forth between the different financial statements since working on one will necessitate changes to the others.

Sample Balance Sheet

Below is a simple balance sheet for the retail store:

How to Finish Your Business Plan and Financial Projections in 1 Day!

Don’t you wish there was a faster, easier way to finish your plan and financial projections?

With Growthink’s Ultimate Business Plan Template you can finish your plan in just 8 hours or less!

How to Create Financial Projections

When it comes to financial forecasting, simplicity is key. Your financial projections do not have to be overly sophisticated and complicated to impress, and convoluted projections likely will have the opposite effect on potential investors. Keep your tables and graphs simple and fill them with credible data that inspires confidence in your plan and vision. The below tips will help bolster your financial projections.  

Create a List of Assumptions

Your financial projections should be tied to a list of assumptions. For example, one assumption will be the initial monthly cash sales you achieve. Another assumption will be your monthly growth rate. As you can imagine, changing either of these assumptions will significantly impact your financial projections.

As a result, tie your income statement, balance sheet, and cash flow statements to your assumptions. That way, if you change your assumptions, all of your financial projections automatically update.

Below are the key assumptions to include in your financial model:

For EACH essential product or service you offer:

• What is the number of units you expect to sell each month?
• What is your expected monthly sales growth rate?
• What is the average price that you will charge per product or service unit sold?
• How much do you expect to raise your prices each year?
• How much does it cost you to produce or deliver each unit sold?
• How much (if at all) do you expect your direct product costs to grow each year?

For EACH subscription/membership, you offer:

• What is the monthly/quarterly/annual price of your membership?
• How many members do you have now, or how many members do you expect to gain in the first month/quarter/year?
• What is your projected monthly/quarterly/annual growth rate in the number of members?
• What is your projected monthly/quarterly/annual member churn (the percentage of members that will cancel each month/quarter/year)?
• What is the average monthly/quarterly/annual direct cost to serve each member (if applicable)?

Cost Assumptions

• What is your monthly salary? What is the annual growth rate in your salary?
• What is your monthly salary for the rest of your team? What is the expected annual growth rate in your team’s salaries?
• What is your initial monthly marketing expense? What is the expected annual growth rate in your marketing expense?
• What is your initial monthly rent + utility expense? What is the expected annual growth rate in your rent + utility expense?
• What is your initial monthly insurance expense? What is the expected annual growth rate in your insurance expense?
• What is your initial monthly office supplies expense? What is the expected annual growth rate in your office supplies expense?
• What is your initial monthly cost for “other” expenses? What is the expected annual growth rate in your “other” expenses?

Capital Expenditures, Funding, Tax, and Balance Sheet Items

• How much money do you need for Capital Expenditures in your first year  (to buy computers, desks, equipment, space build-out, etc.)?
• How much other funding do you need right now?
• What percent of the funding will be financed by Debt (versus equity)?
• What Corporate Tax Rate would you like to apply to company profits?
• What is your Current Liabilities Turnover (in the number of days)?
• What are your Current Assets, excluding cash (in the number of days)?
• What is your Depreciation rate?
• What is your Amortization number of Years?
• What is the number of years in which your debt (loan) must be paid back?
• What is your Debt Payback interest rate?

Create Two Financial Projection Scenarios

It would be best if you used your assumptions to create two sets of financial projections that exhibit two very different scenarios. One is your best-case scenario, and the other is your worst-case. Investors are usually very interested in how a business plan will play out in both these scenarios, allowing them to better analyze the robustness and potential profitability of a business.  

Conduct a Ratio Analysis

Gain an understanding of average industry financial ratios, including operating ratios, profitability ratios, return on investment ratios, and the like. You can then compare your own estimates with these existing ratios to evaluate costs you may have overlooked or find historical financial data to support your projected performance. This ratio analysis helps ensure your financial projections are neither excessively optimistic nor excessively pessimistic.  

Be Realistic

It is easy to get carried away when dealing with estimates and you end up with very optimistic financial projections that will feel untenable to an objective audience. Investors are quick to notice and question inflated figures. Rather than excite investors, such scenarios will compromise your legitimacy.  

Create Multi-Year Financial Projections

The first year of your financial projections should be presented on a granular, monthly basis. For subsequent years, annual projections will suffice. It is advised to have three- or five-year projections ready when you start courting investors. Since your plan needs to be succinct, you can add yearly projections as appendices to your main plan.

You should now know how to create financial projections for your business plan. In addition to creating your full projections as their own document, you will need to insert your financial projections into your plan. In your executive summary, Insert your topline projections, that is, just your sales, gross margins, recurring expenses, EBITDA (earnings before interest, taxes, depreciation, and amortization), and net income). In the financial plan section of your plan, insert your key assumptions and a little more detail than your topline projections. Include your full financial model in the appendix of your plan.

Other Helpful Business Plan Articles & Templates

• Search Search Please fill out this field.
• Building Your Business

How To Create Financial Projections for Your Business

Learn how to anticipate your business’s financial performance

• Understanding Financial Projections & Forecasting

Why Forecasting Is Critical for Your Business

Key financial statements for forecasting, how to create your financial projections, frequently asked questions (faqs).

Maskot / Getty Images

Just like a weather forecast lets you know that wearing closed-toe shoes will be important for that afternoon downpour later, a good financial forecast allows you to better anticipate financial highs and lows for your business.

Neglecting to compile financial projections for your business may signal to investors that you’re unprepared for the future, which may cause you to lose out on funding opportunities.

Read on to learn more about financial projections, how to compile and use them in a business plan, and why they can be crucial for every business owner.

Key Takeaways

• Financial forecasting is a projection of your business's future revenues and expenses based on comparative data analysis, industry research, and more.
• Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts, which can be attractive to investors.
• Some of the key components to include in a financial projection include a sales projection, break-even analysis, and pro forma balance sheet and income statement.
• A financial projection can not only attract investors, but helps business owners anticipate fixed costs, find a break-even point, and prepare for the unexpected.

Understanding Financial Projections and Forecasting

Financial forecasting is an educated estimate of future revenues and expenses that involves comparative analysis to get a snapshot of what could happen in your business’s future.

This process helps in making predictions about future business performance based on current financial information, industry trends, and economic conditions. Financial forecasting also helps businesses make decisions about investments, financing sources, inventory management, cost control strategies, and even whether to move into another market.

Developing both short- and mid-term projections is usually necessary to help you determine immediate production and personnel needs as well as future resource requirements for raw materials, equipment, and machinery.

Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts. They can also be used to make informed decisions about the business’s plans. Creating an accurate, adaptive financial projection for your business offers many benefits, including:

• Attracting investors and convincing them to fund your business
• Anticipating problems before they arise
• Visualizing your small-business objectives and budgets
• Demonstrating how you will repay small-business loans
• Planning for more significant business expenses
• Showing business growth potential
• Helping with proper pricing and production planning

Financial forecasting is essentially predicting the revenue and expenses for a business venture. Whether your business is new or established, forecasting can play a vital role in helping you plan for the future and budget your funds.

Creating financial projections may be a necessary exercise for many businesses, particularly those that do not have sufficient cash flow or need to rely on customer credit to maintain operations. Compiling financial information, knowing your market, and understanding what your potential investors are looking for can enable you to make intelligent decisions about your assets and resources.

The income statement, balance sheet, and statement of cash flow are three key financial reports needed for forecasting that can also provide analysts with crucial information about a business's financial health. Here is a closer look at each.

Income Statement

An income statement, also known as a profit and loss statement or P&L, is a financial document that provides an overview of an organization's revenues, expenses, and net income.

Balance Sheet

The balance sheet is a snapshot of the business's assets and liabilities at a certain point in time. Sometimes referred to as the “financial portrait” of a business, the balance sheet provides an overview of how much money the business has, what it owes, and its net worth.

The assets side of the balance sheet includes what the business owns as well as future ownership items. The other side of the sheet includes liabilities and equity, which represent what it owes or what others owe to the business.

A balance sheet that shows hypothetical calculations and future financial projections is also referred to as a “pro forma” balance sheet.

Cash Flow Statement

A cash flow statement monitors the business’s inflows and outflows—both cash and non-cash. Cash flow is the business’s projected earnings before interest, taxes, depreciation, and amortization ( EBITDA ) minus capital investments.

Here's how to compile your financial projections and fit the results into the three above statements.

A financial projections spreadsheet for your business should include these metrics and figures:

• Sales forecast
• Balance sheet
• Operating expenses
• Payroll expenses (if applicable)
• Amortization and depreciation
• Cash flow statement
• Income statement
• Cost of goods sold (COGS)
• Break-even analysis

Here are key steps to account for creating your financial projections.

Projecting Sales

The first step for a financial forecast starts with projecting your business’s sales, which are typically derived from past revenue as well as industry research. These projections allow businesses to understand what their risks are and how much they will need in terms of staffing, resources, and funding.

Sales forecasts also enable businesses to decide on important levels such as product variety, price points, and inventory capacity.

Income Statement Calculations

A projected income statement shows how much you expect in revenue and profit—as well as your estimated expenses and losses—over a specific time in the future. Like a standard income statement, elements on a projection include revenue, COGS, and expenses that you’ll calculate to determine figures such as the business’s gross profit margin and net income.

If you’re developing a hypothetical, or pro forma, income statement, you can use historical data from previous years’ income statements. You can also do a comparative analysis of two different income statement periods to come up with your figures.

Anticipate Fixed Costs

Fixed business costs are expenses that do not change based on the number of products sold. The best way to anticipate fixed business costs is to research your industry and prepare a budget using actual numbers from competitors in the industry. Anticipating fixed costs ensures your business doesn’t overpay for its needs and balances out its variable costs. A few examples of fixed business costs include:

• Rent or mortgage payments
• Operating expenses (also called selling, general and administrative expenses or SG&A)
• Utility bills
• Insurance premiums

Unfortunately, it might not be possible to predict accurately how much your fixed costs will change in a year due to variables such as inflation, property, and interest rates. It’s best to slightly overestimate fixed costs just in case you need to account for these potential fluctuations.

Find Your Break-Even Point

The break-even point (BEP) is the number at which a business has the same expenses as its revenue. In other words, it occurs when your operations generate enough revenue to cover all of your business’s costs and expenses. The BEP will differ depending on the type of business, market conditions, and other factors.

To find this number, you need to determine two things: your fixed costs and variable costs. Once you have these figures, you can find your BEP using this formula:

Break-even point = fixed expenses ➗ 1 – (variable expenses ➗ sales)

The BEP is an essential consideration for any projection because it is the point at which total revenue from a project equals total cost. This makes it the point of either profit or loss.

Plan for the Unexpected

It is necessary to have the proper financial safeguards in place to prepare for any unanticipated costs. A sudden vehicle repair, a leaky roof, or broken equipment can quickly derail your budget if you aren't prepared. Cash management is a financial management plan that ensures a business has enough cash on hand to maintain operations and meet short-term obligations.

To maintain cash reserves, you can apply for overdraft protection or an overdraft line of credit. Overdraft protection can be set up by a bank or credit card business and provides short-term loans if the account balance falls below zero. On the other hand, a line of credit is an agreement with a lending institution in which they provide you with an unsecured loan at any time until your balance reaches zero again.

How do you make financial projections for startups?

Financial projections for startups can be hard to complete. Historical financial data may not be available. Find someone with financial projections experience to give insight on risks and outcomes.

Consider business forecasting, too, which incorporates assumptions about the exponential growth of your business.

Startups can also benefit from using EBITDA to get a better look at potential cash flow.

What are the benefits associated with forecasting business finances?

Forecasting can be beneficial for businesses in many ways, including:

• Providing better understanding of your business cash flow
• Easing the process of planning and budgeting for the future based on income
• Improving decision-making
• Providing valuable insight into what's in their future
• Making decisions on how to best allocate resources for success

How many years should your financial forecast be?

Your financial forecast should either be projected over a specific time period or projected into perpetuity. There are various methods for determining how long a financial forecasting projection should go out, but many businesses use one to five years as a standard timeframe.

U.S. Small Business Administration. " Market Research and Competitive Analysis ."

Score. " Financial Projections Template ."

Does your business plan need a push?

Writting a business plan can be a springboard exercise for your business, and it's not as difficult as people think. All it takes is a bit of method, and some efficient tools. The good news our free articles and paid course have you covered!

Resources on Business Plan Writing :

An article of the Accelerated MBA written by:

Antoine Martin (Ph.D) | Business coach

Is this article relevant? Share it & help someone!

In this article:

Financial projections: how to write the financial plan in business plan.

So, you’ve decided to write a business plan? Good for you! It’s an important document that will help you outline your business goals, strategies, and tactics.

But it’s not just a document for you, as the business owner in charge of everything – it’s also important for potential investors and lenders.

In particular, one of the most important sections of your business plan should be your financial plan or, in other words, your overall financial projections for the next few years – understand, three to five years – distilled in a specific and highly codified format.

Why? Because the financial projections in a business plan are the numbers’ version of your pitch – if something doesn’t add-up, that’s where you see it.

Now, we know that numbers can be impressive (not to say daunting), so in this post, we’ll explain to you how to write a financial plan in your business plan.

We’ll also explain the logic you are supposed to follow to do things right (because financiers expect you to follow a very specific logic).

And we’ll explain what your business plan absolutely needs to include from a financial standpoint.

If that makes sense to you, then let’s get going!

By the way…

Before we dig into the financial projections’ discussion, let us give you a tiny bit of background!

We are professional business coaches, and our job is to push entrepreneurs and business owners to their next steps.

Business planning and business plans are part of that, obviously, therefore we have written a series of free articles on how to write a business plan – of which this page is a part.

We are on a mission to make entrepreneurship fun and accessible, so we provide about 80 percent of our content for free – including a free business plan template to be downloaded down this page.

Still, in case that’s not sufficient, we’ve also created our Business Plan Builder Module , which has been designed to make your life super easy.

Shameless plug: it gives you access to:

• a complete and solid business plan writing work-frame tool
• automated financial tables that take the hassle away (yayyy!)
• two designer-made templates (comprehensive + pitch deck)
• and two hours of tutorial videos recorded with a business coach to explain all the logic you’ll need to master if you plan on writing a business plan that converts.

There’s simply no way to make things easier!

Now, having said that, let’s get going.

As a reminder, what is a business plan about?

To start the discussion, remember that a business plan is about much more than just numbers. As we’ve explained in our article What are Business Plans For? , the role of such a document is to show that beyond a nice business plan pdf nobody really cares about, you have a real business and a plan to get it somewhere.

First, a business plan’s purpose is to help you explain what your project is about. In that sense, the document you need to write should be written as a storytelling instrument, designed, and formulated to tell people a story they will want to read AND remember.

Second, it should give you a way to showcase your main business objectives for the next few years, as well as the strategy you will put into place to get there and deliver on your promises.

Third, your business plan should also provide a market analysis, and a description of your main target segment. That gives the reader a better understanding of your ecosystem’s potential, but more importantly the exercise forces you to look around, open your eyes and do some meaningful research.

You wouldn’t want to drive blindfolded, would you?

Of course, your document should also have a financial component – which is the topic of this article – and there the challenge is to ensure that your financial projections make sense, that they are clear, accurate and easy to follow.

Long things short, investors and bankers expect you to match a very specific business plan outline and format (there’s a code!) and you don’t have much wiggle room there – so be careful in your approach!

What is a Financial Plan & what should it include?

Now, let’s get into the core of this article: financial plans and financial projections. What are they, why are they important – there is a lot to explore.

First things first, what is a financial plan? How important is it in a business plan? And what type of elements is it made of? What are the projected financial statements you need to provide? Oh, and what do we mean by ‘financial projections’ in the first place, by the way?

What is the role of a financial plan in business plan?

A financial plan is the financial part of your business plan. Its purpose is simple: explain to the reader what should be the ins and outs of your project from a financial perspective, and help them see if their own business projections are aligned with yours.

On the one hand, the idea is to put numbers on your project, to make it tangible and show that your vision includes the end and the means.

On the other, it is also to show that you are capable of defending your big idea as well as the projected financials that need to come with it – something that many wannabe entrepreneurs are actually unable to do…

As a side note, and as silly as that might sound, this means that your business plan should include a lot more than just a financial plan and a smart cash flow projection!

That point brings us back to the one we made earlier when we said that a business plan should follow a specific structure (go read that article!), but we mention it again because we want things to be very clear: your business plan should be a matter of storytelling, not just a matter of financial projections!

Typically, we often see accountants work on business plans, and what they produce is rarely enough because they only deliver financial estimates that make no real sense to non-accountants (even less to the entrepreneurs at stake) and leave aside the rest of the topics – particularly the storytelling!

Said differently? The numbers are one aspect of the story, but you still have to come up with the pitch – which is where the rest of the business plan comes in handy.

Make sure to deliver an easy-to-read mix!

Your financial plan must provide your financial projections

To get into the technical part of the discussion, the financial plan in your business plan should include your financial projections, organized in a very formal format.

That makes two distinct points to consider!

On the one hand, you should be able to show with clear numbers what money should come in and when (that’s the income forecasts), for this year but also for the next, the ones after that for three to five years.

On the other, you should also be able to show what money needs to go out to make the business roll. What are the production costs, the fixed and variable expenses, the salaries, and of course the various marketing expenses needed to generate the development you are planning on getting to.

On that point, remember that your cost of client acquisition should also be part of the formalized projections – otherwise your numbers will be flawed (and doomed).

Ultimately, you need to be very clear as to when your new business (or existing business) should break even, as to when should profits be expected, as to when lenders and investors will get their money back, so forth and so on.

It must include specific financial documents people will expect to see

From a very formal perspective, you shouldn’t be trying to make one single projection sheet. Nope! Your readers will expect to see three important financial documents in the financial section of the business plan you will introduce to them.

• A profit and loss statement – also known as your P&L statement, or as an income statement
• A cash flow statement
• And a balance sheet.

First, the P&L table or income statement should show what money is expected to come in or go out, but it should also show if and when the business will make a profit or a loss, year by year, for the next five years.

The sales forecast and the operating expenses should be easy to understand at that stage, and you should also be able to provide your estimated gross profit, your gross margin, as well as your net profit and net margin.

In case you are wondering, your gross profit corresponds to your sales minus your cost of production. Your net profit corresponds to the gross profit minus all the remaining costs.

It’s okay to read that twice…

Not being profitable is also okay, by the way. That’s the game. However, you must be able to explain why you won’t be profitable in a given year, and how you plan on filling the gap in the bank – otherwise your business dies, right?

Second, the cashflow statement should explain your cash flow management strategy and indicate when you will need to fill the bank account in, and why.

For instance, important account receivables could justify a temporary cashflow need, but the gaps left from the previous years should also be visible. Obviously, the funding needs should also be there and aligned with the financial situation of the business.

Third, the balance sheet is a summary of the previous two tables, except that it shows the various elements in terms of assets or liabilities. For instance, the account receivables we mentioned just before would be an asset (because some money is owed to the business) while account payables would be a liability (since the business owes money to someone else).

Does all this sound a little complex?

That’s because it is.

No need to worry, though. We have you covered and will provide all the templates and tools you need further below. For now, just keep reading.

So, what’s the financial plan in a business plan for?

To conclude, the financial plan in business plan should act as a financial cartography of what you have in mind for that business of yours.

• The financial plan should illustrate the plan you have for the business in terms of numbers
• It should include precise financial projections of what you think can be achieved
• It should clearly illustrate your cashflow management strategy
• And it should summarize the information clearly
• All of this through highly standardized tables financiers will understand very easily

What documents should a financial business plan contain?

Getting your financial business plan right is a lot simpler than it seems.

Now, when you’re pitching that business of yours to potential partners, investors or lenders, you’ll need to provide them with a series of financial statements.

Yet, how to produce those documents without jumping into a living nightmare? How to come up with cash flow projections that make sense instead of being purely random?

Word of caution: financial planning for businesses is typically complex.

The question is not only fair, but it is also super-duper common and literally blocks tons of entrepreneurs and small business owners on a daily basis.

Because financial planning for businesses is typically complex.

Because most people aren’t comfortable with numbers.

And because the vast majority of small business owners simply don’t know where to start.

That’s probably why you were looking for either a financial plan pdf template or an example of financial plan for small business owners a few minutes ago, isn’t it?

Typically, here is what happens.

Some try and do their best, but then they don’t feel confident with pitching and defending their financial analysis, so they keep delaying and nothing happens.

Others end up having recourse to external help, even though external business plan consultants usually aren’t a good idea at that stage.

And the rest gives up.

That’s a shame, especially if consider that financial planning for a small business and building a financial plan for a business plan are only a matter of having access to the right method and tools!

Yes, a big (big) part of the work is to guestimate, but the rest is about trusting the process with the right logic, method and tools – and there’s nothing you can’t manage here.

Especially with the right tools!

How to build your financial forecasts?

Now that you understand the different sections of a financial plan, let us talk about how to build financial forecasting.

In plain English, this part of the exercise is where you’ll estimate your company’s income and expenses for the next few years. Therefore, you should keep a few things in mind.

One, you need to have a good understanding of your business in order to create realistic forecasts.

Sounds silly? Maybe, but this is a mistake people make way too much, and when they fail at justifying their financial projections, everything else goes down.

Two, you absolutely want to make sure that your projections can explore various trends, i.e. your pessimistic, optimistic, and most likely scenarios.

• If everything goes extremely well, we’ll get there.
• If everything goes wrong, we’ll get there.
• But… we should reasonably expect to achieve this and that if we obtain the funding we need…

Can you see the idea?

Be sure to also factor in any potential changes or risks that could affect your business.

For example, if you’re expecting a new competitor to enter the market, you’ll need to account for that in your projections. By being realistic and accounting for as many variables as possible, you’ll give yourself the best chance of success so give it some thought!

Pragmatically, how do I come up with reasonable financial forecasts for my business plan?

It’s all a question of common sense, really.

• How much do you plan on selling?
• What are your short, medium and long term financial goals?
• What would be the cost of production?
• What margin does that leave you with?
• What fixed costs would you expect?
• How about variable costs?
• Have you included transaction fees and credit card fees in your costs?
• What is the cost of insurance premiums?
• Will there be any debt to repay?
• What type of budget do you need for marketing purposes?
• What is the cost of acquisition of the client?
• What operational margin does it leave before the taxman comes in?
• What kind of money do you need to meet your long term goals?
• Have you planned for any emergency fund at all?

Right, that’s a long list. But! Answering those questions should give you a strong basis to build financial projections that make sense, because that’s literally how you would read your income statement in the end.

If you were trying to translate boring numbers into a meaningful story, that’s exactly where you would start!

Again, we have you covered with all this.

If you are looking for a concrete and practical financial plan example, make sure to download our business plan template down the page. It will give you the basic pro forma financials you’ll need.

If you need to understand the logic behind the template and would rather use an automated spreadsheet to get everything done, however, then it’s time to stop struggling.

The Impactified Business Plan Builder will provide everything you need: the automated tables and two hours of business coaching videos designed to explain all the logic you’ll need – what are you waiting for?

Why Are Financial Projections so Important in the end?

So, overall, why is creating financial projections so important? Are there various types of financial projections anyway? There are several things to keep in mind here.

First, your financial projections are important because they give bankers and investors the numbers they need (to make an informed decision) in a format they expect to see.

Second, your projections show whether your strategy is aligned with the means at your disposal to achieve it and whether you are aware of the financial engineering required to make your business roll.

Third, and in a related way, forecasts will give you, as the entrepreneur in charge, an opportunity to show if you understand the business for real (or if someone else not present during the discussion wrote the plan for you).

All of these documents are important, but you (nobody else!) will need to be able to tell a story around them.

Investors aren’t just looking for numbers! They invest in teams and people before investing in projects, so they want to know that you understand your business and that you have a plan for the future!

So, make sure your financial projections are accurate and be prepared to answer any questions investors have about them.

Understanding the investment process

To understand how to handle the exercise properly, understanding the investment and funding process in general is important.

What do bankers and investors expect when they are looking at a business plan? How do they decide whether to invest or not? And how do the financial projections help them make that decision?

In short, investors are looking for a return on their investment. So, they want to know what they can expect to earn from their investment, and how that compares to the risks they’re taking.

Your projected income statement is important there, but so are your cashflow projections!

Your financial estimates should therefore show how your business will grow and what profits you’ll generate, both in the short-term and long-term. This information will help investors determine whether or not your business is a good investment.

In contrast, bankers have a much lower risk tolerance and are not interested in funding you – they lend money to those who have money to repay the debt (or some assets to engage as collateral in case something goes wrong). Hence, what they look for is not a high return on investment based on risk, but a repayment capacity based on predictability and wise financial management.

Said differently? You need to create financial projections that make sense and adapt your financial pitch to your audience accordingly.

Show investors that there is a great opportunity to make money at a later stage and show bankers you will be able to start repaying as soon as possible.

Again, if you need to explore the question of investors’ mindsets, we elaborate on that in our video module – it’s time to give it a try!

Business valuation and exit thinking

Last but not least, understanding the investment process means that you also need to start thinking in terms of valuation and exit.

Or, said differently, the financial plan in your business plan must lead you to think about what your business will be worth a few years from now, and about how you will be able to make money (for you and your investment partners) by selling it.

On the one hand, exit thinking relates to the idea that investors invest in a business with the expectation that the business will raise more money later on, at which stage a larger investor will come in and buy the existing investors out.

To make your investors some money, therefore, you have to start thinking in terms of exiting the business at some point – which means progressively turning the business into an asset that works on its own, for you and as much as possible without you.

This mindset is absolutely key – think about it!

On the other hand, the discussion leads us to think in terms of business valuation – understand, how much is the business worth, and how much could it be sold for.

That topic is probably getting too technical for this article’s discussion, so we’ll explore it in another post.

Meanwhile, make sure to listen to the exit & valuation video in The Business Plan Builder module . We explain all this and even go as far as giving you an automated valuation calculator in the financial tables part of the tool – again, you have no excuse!

Avoiding the typical mistakes small businesses make with financial planning

To finish with the discussion, what should you keep in mind if you wanted to turn your financial plan into an asset that generates money rather than frustration?

Like it or not, but small business financial planning isn’t an intuitive thing and people tend to make very typical mistakes you should avoid at all costs!

Know your business

First piece of advice, you really (really, really) want to know your business from every angle.

When you are writing the financial plan in your business plan, it’s important to remember that your projections should represent an estimate of future performance. That’s how investors and lenders will read your numbers anyway.

So, your financial projections and forecasts should be based on realistic assumptions and calculations that you should always be prepared to adjust as needed.

In order to make accurate projections, it is therefore extremely important to have a good understanding of your business and the industry it operates in. You should also consult with industry experts and other professionals who can help you make informed decisions about your business.

Do the exercise yourself!

When you’re writing your financial plan, it’s important to avoid making common mistakes. One of the most common errors is underestimating how much money your business will need to operate.

Another is to rely on business plan consultants to write your financial projections without being able to understand the numbers yourself. This can lead to mistakes if the numbers are incorrect, and it can lead to embarrassing ahem! moments if you can’t explain how this or that number ended up in the document.

The best way to ensure accuracy is to do the exercise yourself with the right tools in hand and the brainstorming support of someone you trust to challenge your thoughts and conclusions.

This can be done with your acting CFO or close financial advisor if you have one, or with a fellow entrepreneur if anyone around you has the right mindset to dig into the discussion with you.

Alternatively, hiring a business coach is another way to brainstorm and challenge yourself – follow the link to find out more about that.

Don’t be a tourist. That’s stupid.

Third piece of advice: don’t enter into a discussion with a potential partner as a tourist – this is stupid, and that could very well kill you.

We have seen countless entrepreneurs walk into a room (let alone into a large startup event) saying that they were raising money for their startup. Yet, more often than not, their financial targets are not set or beyond approximative, which means they can’t explain why they need money and how they are going to spend it.

When you do that, the only thing you do is be stupid and make sure everyone knows about it.

First, because they won’t take you seriously. Would you invest money into someone who can’t tell you how they’ll use it and with what return on investment expectations?

And second, because the people you talk to will most likely ask you to come back to them once you have more information to provide. Which either means “don’t come back before six months to a year” or “please don’t come back at all, I have better things to do with my time and more competent people to talk to”.

Don’t be a tourist or you’ll just burn yourself. That’s stupid.

Turn your numbers into a story

The fourth piece of advice is going to be a repeat from earlier, but it’s important so let’s be redundant.

Now that you’ve written your financial projections, it’s time to go beyond the numbers and start telling your business story. The financial plan in your business plan is a great place to start but remember that it’s just one part of your overall pitch.

You’ll also need to be ready to pitch your idea, product, or service, and be ready to defend your financial plan against questions from investors or lenders.

Think holistically and build a story people will want to listen to, remember and act on. Period!

TL;DR: Get your financial projections right!

Now that you understand the different components of a financial plan, it’s time to learn how to write it. The key to writing a good financial plan is to be realistic. Don’t make assumptions that are unrealistic or impossible to achieve.

Start by estimating your sales and expenses for the first year of business. Be as specific as possible, and remember to include both fixed and variable costs. From there, you can create a cash flow statement that shows how your business will generate and spend money over time.

The goal of a financial plan is to paint a realistic picture of your business’s financial future. So make sure to update your plan as your business changes and grows. With careful planning and accurate numbers, you can ensure that your business will be successful for years to come.

What should your business plan financial plan include?

• A profit and loss statement – also known as your P&L statement, or as an income statement
• A cash flow statement showing if your business plan financial projections are realistic

What is the purpose of your business plan’s financial projections?

• To how the plan you have for the business in terms of numbers
• To show a financial overview of what you think can be achieved, by when, with what means
• To show you have a cashflow management strategy that makes sense
• To show you understand the standardized expectations and know how to play by the book
• To show that, overall, your business proposal makes sense whatever the angle!

Need a reliable template and video tutorial to get your financial business plan & financial projections right?

It’s built around over 2 hours of explanatory videos and comes with everything you’ll need to:

• Figure out what you need to figure out – powerful, uh?
• Understand the business plan code!
• Write a top business plan – with just the right amount of words and pages!
• Build your financial estimates – with an automated financial projections template excel spreadsheet!
• Create a visually appealing pitch deck people will want to read thanks to our designer-made templates!

If you want to stop wasting your time, this is THE most simple business plan template, and you can’t afford to miss it!

Wanna’ start with something free? Our free business plan template is also here to help !

Psss! Share this Article!

Topics related to Financial Projections: How to write the financial plan in business plan:

• Financial plan in business plan coffee shop
• Financial plan in business plan template

Need help with building & scaling your business?

At Impactified , we are on a mission to make you build, grow, and scale businesses you can be proud of, and we do that by making our business coaching expertise available to you, in person and through kick-ass self-coaching modules. You will love the experience either way, the only question is, what makes the most sense to you?

More Insights on Business Plan Writing

Hey coach! I’m writing a business plan and I’m wondering how to build the financial projections part of the document. What’s the importance of financial projections exactly – I mean, isn’t it absolute BS? How do I write the financial plan in business plan, and even more importantly, how can I make sense of all those messy tables? Can you help me understand this? Thanks in advance!

Do I Need a Business Plan Consultant? No, You Don’t!

Hey there Coach! I’m a small business owner and I need to find some support with my business plan. People suggested that I find a business plan consultant near me, but that’s a big cost and I’m not too sure about what to expect from that. What’s your opinion about business plan consultants in general? Is there any alternative you would highly recommend? Thanks!

How Much Does a Business Plan Cost? Just Under $100!

Hey coach! I was wondering – how much does a business plan cost? I need one, and I’m thinking about having it written for me, so I’d love your insights. Also, I’ve heard business plan writers cost a lot of money, so I’m interested if you have tips for writing a low-cost business plan! Thanks!

The #1 Growth & Scale Facilitation Platform for Entrepreneurs

Building & scaling a business is tough, so we’ve built easy-to-use tools & programs you can leverage anytime to make your business rock. The rest is up to you!

Get Started

• Book a Call!
• Pitch Your Biz!
• Read our Entrepreneurs' blog!

Business Facilitation

• Why Hire a Facilitator?
• Entrepreneur Training
• Our Brochures
• Team performance Survey
• The FREE Coaching Newsletter
• Impactified News
• Get in touch

© 2019-Present - All Rights Reserved - Impactified.com

• Newsletters
• Best Industries
• Business Plans
• Home-Based Business
• The UPS Store
• Customer Service
• Black in Business
• Your Next Move
• Female Founders
• Best Workplaces
• Company Culture
• Public Speaking
• HR/Benefits
• Productivity
• All the Hats
• Digital Transformation
• Artificial Intelligence
• Bringing Innovation to Market
• Cloud Computing
• Social Media
• Data Detectives
• Exit Interview
• Bootstrapping
• Crowdfunding
• Venture Capital
• Business Models
• Personal Finance
• Founder-Friendly Investors
• Upcoming Events
• Inc. 5000 Vision Conference
• Become a Sponsor
• Cox Business
• Verizon Business
• Branded Content
• Apply Inc. 5000 US

Inc. Premium

How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

Editor's Note: Looking for Business Loans for your company? If you would like information to help you choose the one that's right for you, use the questionnaire below to have our partner, BuyerZone, provide you with information for free:

How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

Editorial Disclosure: Inc. writes about products and services in this and other articles. These articles are editorially independent - that means editors and reporters research and write on these products free of any influence of any marketing or sales departments. In other words, no one is telling our reporters or editors what to write or to include any particular positive or negative information about these products or services in the article. The article's content is entirely at the discretion of the reporter and editor. You will notice, however, that sometimes we include links to these products and services in the articles. When readers click on these links, and buy these products or services, Inc may be compensated. This e-commerce based advertising model - like every other ad on our article pages - has no impact on our editorial coverage. Reporters and editors don't add those links, nor will they manage them. This advertising model, like others you see on Inc, supports the independent journalism you find on this site.

The Daily Digest for Entrepreneurs and Business Leaders

Privacy Policy

This device is too small

If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.

• Small Business
• The Top 10 Accounting Software for Small Businesses

What are Financial Projections and Why Do You Need Them?

See Full Bio

Our Small Business Expert

If you run a multimillion-dollar empire, it’s likely that your accounting staff is using enterprise-level software that can quickly and easily produce financial projections.

But if you’re a sole proprietor, freelancer, or micro-business owner, you’re likely to use data from your accounting software in order to prepare financial projections, but the software won’t help you in the preparation itself.

While that may sound confusing, it just means that most software applications such as QuickBooks Online , Sage 50cloud Accounting , and Xero can create the financial statements needed for you to prepare your financial projections, but the software itself will not be used in the actual creation of the projections.

At a glance: How you can create and utilize financial projections

• Three financial statements -- a balance sheet, income statement, and cash-flow statement -- are required for any financial projections you create.
• New businesses need financial projections, too. If you’re still in the planning stages, be aware that you will still need to prepare projections for your business plan.
• You’ll likely be using a template to prepare your projections. While accounting software provides the basis for your financial projections, most small business accounting software applications aren’t capable of producing financial projections.

Overview: What are financial projections?

Financial projections are an important part of managing your business. Preparing financial projections may seem like a daunting task for small business owners, but if you can create financial statements, you can create financial projections. Similar to creating a budget, financial projections are a way to forecast future revenue and expenses for your business.

Frequently used as a way to attract future investors, financial projections are also an important component when preparing a business plan for a new business or creating a strategic plan for your current business.

You can create both short-term and long-term financial projections, with most business owners using both types of projections:

Short-term projections: Short-term projections usually cover a year and are typically broken down by month.

Long-term projections : Long-term projections typically cover the next three to five years and are usually used when creating a strategic plan, or for attracting investors.

What are financial projections used for?

Financial projections can be used in a variety of ways, but they’re usually used to attract investors or when applying for a bank loan or line of credit.

Here are a few situations that would call for financial projections:

• You’re creating a business plan: One of the first things potential investors or banks want to see is a financial projection for your business, even if it isn’t operational yet.
• You’re hoping to attract investors: When looking to invest in a business, investors typically look for financial viability. No one will invest in a business without a financial projection that outlines variables such as expenses, revenue, and growth patterns.
• You’re applying for a loan or line of credit: Again, banks or other financial institutions are interested in the financial health of your business. This means providing them not just with current financial statements that outline current business performance, but also where you see your business next year, and the year after.
• You want to get a better handle on your business: You may not be in the market to attract investors or obtain a bank loan, but you do want to be able to map out your potential growth and create budgets allowing your business grow and thrive. Financial projections can help here, too.

How to create financial projections for your small business

When you’re creating financial projections for your business, the same information is required whether your business is up and running or still in the planning stages.

The difference is whether you can create your projections using historical financial data, or if you’ll need to start from scratch. This includes creating projections based on your own experience in the field, or by doing some market research in the industry in which your business will operate.

Step 1: Create a sales projection

Sales projections are an important component of your financial projections. For existing businesses, you can base your projections on past performance obtained from your financial statements. For instance, if your sales tend to be higher in the summer and fall, you’ll want to include that in your projections.

You’ll also need to take under consideration some outside factors, such as the current and projected health of the economy, whether your inventory may be affected by additional tariffs, and whether there’s been a downturn in your industry.

While we all want to be optimistic about our businesses, be sure to plan realistically.

This is one of Microsoft Excel's templates for sales forecasting. Image source: Author

Those still in the planning stages can follow the exact same plan (minus historical data), but you’ll need to do some additional research into the health of similar businesses in your proposed industry in order to plan as accurately as possible.

Step 2: Create an expense projection

Creating an expense projection may initially seem a bit simpler, because it’s easier to predict possible expenses than it is to predict the buying habits of current or potential customers.

For those working from history, you can predict with some certainty what your fixed expenses are, such as your rent or mortgage, along with recurring expenses such as utilities and payroll.

However, it’s much harder to predict those one-time expenses that have the potential to destroy your business.

What if the roof leaks in your business and destroys 75% of your inventory? What if you import the majority of your inventory from China, and you’re hit with escalating prices?

The “what ifs” can drive any of us crazy. All you can do is project expenses to the best of your ability, and maybe tack on an additional 15% to your initial number.

Step 3: Create a balance sheet projection

If you’re using accounting software and your business has been operational for at least a few months, you’ll be able to create a balance sheet directly from your software.

A balance sheet shows the financial position of your business, listing assets, liabilities, and equity balances for a particular time frame.

When creating your financial projections, you can use your current balance sheet totals to better predict where your business will be one to three years down the road.

For those of you in the planning stages, create a balance sheet based on the information you have collected from industry research.

Step 4: Create an income statement projection

Current business owners can easily create an income statement projection by using your current income statement to estimate your projected numbers.

This Excel template can be used to display revenue, cost of goods sold, expenses, and other income to identify net income. Image source: Author

An income statement provides a view of the net income of your business after things such as cost of goods sold, taxes, and other expenses have been subtracted.

This can give you a good idea of how your business is currently performing as well as serve as the basis for estimating net income for the next one to three years.

If you're in the planning stages, producing a possible income statement demonstrates that you’ve done your research and have created a good-faith estimate of your income for the next three years.

If you’re not sure where to start, visit market research firms such as Allied Market Research, which can give you an overview of your targeted industry, including product sales, target markets, and current and expected industry growth levels.

Step 5: Create a cash flow projection

The last step in completing your financial projection is the cash flow statement. The cash flow statement ties into both the income statement and the balance sheet, displaying any cash or cash-related activities that affect your business.

The cash flow statement shows how money is being spent, a must for those looking to attract an investor or obtain financing.

Again, you can use your current cash flow statement if your business has been operational for at least six months, while those of you in the start-up phase can use the data you’ve collected in order to create a credible cash flow projection.

Benefits of using accounting software for your financial projections

If you’re an existing business owner, you’re likely using accounting software to track your financial transactions. If so, the availability of financial reports such as a balance sheet, income statement, and cash flow statement are valuable resources when creating financial projections.

Here are some of the benefits of using accounting software:

• Accuracy: Unless you’re still in the planning stages, having the ability to create various financial reports and transactional histories from your software application helps to ensure your financial projections are based on accurate numbers.
• Availability of data: Being able to pull financial reports can go a long way in preparing financial projections. While you’ll likely create the projections themselves using a spreadsheet application such as Microsoft Excel, the data for your projections is readily available for you and others to access and review.
• Credibility: Being able to include supporting financial statements created by your accounting software with your financial projections lends credibility to your business and signals that you’re serious.

If you’re looking for a template to use to create financial projections, SCORE offers a downloadable financial projections template from Excel.

Finding the best way to create financial projections

While you’ll likely be using a template to create your financial projections, don’t underestimate the important role accounting software plays in creating accurate financial projections -- a necessity if you’re looking for investors or additional financing for your business.

If you’re still using manual ledgers or spreadsheet software to manage your business, it may be time to step up to the next level of professionalism by choosing and implementing an accounting software application that works for your business.

If you’re not sure which accounting software is right for you, be sure to check out our accounting software reviews .

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.

Copyright © 2018 - 2024 The Ascent. All rights reserved.

• Real-time data and analysis
• Collaborate and share
• Centralized Budgeting
• Forecast revenue
• Create multiple scenarios
• Automated hiring planning
• Plan for fundraising
• Founders and Small Businesses
• Mid-Sized Businesses

Downloadables

Help Center

Financial Modeling

Fundraising

Founder Story

How to Create Financial Projections For Your Business (Accurately)

Whether you’re starting a new business or making plans for an existing one, creating financial projections will give you a significant advantage.

For a new business, financial projections can help you:

• Determine whether or not your business is financially feasible
• Figure out how much cash you need to sustain the business
• Create revenue and expense projections

Not only that, but if you’re seeking outside funding (e.g. loans or fundraising) the people giving you money will expect to see financial projections in your business plan.

For an existing business, your projections can help you:

• Forecast changes in your revenue and expenses
• Re-evaluate your current and future growth plans
• Decide if and when you need to fundraise

But where exactly do you start?

In this guide, we’ll break down everything you need to know about creating financial projections. From what to include, how to create one, and what steps to take based on your projections.

Table of Contents

What is a Financial Projection?

A financial projection is a forecast of how much revenue you expect to generate and what your expenses will be, broken down month by month.

Your financial projection should answer these three questions:

• What does the financial future of your business look like?
• How much cash will flow in and out of your business?
• Where will that cash come from and how will you use it?

Here’s where things get a little tricky.

When someone asks you for financial projections, they could be asking for a number of different things.

For some people, they just want to see your profit and loss statement (P&L) forecast. Others will want to see cash flow projections.

To cover yourself, we suggest having projections for all three financial statements handy.

Don’t worry, I’ll show you how to condense this and make it easy for anyone to access the parts they’re most interested in.

When Do You Need to Create Financial Projections?

Financial projections aren’t something you typically do spur of the moment. It’s usually done in preparation for something else.

Here are some of the most common reasons to create financial projections for your business:

No matter how great your idea may be or how compelling your story is, most investors want to see the numbers behind it. Financial projections are the most common way to present financial information to investors.

Getting a loan

If you’re applying for a business loan with a bank or other financial institution, they’ll likely want to see financial projections in your business plan.

Banks are generally more risk-averse than investors. Your projections can go a long way towards making lenders feel secure in lending your business money.

Financial projections can have significant implications on your annual budget. A positive projection might make you feel more comfortable increasing your expenses to fund growth.

A less favorable projection may cause you to pull back a bit and be more conservative with hiring, marketing costs, and other expenses.

Making Growth Plans

One of the most important reasons to do a financial projection is to figure out whether or not your business will be financially viable in the short, mid, and long term.

Taking the time to project revenue, expenses, and cash flow will show you what your financials will look like within a specific period of time.

What to Include in Your Financial Projection

Financial projections typically include several pieces of information that are organized into three financial statements:

• P&L or income statement
• Cash flow projection
• Balance sheet

Now, let’s dive deeper into all the parts of your projection.

Without revenue , you don’t have a business.

Your projection should answer the question: How much revenue will your business generate in the next 6, 12, or 18 months?

Your revenue projections help you understand how much you expect to sell and how much money you’ll have to spend on operating and growing the business.

Cost of Goods Sold (COGS)

It takes money to make money. Your cost of goods sold (also known as cost of sales) projections will help you understand how much it’s going to cost you to produce your product or service.

If you’re selling physical goods, for instance, your production costs will likely increase in relation to your sales since you need to buy materials or products in order to sell your goods.

In addition to your COGS, you’ll also have other operating expenses that go along with running and growing your business.

Software, equipment, sales and marketing , accounting services, legal fees, and all the other costs of doing business need to be included in your expense projections.

Payroll is one of the largest expenses for most startups.

Not only should you project payroll as a whole (i.e. we expect to spend “X” amount in salaries per month), but you can also break it down by department.

For instance, you can project how much you expect to spend on salaries for sales, engineering, customer service, marketing, and all of your other teams.

Cash Flow Projections

In addition to laying out your revenue and expenses, you should also include a cash flow projection.

A cash flow projection (also known as a cash flow forecast) is a monthly breakdown of:

• Accounts receivable: Cash you expect to collect. This includes the revenue from sales and any other forms of incoming cash.
• Accounts payable: Cash you expect to pay out. This includes things like the expenses we mentioned above like payroll, office rent, and supplies. It also includes other costs like loan repayments and taxes.

You subtract your accounts payable from your accounts receivable to get your monthly cash balance.

That cash balance gets carried over to the next month and added to your cash balance.

Here’s an example of what a cash flow projection might look like.

Cash flow projections show whether or not your company is generating cash, and how much. This will allow you to know how much cash you’ll have at any given point in time.

You can use that information to plan how to use a projected cash surplus, or anticipate when to be more conservative if you’re projecting a cash shortage.

Balance Sheet

Last but not least is your balance sheet. Your balance sheet summarizes your company’s:

• Assets: What your company owns.
• Liabilities: What your company owes.
• Shareholder equity: How much your shareholders have invested in the company.

In summary, if you’re doing financial planning in anticipation of fundraising or to take on a loan, investors or lenders will use your balance sheet to calculate your company’s projected net worth and financial efficiency.

A balance sheet projection is also handy to have for your own purposes, as well, particularly as you grow.

You might not have plans to sell or seek investments today, but having the information on-hand and updated will save you a lot of stress and aggravation if and when the time comes.

How to Create Financial Projections

You’re probably wondering how to fit all of this financial information into a single report or page?

Well, you don’t have to.

The best way to create financial projections is in a dashboard . In most cases, you’re preparing financial projections to share with someone (potential investors, lenders, your team). Giving them a huge spreadsheet of numbers or multiple PDFs for each financial report is less than ideal.

While sharing PDFs and spreadsheets might’ve been the “standard” before, better solutions exist—like Finmark .

Here’s how to create financial projections that you can easily analyze and share with others.

Step 1: Gather Your Data

First, you need to get all your revenue and expenses together.

If you’re building projections for a new business, this will involve some estimations and guesswork. That’s ok.

Just make sure there’s a basis for your estimates that you can validate.

For instance, you can estimate your payroll projections by looking at salary benchmarks from a database like Glassdoor .

If you have historical data, this process is as simple as exporting your past 12 or so months of revenue and expense data into a spreadsheet.

You can make the process even easier by using a tool like Finmark that integrates with your payroll and accounting software to sync your actuals for you.

Step 2: Make Assumptions For Growth

Next, think about what factors will contribute to your growth and potential setbacks. This will help you make assumptions for revenue growth and any changes in your expenses.

For instance, do you plan to launch a new product or service in the next 12 months? Maybe you’re revisiting your pricing strategy or testing new marketing channels.

These are all things that will have a direct impact on your financial projections so they need to be accounted for.

With Finmark, you can add these variables directly into your projections. For instance, new revenue sources can be added as revenue drivers.

All you have to do is fill out a few assumptions about the drivers and our software will calculate it into your revenue projections. The changes will also reflect in your financial statements as well.

You can do the same thing with expenses.

For instance, if you plan to test a new marketing channel, you can build your assumptions directly into your projections.

If you’re using a spreadsheet to build your financial projections, this process will take a bit more elbow grease. That goes beyond the scope of this article however.

Plus, if you’re still using spreadsheets to manage your financial projections and forecasts, it’s probably time to upgrade to a dedicated financial planning tool like Finmark .

Step 3: Analyze The Results

Assuming you’re using Finmark, all your data will have been “crunched” automatically, allowing you to see your projected revenue, expenses, cash flow, and more.

Now, it’s time to analyze the results and draw conclusions.

Go through each area of your business and note down anything of interest. Here’s an example of the order you might review things in:

• P&L Statement
• Cash flow statement
• Revenue projection
• Expense projection

With this approach, you’re starting at a high level by reviewing projections for each financial statement. This is generally an easy way to spot potential red flags that need digging into.

For instance, maybe your P&L shows your net income shrinks considerably after six months. That would signal you to look at your detailed revenue and expense projections at months 4-6 to see what’s happening.

Or maybe you notice significant growth in your gross profit, and you want to revisit your expenses to see if the additional revenue can be used for new hires or other growth measures.

The beauty of Finmark is you can get these insights and immediately test your assumptions by adjusting your model. In our example, we might duplicate our current projection and make an alternative scenario with a few new hires.

Then, we can compare the two side-by-side and see how new hires will impact profit and our overall growth.

Step 4: Share Your Financial Projections

Once you’ve reviewed the projections and drawn your analysis, you can share it with potential investors, lenders, or stakeholders.

If you’re using spreadsheets, you may want to give view-only access or create a “Shared” version of the spreadsheet before sending it off.

If you’re using a tool like Finmark, you can easily share access to your projections and customize their permission level.

Tips for Creating Financial Projections

On the surface, creating a financial projection for your business seems simple enough. It’s just a combination of different types of projections.

However, there are some mistakes you’ll want to avoid. There are also a few best practices to follow in order to get the most from all the financial planning you’re doing.

Don’t Expect Perfection

Financial projections aren’t meant to be 100% accurate.

There’s a long list of variables that can alter your projections.

For instance, if your sales team over or underperforms, it can change your sales projections.

Your conversion rates can also impact revenue.

Additionally, unexpected market conditions and the economy can play a role.

My point is, don’t obsess too much over trying to make your projections perfect because unless you have a magic crystal ball, perfect projections don’t exist.

Be Realistic

First and foremost, you need to be honest with your projections. When you’re pitching to investors, it’s tempting to paint the best picture of your company. However, if your numbers are overly optimistic, it can come back to bite you if you don’t deliver.

With that said, your projections should be based on data. The longer you’re in business, the more data you’ll have to build your projections. However, if you’re creating projections for a new company, things might not be as straightforward and there’s going to be more guesswork involved.

For those situations, it can be helpful to work backwards from your target goals in order to build your projections. In our revenue forecasting guide , we walk through an example of how to project revenue growth if you don’t have historical data. You can use that same process here as well.

The gist of the process, though, is to root your projections in reality. An easy way to do that is to figure out the “why” and “how” behind any assumptions you make for your projections.

For instance, if you project 40% revenue growth MoM for the first year of your business, you need a plan for how you’re going to achieve that.

Create Multiple Scenarios

If you’ve ready some of our content, you’ll know we’re all about scenario planning and analysis . Way too many founders make the mistake of creating one financial plan and running with it.

However, you also need to prepare for what happens if things go better or worse than expected.

Not only will this help you as a founder, but it’s also re-assuring for investors. Showing them that you’re prepared in case things don’t go as planned is a good sign that you’ll be financially-ready through the ups and downs.

We recommend having three scenarios for your financial projections:

• Base plan: This is your working/operating plan that’ll likely be what you present to investors and stakeholders. It’s your base-level plan. Upside plan: This is your best case scenario that has assumptions of faster and larger growth.
• Downside plan: This is your “worst case scenario” that has assumptions of slower growth.

Don’t worry–you don’t need to manually create each scenario.

For example, if you use a tool like Finmark you can create and maintain multiple scenarios for your financial model and projections. Check out our scenario analysis guide to see how the process works.

Consider Doing a Rolling Forecast

A common question founders have is: “How far out should my financial projections go?”

There are two general approaches:

• Create an annual forecast: You create a model that projects the current year (i.e. January-December)
• Create a rolling forecast : You create a model that projects the next 12 months. So in March 2022, you’d see the projections through March 2023.

A rolling financial forecast can be beneficial for a few different reasons.

For one, it gives you a more dynamic view of your business. Instead of creating projections once and just sticking to it, you can update your projections in real time and see where you stand in the coming months.

On top of that, a rolling forecast is more forward looking. In October, you want to see what you’re projected to do through the beginning of the next year, not just over the last few months of the current year.

Keep in mind, a rolling forecast is easiest if you’re using a tool that takes care of the legwork for you rather than having to manually copy/paste data and formulas every month.

Create a rolling forecast in Finmark!

Check (And Update) Your Projections Regularly

Staying on the theme of making your projections dynamic, be intentional about checking and updating your projections.

It requires a bit of a mindset shift, but when you stop looking at your financial projection as just a collection of documents and more of a tool to plan growth, it becomes much more useful.

For instance, if your original projections forecast that you’ll reach $500K in MRR within the next few months, but you’ve noticed your lead volume has been declining, use that as an opportunity to dig into why you’re generating fewer leads.

From that point, you can decide what you need to do to get back on track and you may have to update your financial plan based on a lower lead volume.

Your financial projections can help you gauge whether your business is growing fast enough, as well as help you predict issues before it’s too late.

Have You Made Your Financial Projections?

Financial projections paint a picture of your company’s financial performance today and in the future.

In short, whether you’re a bootstrapped startup, seed-stage company seeking funding, or a growth company that’s well funded, taking the time to create financial projections will give you a huge advantage as you build and grow your business.

This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.

Subscribe to the Finmark Blog

Historically financial modeling has been hard, complicated, and inaccurate. But financials are the lifeblood of any company. They’re too important to be ignored or outsourced. They should be a core part of every founder’s job. This doesn’t have to be scary. And you don’t have to do it alone. The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward.

You can unsubscribe at any time.

By continuing, you agree to Finmark Terms of Service and Privacy Notice .

Other articles you might be interested in...

Cfo checklist: your first 90 days, financial reporting vs. management reporting: an in-depth comparison, finmark raises $5 million in oversubscribed seed round to simplify financial planning for startups.

• Start free trial

Start selling with Shopify today

Start your free trial with Shopify today—then use these resources to guide you through every step of the process.

How To Create Financial Projections for Your Business Plan

Building a financial projection as you write out your business plan can help you forecast how much money your business will bring in.

Planning for the future, whether it’s with growth in mind or just staying the course, is central to being a business owner. Part of this planning effort is making financial projections of sales, expenses, and—if all goes well—profits.

Even if your business is a startup that has yet to open its doors, you can still make projections. Here’s how to prepare your business plan financial projections, so your company will thrive.

What are business plan financial projections?

Business plan financial projections are a company’s estimates, or forecasts, of its financial performance at some point in the future. For existing businesses, draw on historical data to detail how your company expects metrics like revenue, expenses, profit, and cash flow to change over time.

Companies can create financial projections for any span of time, but typically they’re for between one and five years. Many companies revisit and amend these projections at least annually. 

Creating financial projections is an important part of building a business plan . That’s because realistic estimates help company leaders set business goals, execute financial decisions, manage cash flow , identify areas for operational improvement, seek funding from investors, and more.

What are financial projections used for? 

Financial forecasting serves as a useful tool for key stakeholders, both within and outside of the business. They often are used for:

Business planning

Accurate financial projections can help a company establish growth targets and other goals . They’re also used to determine whether ideas like a new product line are financially feasible. Future financial estimates are helpful tools for business contingency planning, which involves considering the monetary impact of adverse events and worst-case scenarios. They also provide a benchmark: If revenue is falling short of projections, for example, the company may need changes to keep business operations on track.

Projections may reveal potential problems—say, unexpected operating expenses that exceed cash inflows. A negative cash flow projection may suggest the business needs to secure funding through outside investments or bank loans, increase sales, improve margins, or cut costs.

When potential investors consider putting their money into a venture, they want a return on that investment. Business projections are a key tool they will use to make that decision. The projections can figure in establishing the valuation of your business, equity stakes, plans for an exit, and more. Investors may also use your projections to ensure that the business is meeting goals and benchmarks.

Loans or lines of credit 

Lenders rely on financial projections to determine whether to extend a business loan to your company. They’ll want to see historical financial data like cash flow statements, your balance sheet , and other financial statements—but they’ll also look very closely at your multi-year financial projections. Good candidates can receive higher loan amounts with lower interest rates or more flexible payment plans.

Lenders may also use the estimated value of company assets to determine the collateral to secure the loan. Like investors, lenders typically refer to your projections over time to monitor progress and financial health.

What information is included in financial projections for a business?

Before sitting down to create projections, you’ll need to collect some data. Owners of an existing business can leverage three financial statements they likely already have: a balance sheet, an annual income statement , and a cash flow statement .

A new business, however, won’t have this historical data. So market research is crucial: Review competitors’ pricing strategies, scour research reports and market analysis , and scrutinize any other publicly available data that can help inform your projections. Beginning with conservative estimates and simple calculations can help you get started, and you can always add to the projections over time.

One business’s financial projections may be more detailed than another’s, but the forecasts typically rely on and include the following:

True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories:

Income statement

Projected income statements, also known as projected profit and loss statements (P&Ls), forecast the company’s revenue and expenses for a given period.

Generally, this is a table with several line items for each category. Sales projections can include the sales forecast for each individual product or service (many companies break this down by month). Expenses are a similar setup: List your expected costs by category, including recurring expenses such as salaries and rent, as well as variable expenses for raw materials and transportation.

This exercise will also provide you with a net income projection, which is the difference between your revenue and expenses, including any taxes or interest payments. That number is a forecast of your profit or loss, hence why this document is often called a P&L.

Balance sheet

A balance sheet shows a snapshot of your company’s financial position at a specific point in time. Three important elements are included as balance sheet items:

• Assets. Assets are any tangible item of value that the company currently has on hand or will in the future, like cash, inventory, equipment, and accounts receivable. Intangible assets include copyrights, trademarks, patents and other intellectual property .
• Liabilities. Liabilities are anything that the company owes, including taxes, wages, accounts payable, dividends, and unearned revenue, such as customer payments for goods you haven’t yet delivered.
• Shareholder equity. The shareholder equity figure is derived by subtracting total liabilities from total assets. It reflects how much money, or capital, the company would have left over if the business paid all its liabilities at once or liquidated (this figure can be a negative number if liabilities exceed assets). Equity in business is the amount of capital that the owners and any other shareholders have tied up in the company.

They’re called balance sheets because assets always equal liabilities plus shareholder equity. 

5 steps for creating financial projections for your business

• Identify the purpose and timeframe for your projections
• Collect relevant historical financial data and market analysis
• Forecast expenses
• Forecast sales
• Build financial projections

The following five steps can help you break down the process of developing financial projections for your company:

1. Identify the purpose and timeframe for your projections

The details of your projections may vary depending on their purpose. Are they for internal planning, pitching investors, or monitoring performance over time? Setting the time frame—monthly, quarterly, annually, or multi-year—will also inform the rest of the steps.

2. Collect relevant historical financial data and market analysis

If available, gather historical financial statements, including balance sheets, cash flow statements, and annual income statements. New companies without this historical data may have to rely on market research, analyst reports, and industry benchmarks—all things that established companies also should use to support their assumptions.

3. Forecast expenses

Identify future spending based on direct costs of producing your goods and services ( cost of goods sold, or COGS) as well as operating expenses, including any recurring and one-time costs. Factor in expected changes in expenses, because this can evolve based on business growth, time in the market, and the launch of new products.

4. Forecast sales

Project sales for each revenue stream, broken down by month. These projections may be based on historical data or market research, and they should account for anticipated or likely changes in market demand and pricing.

5. Build financial projections

Now that you have projected expenses and revenue, you can plug that information into Shopify’s cash flow calculator and cash flow statement template . This information can also be used to forecast your income statement. In turn, these steps inform your calculations on the balance sheet, on which you’ll also account for any assets and liabilities .

Business plan financial projections FAQ

What are the main components of a financial projection in a business plan.

Generally speaking, most financial forecasts include projections for income, balance sheet, and cash flow.

What’s the difference between financial projection and financial forecast?

These two terms are often used interchangeably. Depending on the context, a financial forecast may refer to a more formal and detailed document—one that might include analysis and context for several financial metrics in a more complex financial model.

Do I need accounting or planning software for financial projections?

Not necessarily. Depending on factors like the age and size of your business, you may be able to prepare financial projections using a simple spreadsheet program. Large complicated businesses, however, usually use accounting software and other types of advanced data-management systems.

What are some limitations of financial projections?

Projections are by nature based on human assumptions and, of course, humans can’t truly predict the future—even with the aid of computers and software programs. Financial projections are, at best, estimates based on the information available at the time—not ironclad guarantees of future performance.

Keep up with the latest from Shopify

Get free ecommerce tips, inspiration, and resources delivered directly to your inbox.

By entering your email, you agree to receive marketing emails from Shopify.

popular posts

The point of sale for every sale.

Subscribe to our blog and get free ecommerce tips, inspiration, and resources delivered directly to your inbox.

Unsubscribe anytime. By entering your email, you agree to receive marketing emails from Shopify.

Latest from Shopify

10 Sept 2024

Learn on the go. Try Shopify for free, and explore all the tools you need to start, run, and grow your business.

Try Shopify for free, no credit card required.

Our work is reader-supported, meaning that we may earn a commission from the products and services mentioned.

How to Create Financial Projections for your Business Plan

• Last Updated: March 27, 2023
• By: StartUp 101

Advertising Disclosure

Starting a business is an exciting time, but one that can come with some uncertainty. Writing out your business plan helps to increase your success significantly in addition to reducing some of the worries by getting all the ideas out of your head and organized on paper.

Financial projections are an essential component of the  business plan  to provide a realistic view as to whether or not your business is financially viable for success.

By creating financial plans, you are also able to test some of your assumptions to see the financial impact and analyze whether your business idea is feasible.

What are financial projections?

Financial projections (sometimes referred to as pro forma) are an essential part of a business plan. They are used to forecast a business’s expected sales and expenses and analyze the financial feasibility of the company. These forecasts evaluate past trends, current market conditions, and future expectations. They will also take into account regional sales potential and growth strategies and examine external and internal costs, such as the cost of customer acquisition and the amount of money you can afford to pay team members and yourself.

While it may be tempting to skip this step, not completing it could be costly.

Why are financial projections important?

Financial projections are one of the most critical steps in starting a small business. These figures help show you whether or not your business has a reasonable chance of being profitable. If your company does not reflect a profit based on your projections, you may have to make some adjustments. Financial projections can also help determine realistic price points and sales goals. They can also show you whether or not a profitable market even exists for the product or service you wish to provide.

The sales forecast is also useful in analyzing cash flows from accounts receivable and accounts payable to ensure the company has enough cash to operate.

Another reason financial projections are important is when requesting funding.  The bank will review whether you have realistic financial projections before making a business loan.

How to create financial projections?

It is important to understand that financial projections are simply the best estimates you can determine based on the information available.

These figures are next to impossible to predict accurately. While this financial forecast can’t predict how the business will perform in the future, it will provide the analysis to make informed decisions and plans for the business.

Financial projections are typically shown as a 12-month projection in the first year and by quarter in the second year and third year.

To begin with, your business plan financial projections, start by focusing on your revenue potential and likely expenses.

1. Create sales projections

Projecting sales projections (also known as revenue projections) for a new business is difficult, especially if you are new to the type of business you are starting. They are a few approaches you can consider when preparing the sales forecast.  Some companies will have multiple sources of revenue. To make these easier to follow, each revenue stream is often put on a separate line in the projections.

Average household spending  – The Consumer Expenditure Survey program from the  U.S. Bureau of Labor Statistics  (scroll down to the Annual Calendar Year Tables) provides data on the expenditures of U.S. consumers. Using the average household spending multiplied by the population in your target area, you can come up with the total potential sales. Try not to get too carried away with your target area as it will have a significant impact on potential sales.

Using the BLS data, you can look up how much people spend on food and beverages (such as food at home, food away at home, bakery products, alcoholic beverages, etc.), appliances, apparel, education, reading – and the list goes on. This information can be assessed against demographic information such as age, income, education level, occupation, race, religion, and more.

Not only can you use this data to provide useful because you can use it to gauge the feasibility of your business. For instance, if there are three competitors in your market, and you need 10% of the market to make an adequate profit, this may be a good indication your business would be successful. If you needed 80% of the market, it would likely be much more challenging.

Trade associations –  Depending on the industry you are starting your business in, it’s likely there is an industry association. Do a Google search for “[type of business] industry association” or even find a Facebook group to join and ask questions. Many industry associations have statistics and formulas you can use to estimate sales. Make sure to reference your work, so the bank or prospective investors know you didn’t come up with these numbers out of thin air. Be sure to do your own due diligence as these numbers may be overly optimistic.

Menu of services –  Another way to project sales is to create a list of services to assess how many jobs you can do in a day and the pricing of each job.

For instance, if you own a  car detailing business and it takes 4 hours per vehicle to detail, you may be able to do up to two vehicles per day, ten vehicles a week, or 40 vehicles a month (you could squeeze in a few more in a month, but let’s keep the math easy for now).

Each vehicle brings in an average of $100 for a total monthly sales revenue of $4,000. Let’s say that after subtracting rent, utilities, supplies, advertising, etc, you are left with $2,000. Now you find that best case, you have a profit of $2,000, and by working 8 hours a day, you would make $12.50 per hour. Now you have to ask yourself that in this best-case scenario where you have clients lined up each and every day and you are making $12.50 per hour, is this business worth your time?

Regardless of how you project sales, be sure to explain the key assumptions in the business plan so the reader can follow the math!

2. Project operating expenses

Next, project the monthly operating expenses of the business. Some expenses are going to be easy to estimate, such as fixed costs like rent, insurance, and utilities. Other expenses need to be carefully examined as they can make a large difference in the projected profit.

The biggest expense for most businesses is the cost of goods sold, sometimes called COGS, cost of sales, or cost of inventory. This is the cost to produce the item being sold, such as the raw materials to produce it. A typical example is a wedding band sold at a jewelry store. The sales price to the customer may have been $1,000, but the jewelry store purchased it for $700. The cost of goods sold in this instance is $700. Many times COGS is represented as a percentage, which in this example would have been 70% ($700 /$1,000).

You can often find the average cost of goods for most businesses by searching for industry publications.

Another major expense for most businesses is employees. This number can be found for many industries as a percentage of sales; however, we would recommend you create a list of the positions needed, the number of employees for each position, the number of hours worked, and wages. By comparing the industry average with your own list, you can have some confidence your numbers are in the ballpark.

Make a list of the monthly expenses and the cost for those expenses to use later in the financial statements.

3. Seasonality

After getting the sales projections completed, you will also want to look at seasonality. Seasonality refers to the fluctuations in monthly sales. Some businesses will be affected more by seasonality than others, but it is important to analyze because it may show your business will run out of cash. Lenders and potential investors will expect some seasonality, but if you have a business that has steady sales, be sure to explain why your sales are consistent.

In most areas,  landscapers  are a common business that has fluctuating sales. The spring and fall are really busy, while in the winter, there is little to no work.

4. Financial projections

With the sales projections, expenses, and seasonality now out of the way, creating the pro forma financial statements are actually pretty straightforward.

Business plan financial forecasting is typically set up to show a three-year outlook. Depending on the project, especially if it is one that has a significant amount of research and development time before revenues start to come in, some banks and lenders will occasionally want to see a five-year outlook.

There will be three financial statements to create:

• Cash flow statement –  Similar to a detailed view of a checkbook, the projected cash flow statement  looks at cash coming in and cash going out of the business. Cash flow projections usually look at the first year broken out into 12 months, and the following two years by quarter.
• Profit and loss statement  – Also referred to as an income statement, this statement is an annual estimate of the taxable profits (or losses) of the business. The numbers in the P&L statement are similar to the cash flow statement; however, depreciation and amortization are also included.
• Balance sheet –  Not every bank will request a proforma balance sheet for a start-up business. The balance sheet is similar to a personal financial statement that looks at assets and liabilities to determine the net worth.

The balance sheet is projected at the end of each year.

5. Sources and uses of funds

The sources and uses of funds section provide an overview of the financing activities, use of working capital,  loan repayments, and how the money is spent.

The sources section is a list of where the money is coming from to fund the project. This will commonly have a line for the amount of the bank loan and another line for the amount the owner is investing in the business. Keep in mind when preparing this for the bank that most banks will want to see the business owner invest 15%-25% of their own funds in a start-up business.

The uses section provides details of all the startup costs for the business. Items are usually put into categories such as:

• Real estate
• Renovations

The amount in the sources section should equal the amount in the uses section.

Financial Projection Templates

There are free financial projection templates from  Smartsheet ,  Spreadsheet 123 , and others. LivePlan has a guided approach (like Turbo Tax) to creating financial projections that are pretty thorough and easy to use.

There are free financial projection templates from  Smartsheet ,  Spreadsheet 123 , and others.  LivePlan has a guided approach (like Turbo Tax) to creating financial projections that are pretty thorough and easy to use.

Can I open a business on a military base?

What is an SBA Loan and Would I Want One?

What is the registration/filing fee when applying for a Federal EIN with the IRS?

What Is An LLC? | How Does It Work?

Do I Have To Put LLC On My Logo or Business Card?

How Does an LLC Protect You?

What is a Professional LLC (PLLC)?

What Licenses Do Home-Based Businesses Need?

How to Run Payroll Yourself

Popular Questions

See more start-up questions

Popular Business Ideas

See more business ideas

Form An LLC

Business ideas, common start-up questions, get in touch.

Contact Form

Rules and regulations for starting a business change frequently. While we do our best to keep this information fully up-to-date, its very difficult to stay on top of the changes for every state. Also, this site is for informational purposes only and does not provide legal or tax advice.

Additionally, Startup101 may earn a small commission from products or services mentioned on this site.

Disclaimer | Privacy

© 2017 – 2024 StartUp101 LLC – All Rights Reserved.

Some (but not all) of the links on StartUp101.com  are affiliate links. This means that a special tracking code is used and that we may make a small commission on the sale of an item if you purchase through one of these links. The price of the item is the same for you whether it is an affiliate link or not, and using affiliate links helps us to maintain this website.

StartUp101.com  is also a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to  Amazon.com .

Our mission is to help businesses start and promoting inferior products and services doesn’t serve that mission. We keep the opinions fair and balanced and not let the commissions influence our opinions.

Everything that you need to know to start your own business. From business ideas to researching the competition.

Practical and real-world advice on how to run your business — from managing employees to keeping the books

Our best expert advice on how to grow your business — from attracting new customers to keeping existing customers happy and having the capital to do it.

Entrepreneurs and industry leaders share their best advice on how to take your company to the next level.

• Business Ideas
• Human Resources
• Business Financing
• Growth Studio
• Ask the Board

Looking for your local chamber?

Interested in partnering with us?

Run » finance, how to create a financial forecast for a startup business plan.

Financial forecasting allows you to measure the progress of your new business by benchmarking performance against anticipated sales and costs.

When starting a new business, a financial forecast is an important tool for recruiting investors as well as for budgeting for your first months of operating. A financial forecast is used to predict the cash flow necessary to operate the company day-to-day and cover financial liabilities.

Many lenders and investors ask for a financial forecast as part of a business plan; however, with no sales under your belt, it can be tricky to estimate how much money you will need to cover your expenses. Here’s how to begin creating a financial forecast for a new business.

[Read more: Startup 2021: Business Plan Financials ]

Start with a sales forecast

A sales forecast attempts to predict what your monthly sales will be for up to 18 months after launching your business. Creating a sales forecast without any past results is a little difficult. In this case, many entrepreneurs make their predictions using industry trends, market analysis demonstrating the population of potential customers and consumer trends. A sales forecast shows investors and lenders that you have a solid understanding of your target market and a clear vision of who will buy your product or service.

A sales forecast typically breaks down monthly sales by unit and price point. Beyond year two of being in business, the sales forecast can be shown quarterly, instead of monthly. Most financial lenders and investors like to see a three-year sales forecast as part of your startup business plan.

Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign.

Tim Berry, president and founder of Palo Alto Software

Create an expenses budget

An expenses budget forecasts how much you anticipate spending during the first years of operating. This includes both your overhead costs and operating expenses — any financial spending that you anticipate during the course of running your business.

Most experts recommend breaking down your expenses forecast by fixed and variable costs. Fixed costs are things such as rent and payroll, while variable costs change depending on demand and sales — advertising and promotional expenses, for instance. Breaking down costs into these two categories can help you better budget and improve your profitability.

"Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Tim Berry, president and founder of Palo Alto Software, told Inc . "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such."

Project your break-even point

Together, your expenses budget and sales forecast paints a picture of your profitability. Your break-even projection is the date at which you believe your business will become profitable — when more money is earned than spent. Very few businesses are profitable overnight or even in their first year. Most businesses take two to three years to be profitable, but others take far longer: Tesla , for instance, took 18 years to see its first full-year profit.

Lenders and investors will be interested in your break-even point as a projection of when they can begin to recoup their investment. Likewise, your CFO or operations manager can make better decisions after measuring the company’s results against its forecasts.

[Read more: ​​ Startup 2021: Writing a Business Plan? Here’s How to Do It, Step by Step ]

Develop a cash flow projection

A cash flow statement (or projection, for a new business) shows the flow of dollars moving in and out of the business. This is based on the sales forecast, your balance sheet and other assumptions you’ve used to create your expenses projection.

“If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months,” wrote Inc . The cash flow statement will include projected cash flows from operating, investing and financing your business activities.

Keep in mind that most business plans involve developing specific financial documents: income statements, pro formas and a balance sheet, for instance. These documents may be required by investors or lenders; financial projections can help inform the development of those statements and guide your business as it grows.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Follow us on Instagram for more expert tips & business owners’ stories.

Join us on October 8, 2024!   Tune in at 12:30 p.m. ET for expert tips from top business leaders and Olympic gold medalist Dominique Dawes. Plus, access our exclusive evening program, where we’ll announce the CO—100 Top Business! - Register Now!

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here .

Join us October 8, 2024

Unlock today’s biggest trends with expert tips and inspiring stories from Olympic gold medalist Dominique Dawes! Don’t miss our exclusive evening program and CO—100 Top Business announcement!

RSVP Now for the CO—100 Small Business Forum!

Discover today’s biggest AI and social media marketing trends with top business experts! Get inspired by Dominique Dawes’ entrepreneurial journey and enjoy free access to our exclusive evening program, featuring the CO—100 Top Business reveal. Register now!

For more finance tips

How to calculate credit card processing fees, 3 small business tax tasks to do this fall, small business funding: a breakdown of business loan types.

By continuing on our website, you agree to our use of cookies for statistical and personalisation purposes. Know More

Welcome to CO—

Designed for business owners, CO— is a site that connects like minds and delivers actionable insights for next-level growth.

U.S. Chamber of Commerce 1615 H Street, NW Washington, DC 20062

Social links

Looking for local chamber, stay in touch.

Mapping Your Business’ Financial Future: Financial Projections 101

As a business owner, you probably have many ideas and plans for your company’s future. But without a clear understanding of your business’s financial performance and potential, these ideas may remain just that — ideas. This is where financial projections come in.

Financial projections are a critical tool for both new and established businesses. They provide insight into your company’s financial future, allowing you to make informed decisions and plan for growth. 

In this blog post, we will cover the basics of financial projections and guide you through the process of creating them for your business.

Importance Of Financial Projections For New And Established Businesses

Table of Contents

Source: Pexels

Financial projections serve many purposes for businesses of all sizes. Here are some key reasons why financial projections are essential:

• They help you plan for the future: Financial projections allow you to anticipate your business’s financial performance and plan for future growth, making it easier to set goals and make informed decisions.
• They enable you to secure funding: Financial projections are crucial if you need to secure financing from investors or lenders. They demonstrate your business’s potential profitability and help investors and lenders assess the risk involved in funding your business .
• They provide a benchmark for performance: Once you have created financial projections, you can use them to measure your business’s actual financial performance against your expectations. This helps you identify areas where you need to improve and adjust your strategy.

Step-by-Step Guide to Financial Projections

Creating financial projections for your business may seem daunting initially, but it’s a straightforward process. Here’s a step-by-step guide to help you get started:

1. Define Your Business Model And Goals

Before you can create financial projections, you need to understand your business model and goals clearly. Consider what products or services you offer, your target audience, and how you plan to generate revenue. This information will help you create accurate financial projections that reflect your business’s potential.

2. Create A Sales Forecast

One of the most critical components of financial projections is the sales forecast. This projection estimates the amount of revenue your business will generate over a specific period, typically a year. 

Consider your pricing strategy, target audience, and marketing efforts to create a sales forecast. You can use financial projection templates or create your own to help you estimate your sales revenue accurately.

3. Estimate Expenses

You must also estimate your business’s expenses to create accurate financial projections. Consider both fixed costs (rent, utilities, salaries, etc.) and variable costs (materials, advertising, etc.). This information will help you understand your business’s profit margin and adjust your expenses to improve profitability.

4. Create A Cash Flow Projection

Cash flow is another critical component of financial projections. A cash flow projection estimates the amount of cash your business will have on hand at any given time based on your projected revenue and expenses. This projection helps you plan for cash flow gaps and avoid cash flow problems.

5. Prepare A Profit And Loss Statement

A profit and loss (P&L) statement summarize your business’s revenues, costs, and expenses over a specific period. This statement helps you understand your business’s profitability and make adjustments to improve it. You can use financial projection templates or create your own to help you prepare a P&L statement.

6. Review And Revise Projections

Once you have created your financial projections, it’s essential to review and revise them regularly. As your business evolves, your projections may need to be adjusted to reflect changes in your business model, market conditions, or other factors. Reviewing and revising your projections regularly helps you stay on track and make informed decisions.

Key Takeaways

Financial projections are not just for securing financing or planning growth. They also help business owners make informed decisions and identify areas to improve. Creating realistic and data-driven projections allows businesses to stay on track and avoid cash flow problems. 

Regularly reviewing and revising projections is crucial for staying ahead of market changes and making informed decisions. Financial projections are a powerful tool for mapping out a business’s financial future and achieving long-term success.

Related Posts

Science Fair Project Ideas For 6th Graders

When it comes to Science Fair Project Ideas For 6th Graders, the possibilities are endless! These projects not only help students develop essential skills, such…

Java Project Ideas for Beginners

Java is one of the most popular programming languages. It is used for many applications, from laptops to data centers, gaming consoles, scientific supercomputers, and…

An official website of the United States government

Here’s how you know

Official websites use .gov A .gov website belongs to an official government organization in the United States.

Secure .gov websites use HTTPS A lock ( Lock Locked padlock ) or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites.

Write your business plan

Business plans help you run your business.

A good business plan guides you through each stage of starting and managing your business. You’ll use your business plan as a roadmap for how to structure, run, and grow your new business. It’s a way to think through the key elements of your business.

Business plans can help you get funding or bring on new business partners. Investors want to feel confident they’ll see a return on their investment. Your business plan is the tool you’ll use to convince people that working with you — or investing in your company — is a smart choice.

Pick a business plan format that works for you

There’s no right or wrong way to write a business plan. What’s important is that your plan meets your needs.

Most business plans fall into one of two common categories: traditional or lean startup.

Traditional business plans are more common, use a standard structure, and encourage you to go into detail in each section. They tend to require more work upfront and can be dozens of pages long.

Lean startup business plans are less common but still use a standard structure. They focus on summarizing only the most important points of the key elements of your plan. They can take as little as one hour to make and are typically only one page.

Traditional business plan

Lean startup plan

Traditional business plan format

You might prefer a traditional business plan format if you’re very detail-oriented, want a comprehensive plan, or plan to request financing from traditional sources.

When you write your business plan, you don’t have to stick to the exact business plan outline. Instead, use the sections that make the most sense for your business and your needs. Traditional business plans use some combination of these nine sections.

Executive summary

Briefly tell your reader what your company is and why it will be successful. Include your mission statement, your product or service, and basic information about your company’s leadership team, employees, and location. You should also include financial information and high-level growth plans if you plan to ask for financing.

Company description

Use your company description to provide detailed information about your company. Go into detail about the problems your business solves. Be specific, and list out the consumers, organization, or businesses your company plans to serve.

Explain the competitive advantages that will make your business a success. Are there experts on your team? Have you found the perfect location for your store? Your company description is the place to boast about your strengths.

Market analysis

You'll need a good understanding of your industry outlook and target market. Competitive research will show you what other businesses are doing and what their strengths are. In your market research, look for trends and themes. What do successful competitors do? Why does it work? Can you do it better? Now's the time to answer these questions.

Organization and management

Tell your reader how your company will be structured and who will run it.

Describe the  legal structure  of your business. State whether you have or intend to incorporate your business as a C or an S corporation, form a general or limited partnership, or if you're a sole proprietor or limited liability company (LLC).

Use an organizational chart to lay out who's in charge of what in your company. Show how each person's unique experience will contribute to the success of your venture. Consider including resumes and CVs of key members of your team.

Service or product line

Describe what you sell or what service you offer. Explain how it benefits your customers and what the product lifecycle looks like. Share your plans for intellectual property, like copyright or patent filings. If you're doing  research and development  for your service or product, explain it in detail.

Marketing and sales

There's no single way to approach a marketing strategy. Your strategy should evolve and change to fit your unique needs.

Your goal in this section is to describe how you'll attract and retain customers. You'll also describe how a sale will actually happen. You'll refer to this section later when you make financial projections, so make sure to thoroughly describe your complete marketing and sales strategies.

Funding request

If you're asking for funding, this is where you'll outline your funding requirements. Your goal is to clearly explain how much funding you’ll need over the next five years and what you'll use it for.

Specify whether you want debt or equity, the terms you'd like applied, and the length of time your request will cover. Give a detailed description of how you'll use your funds. Specify if you need funds to buy equipment or materials, pay salaries, or cover specific bills until revenue increases. Always include a description of your future strategic financial plans, like paying off debt or selling your business.

Financial projections

Supplement your funding request with financial projections. Your goal is to convince the reader that your business is stable and will be a financial success.

If your business is already established, include income statements, balance sheets, and cash flow statements for the last three to five years. If you have other collateral you could put against a loan, make sure to list it now.

Provide a prospective financial outlook for the next five years. Include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets. For the first year, be even more specific and use quarterly — or even monthly — projections. Make sure to clearly explain your projections, and match them to your funding requests.

This is a great place to use graphs and charts to tell the financial story of your business.  

Use your appendix to provide supporting documents or other materials were specially requested. Common items to include are credit histories, resumes, product pictures, letters of reference, licenses, permits, patents, legal documents, and other contracts.

Example traditional business plans

Before you write your business plan, read the following example business plans written by fictional business owners. Rebecca owns a consulting firm, and Andrew owns a toy company.

Lean startup format

You might prefer a lean startup format if you want to explain or start your business quickly, your business is relatively simple, or you plan to regularly change and refine your business plan.

Lean startup formats are charts that use only a handful of elements to describe your company’s value proposition, infrastructure, customers, and finances. They’re useful for visualizing tradeoffs and fundamental facts about your company.

There are different ways to develop a lean startup template. You can search the web to find free templates to build your business plan. We discuss nine components of a model business plan here:

Key partnerships

Note the other businesses or services you’ll work with to run your business. Think about suppliers, manufacturers, subcontractors, and similar strategic partners.

Key activities

List the ways your business will gain a competitive advantage. Highlight things like selling direct to consumers, or using technology to tap into the sharing economy.

Key resources

List any resource you’ll leverage to create value for your customer. Your most important assets could include staff, capital, or intellectual property. Don’t forget to leverage business resources that might be available to  women ,  veterans ,  Native Americans , and  HUBZone businesses .

Value proposition

Make a clear and compelling statement about the unique value your company brings to the market.

Customer relationships

Describe how customers will interact with your business. Is it automated or personal? In person or online? Think through the customer experience from start to finish.

Customer segments

Be specific when you name your target market. Your business won’t be for everybody, so it’s important to have a clear sense of whom your business will serve.

List the most important ways you’ll talk to your customers. Most businesses use a mix of channels and optimize them over time.

Cost structure

Will your company focus on reducing cost or maximizing value? Define your strategy, then list the most significant costs you’ll face pursuing it.

Revenue streams

Explain how your company will actually make money. Some examples are direct sales, memberships fees, and selling advertising space. If your company has multiple revenue streams, list them all.

Example lean business plan

Before you write your business plan, read this example business plan written by a fictional business owner, Andrew, who owns a toy company.

Need help? Get free business counseling

From Idea to Foundation

Master the Essentials: Laying the Groundwork for Lasting Business Success. 

Funding and Approval Toolkit

Shape the future of your business, business moves fast. stay informed..

Discover the Best Tools for Business Plans

Learn from the business planning experts, resources to help you get ahead, financial projections, table of contents.

Financial projections are not just a component of your business plan; they are the beating heart of strategic thinking and analysis in both startups and established businesses. These projections serve as a vital tool for setting targets, assessing key results, and understanding the reasons behind meeting or not meeting these targets. They enable businesses to recalibrate their strategies effectively, ensuring agility and responsiveness to market dynamics.

Essential for Diverse Business Needs

Apart from their critical role in internal analysis and strategy setting, financial projections are indispensable for a variety of external purposes:

• Raising Capital:  Whether you’re a startup aiming for seed funding or an established business seeking expansion capital, clear and well-structured financial projections can significantly increase your chances of securing investment .
• Regulatory and Legal Compliance:  Specific employment and investment visas, licensing, certification, and accreditation processes often require detailed financial projections to demonstrate the viability and potential of your business.
• Understanding Audiences:  Depending on the audience—whether investors, regulatory bodies, or partners—the nature and detail of the financial projections can vary. Our “Understanding Audiences” page provides in-depth insights into tailoring your projections for different stakeholders.

Versatility in Application

Financial projections can be a standalone document or part of a comprehensive business plan. Their structure and emphasis may vary based on the business’s objectives:

• Debt Financing:  For new businesses seeking loans , financial projections within a business plan help in demonstrating the capacity to repay the loan.
• Equity-Based Financing:  For businesses in stages like pre-seed, seed , or series A funding, standalone financial projections are crucial. They provide clarity on startup requirements, burn-rate , and runway , which are key factors investors evaluate.

Foundations of Effective Financial Projections

Crafting impactful financial projections is a detailed and systematic process, grounded in deep research and thorough data collection. To create a robust foundation for these projections, two distinct approaches are recommended, each suited to different types of businesses and their unique needs:

• Ideal for New and Innovative Ventures:  The Pre-Planning Process , detailed under Core Cost Analysis and Startup & Operational Costs in the “Get Started” section of Businessplan.com, is particularly beneficial for businesses that are in their nascent stages or are pioneering new markets.
• First-Movers and Fast-Followers:  For ventures that aim to be first-movers or fast-followers in emerging industries, this comprehensive approach is crucial to understand the uncharted market dynamics.
• Startups Eyeing Investment Capital:  Additionally, startups that plan to seek investment capital will find this process instrumental in laying a solid groundwork for their financial projections, giving potential investors a clear view of the business’s potential.
• Tailored for Established Industries:  Businesses operating within well-established industries, where market dynamics are relatively known and stable, will benefit significantly from using a Model-Based Planning® Worksheet .
• Focus on Speed and Efficiency:  This approach is designed for ventures where rapid planning and execution are prioritized. It provides a streamlined, industry-specific framework that accelerates the planning process.
• Customized to Specific Business Models:  The Worksheet is customized for a wide range of business models and industries, ensuring that the financial projections are relevant and aligned with industry standards and expectations.

By choosing the approach that best aligns with your business’s stage, industry, and goals, you can ensure that your financial projections are not only realistic and well-informed but also highly effective in guiding your business towards success.

Key Sections of Financial Projections

Key assumptions.

In financial planning for businesses, especially startups, the creation of key assumptions is critical. These assumptions form the backbone of your financial projections, influencing every aspect from revenue forecasting to cost management. Their accuracy and realism are crucial for developing a financial model that truly reflects the potential of your business.

The Role of Key Assumptions

Key assumptions serve multiple purposes:

• Simplifying Complexity : By categorizing diverse products or services into manageable units, Key Assumptions help in creating a more readable and practical financial model .
• Guiding Strategic Decisions:  These assumptions are instrumental in shaping business strategies, from marketing to product development.
• Facilitating Communication:  Clear and concise assumptions make your financial projections more understandable to stakeholders, including investors and team members.

Creating Effective Key Assumptions

To craft meaningful and effective Key Assumptions, consider the following steps:

• Understand Your Business Model:  Grasp the intricacies of your business, including product/service offerings, customer behavior, and market trends.
• Use Averages and Ratios:  Simplify complex product lines or service offerings into average sales figures or ratios.
• Research and Validate:  Ground your assumptions in market research or historical data, ensuring they are realistic and defendable.
• Think Creatively and Contextually:  Tailor your assumptions to the unique context of your business, avoiding one-size-fits-all templates.

Personnel Plan

A comprehensive personnel plan is an essential component of your business’s financial projections. It not only outlines the staffing requirements but also encapsulates the associated costs, playing a significant role in the overall financial health of your enterprise.

Part 1: Personnel Forecast

The Personnel Forecast is a detailed table that includes the following elements:

• Specific Roles/Positions:  Identify the various roles and positions needed within your company. This could range from managerial positions to operational staff.
• Average Salary or Hourly Rate:  For each position, determine the average salary or hourly wage. This should be based on industry standards, regional salary averages, and the level of expertise required.
• Headcount:  Specify the number of individuals needed for each role. This will depend on the scale of your operations and business needs.
• Total Payroll per Position:  Calculate the total payroll for each position by multiplying the average salary or hourly rate by the headcount.
• Total Payroll:  Summarize the total payroll expenses, combining the costs from all positions.

Part 2: Personnel-Related Notes for Other Financial Tables

In addition to the Personnel Forecast, certain personnel-related expenses will be input into other financial tables:

• Pre-Launch Training:  Costs associated with training employees before the business launch should be included in the ‘ Sources & Uses of Funds ‘ under ‘Startup Expenses’.
• Ongoing or Post-Launch Training:  Regular training or development costs incurred after the launch should be accounted for in the ‘Expenses’ section of the Pro Forma Profit & Loss statement.
• Total Benefits:  Include costs related to sick leave, vacation, 401K match, health insurance, etc., in the Pro Forma Profit & Loss statement. These benefits form a significant part of employee compensation and affect the overall financial planning.
• Payroll Taxes:  Calculate and include payroll taxes based on state and federal rates in the Pro Forma Profit & Loss statement. These taxes are a mandatory financial obligation and an integral part of payroll expenses.

Projecting Revenue

Projecting revenue is one of the most challenging aspects of business planning, primarily due to the uncertainties inherent in predicting future market behavior. However, strategic tools like Total Addressable Market (TAM) , Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) can significantly aid in this process.

Understanding TAM, SAM, and SOM

• Total Addressable Market (TAM):  TAM refers to the total market demand for a product or service. It’s the maximum revenue opportunity available for a product or service, assuming 100% market share.
• S erviceable Available Market (SAM):  SAM is the segment of the TAM targeted by your products and services that is within your geographical reach. It’s more realistic than TAM as it considers the market that is actually serviceable.
• Serviceable Obtainable Market (SOM):  SOM, the most immediate and practical measure, is the portion of SAM that you can capture. It considers factors like competition, your unique value proposition, pricing strategy, and operational capacity. SOM is what you realistically aim to achieve in the short to medium term.

Utilizing Industry Reports for Revenue Projection

Industry reports, like those from IBISWorld , are invaluable in this process. They provide detailed insights, including a section on Cost Structure which outlines the average percentage of revenue spent on various expenses in your industry. Here’s how you can use this data:

• Estimate Revenue Based on Personnel Costs:  Given the detailed personnel plan you have, use the “Wages” percentage from the IBISWorld report. By dividing your total annual personnel costs by this percentage, you get an estimate of the annual revenue required to support your staff.
• Refine with SOM:  This initial estimate is a starting point. Refine it by applying the SOM concept. Assess how your company’s unique factors — like your value proposition , competitive landscape, and sales capacity — will influence your achievable market share. For example, if the SAM for your product is $100 million and you estimate that you can realistically capture 5% of this market based on your unique factors, your SOM would be $5 million.

While no method guarantees perfect revenue projections, using TAM, SAM, and SOM provides a structured approach to estimate potential sales. Industry reports like those from IBISWorld further refine these projections by grounding them in real-world data, making them more realistic and achievable. Always remember, these are estimates meant to guide planning and strategy, and they should be regularly reviewed and adjusted as your business grows and market conditions evolve.

Pro Forma Profit & Loss Statement

A Pro Forma Profit & Loss (P&L) Statement is a crucial financial document that projects your business’s revenues and expenses over a specific period. While industry reports like those from IBISWorld offer a high-level view of common expenses, creating a detailed and realistic P&L statement requires a deeper dive into your unique fixed and variable costs .

Utilizing Industry Reports with Caution

Industry reports provide average percentages for various cost categories such as marketing, depreciation, profit, rent, utilities, wages, and others. However, it’s vital to remember that these figures are averages derived from a wide range of companies. Your specific costs may differ significantly based on your business model, location, and operational strategy.

Steps to Develop a Pro Forma P&L Statement

• Rent:  Engage in preliminary discussions with landlords or commercial brokers to ascertain expected rent costs. Location and space requirements will significantly impact this expense.
• Marketing and Promotion:  Detail the components of your marketing, promotional, sales, and customer service strategies. Refer to the ‘ Strategy & Implementation ‘ section on Businessplan.com for guidance. Assess the costs associated with each element, considering both traditional and digital marketing channels.
• Operational Costs:  Identify and quantify your fixed and variable operational costs. Fixed costs might include utilities, insurance, and salaries, while variable costs could be tied to production levels, such as raw materials and shipping.
• Utilize your revenue projections (based on TAM, SAM, and SOM analyses) to estimate sales.
• List and quantify all anticipated expenses, separating them into fixed and variable categories. This is a good time to thoroughly review the Key Activities, Key Resources, and Key Partners in your business model.
• Gross Profit:  Subtract the cost of goods sold (COGS) from your total revenue.
• Net Profit:  Deduct all operational expenses, including fixed and variable costs, from the gross profit.
• Account for depreciation of assets and any applicable taxes to determine the final net profit.

A detailed Pro Forma P&L statement is a vital tool for any business. While industry reports offer a starting point, the specificity and accuracy of your projections will come from a deep understanding of your unique business costs and revenue potential. Regularly revisiting and updating this document is key to maintaining its relevance and usefulness as your business evolves.

Projected Cash Flow

A projected cash flow statement is an essential financial tool that helps map out the flow of cash in and out of your business. It’s a forecast of your company’s cash income and expenditures over a specific period and is crucial for managing liquidity and ensuring financial stability.

Creating a Cash Flow Projection

Estimate Cash Inflows:  Include all sources of income, such as sales revenue, investment income, and any other cash receipts. Consider the timing of these inflows, as delays in payment can significantly affect your cash flow.

Estimate Cash Outflows:  List all expected cash payments, including operating expenses, loan repayments, purchases of assets, and other expenditures. Timing is crucial here as well, particularly for seasonal businesses or those with irregular payment cycles.

Project Net Cash Flow:  Calculate the net cash flow for each period (monthly, quarterly, etc.) by subtracting cash outflows from cash inflows. This gives you a clear picture of when and where cash shortages or surpluses might occur.

Include Opening and Closing Balances:  Start with your opening cash balance (beginning of the period). Add the net cash flow to this opening balance to arrive at the closing balance (end of the period).

Projected Balance Sheet

The projected balance sheet is a financial statement that provides a snapshot of your company’s financial position at a future date. It includes assets , liabilities , and owner’s equity , projecting how these elements will change over time.

Preparing a Projected Balance Sheet

• Current Assets:  Include cash, accounts receivable , inventory , and other assets that are expected to be converted to cash within a year.
• Long-term Assets:  Include property, plant, equipment, and other assets that provide value over a longer period.
• Current Liabilities:  These are obligations due within a year, like accounts payable, short-term loans, and accrued expenses.
• Long-term Liabilities:  Include long-term debts, lease obligations, and other liabilities not due within the next year.
• Calculate Owner’s Equity:  Owner’s equity is the residual interest in the assets of the business after deducting liabilities. It includes initial investment, retained earnings, and any other equity contributions.
• Ensure the Fundamental Accounting Equation:  The balance sheet must follow the equation: Assets = Liabilities + Owner’s Equity. This equation must balance, which means the total value of the assets must equal the combined value of liabilities and owner’s equity.

Break-Even Analysis

Break-even analysis is a critical financial tool used to determine when a business will be able to cover all its expenses and start generating profit. Understanding the break-even point is vital for both new and existing businesses, as it informs pricing strategies, cost management, and funding requirements.

Break-Even for Different Business Types

• Established Market Entrants:  Businesses entering established markets (restaurants, dental offices, dry cleaners, etc.), possibly with debt financing like an SBA loan, typically have shorter break-even periods. These range from 6 to 18 months, depending on business complexity and market penetration strategies. For these businesses, the break-even point is crucial to manage debt and establish a foothold in the market.
• Venture-Backed Companies:  For startups (first-movers or fast-followers) creating new markets with novel solutions, the path to break-even is often longer. This is by design, as venture capitalists invest in these companies with the understanding that establishing or growing a new market takes time. These companies may operate for extended periods without breaking even, focusing on market creation and growth rather than immediate profitability.

Calculating the Break-Even Point

• The break-even point is calculated by dividing total fixed costs by the difference between unit price and variable cost per unit.
• Understanding fixed costs (like rent, salaries) and variable costs (costs that change with production volume) is essential for accurate calculation.

Sensitivity Analysis

Sensitivity analysis is a technique used to predict the outcome of a decision given a certain range of variables. In financial modeling , it involves testing how different values of an independent variable affect a particular dependent variable under a given set of assumptions.

Application in Revenue Projections

• Adjusting Revenue Projections:  Commonly, sensitivity analysis in business planning involves altering top-line revenue projections by a certain percentage. This helps in understanding how changes in sales will impact the business’s financial health.
• Scenarios for Sensitivity Analysis:  For example, a business may test how their financials would look if revenues are 15% lower than projected. Assessing different scenarios helps in preparing for various market conditions.
• Importance in Debt Financing:  Banks and financial institutions often use sensitivity analysis to determine if a business can still maintain a debt service coverage ratio above a certain threshold (e.g., 1.3) even if revenues fall short of projections. This analysis is crucial for businesses seeking loans, as it impacts the lender’s confidence in the business’s ability to repay debt.

Up Next: Strategy & Implementation

It’s essential to remember the critical role financial projections play in writing a business plan and guiding your business towards sustainable growth and success. Projections, built on a foundation of diligent research and detailed analysis, enable you to navigate the complexity of fundraising or business management with greater confidence and precision.

Financial projections empower you to set realistic targets, assess key results, and adapt strategies effectively in response to market dynamics. Your financial projections are not just numbers on a page; they are a reflection of your business’s potential and a roadmap for its future.

We encourage you to revisit and refine your financial projections regularly, aligning them with your evolving business landscape and market conditions. And remember, the journey doesn’t end here. To continue enhancing your business acumen and strategic planning, we invite you to explore the next critical step in the Plan & Pitch section: Strategy & Implementation . Here, you’ll get deeper into formulating effective strategies and actionable plans that will further elevate your business’s trajectory. Embrace this journey with the knowledge and tools you’ve acquired, and watch your business vision come to life, one well-planned step at a time.

Proceed to Strategy & Implementation

Welcome to Businessplan.com

Currently in beta test mode.

Products available for purchase are placeholders and no orders will be processed at this time.

Let’s craft the ultimate business planning platform together.

Have questions, suggestions, or want a sneak peek at upcoming tools and resources? Connect with us on X or join “On the Right Foot” on Substack .

This site uses cookies from Google to deliver its services and to analyze traffic.

Ok, Got It.

Privacy Policy

• Business Essentials
• Leadership & Management
• Credential of Leadership, Impact, and Management in Business (CLIMB)
• Entrepreneurship & Innovation
• Digital Transformation
• Finance & Accounting
• Business in Society
• For Organizations
• Support Portal
• Media Coverage
• Founding Donors
• Leadership Team

• Harvard Business School →
• HBS Online →
• Business Insights →

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

• Career Development
• Communication
• Decision-Making
• Earning Your MBA
• Negotiation
• News & Events
• Productivity
• Staff Spotlight
• Student Profiles
• Work-Life Balance
• AI Essentials for Business
• Alternative Investments
• Business Analytics
• Business Strategy
• Business and Climate Change
• Creating Brand Value
• Design Thinking and Innovation
• Digital Marketing Strategy
• Disruptive Strategy
• Economics for Managers
• Entrepreneurship Essentials
• Financial Accounting
• Global Business
• Launching Tech Ventures
• Leadership Principles
• Leadership, Ethics, and Corporate Accountability
• Leading Change and Organizational Renewal
• Leading with Finance
• Management Essentials
• Negotiation Mastery
• Organizational Leadership
• Power and Influence for Positive Impact
• Strategy Execution
• Sustainable Business Strategy
• Sustainable Investing
• Winning with Digital Platforms

7 Financial Forecasting Methods to Predict Business Performance

• 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

Access your free e-book today.

What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

• Income statements
• Balance sheets
• Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

About the Author

440-951-2997

general@h-jcpa.com

• Client Resources
• Client Login

• Accounting Solutions
• Business Valuations
• Financial Planning
• Litigation Support
• Mergers and Acquisitions
• Nonprofit Assurance and Tax
• Tax Solutions
• About H&J CPAs
• Latest News

The Importance of Financial Projections in Your Business Plan

Financial projections are a crucial aspect of the core small business plan, especially for newer companies.

By considering factors like production costs, market prices, and demand for your services, you can achieve a clear understanding of your financial situation and discover your full profit potential.

Benefits of Financial Projections

• Perceive an unbiased view of your company’s economic status and the path it will likely take in the future.
• Prepare for expenses and revenue based on supply and demand patterns in the market.
• Establish goals by developing intentional commitments for long-term success.
• Set up points of achievement to ensure your business is growing as predicted.
• Compare the development of the market with the rate at which your business is flourishing.
• Reveal growth deviations from your projections early on to efficiently mitigate any concerns.

Tips for a Successful Projection Plan

• Create a budget congruent with the long-term objectives of your company, and be sure to stick to it despite successful or challenging periods.
• Evaluate and update your budget regularly, but know your predictions aren’t likely to unfold exactly as planned.
• Measure your budget against your goals to adjust your spending and seize opportunities for growth.
• Use short-term budgets for immediate plans, and extended projections to consider the overall goals of the company.
• Be sure to allocate spare funds to prepare for unexpected or larger costs.

Ensure you are creating your ideal business strategy by making careful and flexible financial predictions. Contact FOSS to speak with one of our experts about your small business plan.

• Starting a business Your guide to starting a small business
• Online store & retail E-commerce resources for small business
• Small business & self-employed Resources for small business owners and self-employed individuals
• Funding Everything you need to know about small business funding

Starting a business

How to Start a Business: Step-By-Step Guide to Success

November 22, 2023

Small Business and Self-Employed

How to write a business proposal for small businesses

February 4, 2020

• Running a business Everything you need to know to run your small business successfully
• Manage employees Everything you need to know about managing and retaining employees
• Invoicing Simplify invoicing with these small business resources
• Expenses Manage expenses like a pro with these small business resources
• Cash flow Everything you need to know about cash flow
• Inventory management Everything you need to know about managing inventory

How To measure your Business Profitability: Four ways to measure profitability and grow your business

How to Pay Yourself as a Small Business Owner

• Growing a business Take your small business to the next level with our guide to growing your business
• Technology & security Keep yourself and your customers safe online
• Tools Learn about the tools that can help your small business
• Marketing Spread the word - what you need to know about marketing your small business

Pricing Strategies For Products And Services

Social media marketing for small businesses: 22 bite-sized steps to master your strategy

• Accountanting & bookkeeping Learn about accounting and bookkeeping concepts for your business
• Taxes Simplify tax time with these small business resources
• Accountants Resources for bookkeepers and accountants

Bookkeeping Course Online: How to Become a Bookkeeper

LinkedIn profile tips for Accountants

• Tools & templates hub See our small business tools and templates hub
• Small Business Invoice Templates Customise a small business invoice template for your industry
• Invoice Templates Create professional invoices with our free invoice templates

Best Invoice Templates For Your Small Business

Financial Statement Template - a Guide

Understanding financial projections and forecasting

In order to get the attention of serious investors, it’s important to have realistic financial projections incorporated into your business plan . Projections can be tricky to calculate as you try to anticipate expenses while also predicting how quickly your business will grow. With a quick outline and some forethought, though, you can easily get a handle on your business’s financial projections.

What is a financial projection?

In its simplest form, a financial projection is a forecast of future revenues and expenses. Typically a financial projection will account for internal or historical data and will include a prediction of external market factors.

In general, you’ll need to develop both short-term and mid-term financial projections, neaing short-term projections account for the first year of your new business, normally outlined month by month, while mid-term financial projections typically account for the following 3 years of business, outlined year by year.

Why is financial projection important?

A financial projection is important because it gives you insight into how your company will perform in the near future. The projection is important to business owners as well as potential investors because it predicts whether the business will grow and be profitable.

What’s the difference between financial forecasting and financial projections?

What is financial forecasting and how does it differ from financial projections? Although financial forecasting and financial projections are sometimes used interchangeably, they have different meanings.

Your business can use financial forecasting to predict future business performance, provided that everything stays the same. The demand for your product is the same, and your business operates in exactly the same way. A financial forecast can be used alongside a financial projection to evaluate how a company will perform in 1 or more potential futures.

What is an example of a financial projection?

A financial projection creates a “what if” scenario, where something about your company or industry is different in the future. For example, if your business is closed on the weekends but you wanted to know what would happen if you changed your schedule to be open 7 days a week, that would be a financial projection.

If you think there’s a chance that the demand for your product or service will increase in the future, creating a financial projection with that in mind will benefit your financial planning to account for that potential outcome.

If the weather report says that based on current information, you should expect an inch of rain on Monday, but you plan for a scenario where you get 14 inches of rain, it’s no longer a regular forecast—it becomes a projection.

What are the 5 advantages of financial forecasting?

The main advantages of financial forecasting include the ability to attract investors, determine business viability, plan for future expenses, reduce financial risk, and measure and improve your business. See additional details on each advantage below:

• Attract investors : Sharing a financial forecast is essential to attracting potential investors. Being able to project where your company will be in six months or a year is important to attract investors or secure bank loans.
• Determine business viability : If the financial forecast doesn’t look promising, it can inform the business owner that the business plan needs to be improved.
• Plan for future expenses : By understanding when sales may be lower or cash flow will be reduced, you can determine when business loans or additional investments will be needed.
• Reduce financial risk : Forecasting allows you to take a broad view of your business and understand where resources are being wasted, so they can be repurposed or limited.

Measure and improve your business : With each subsequent financial forecast, you can continually improve and more accurately predict your future performance.

What do financial projections include?

All financial projections should include 3 types of financial statements : the income statement, balance sheet, and a cash flow projection.

1. Income statement

An income statement shows your revenues, expenses, and profit for a particular period. If you’re developing these projections prior to starting your business, this is where you’ll want to do the bulk of your forecasting. The key sections of an income statement are:

• Revenue : This is the money you will earn from whatever products or services you provide.
• Expenses : Be sure to account for all of the expenses you will encounter, including direct costs (materials, equipment rentals, employee wages, your salary, etc.) and general and administrative costs (accounting and legal fees, advertising, bank charges, insurance, office rent, telecommunications, etc.).
• Total income : Your revenue minus your expenses, before income taxes.
• Income taxes : Money your business pays to the government.
• Net income : Your total income after income taxes.

2. Cash flow projections

A cash flow projection can help you decide if it’s a good time to invest cash into your business, or if it’s time to save. Cash flows can also demonstrate to a loan officer or investor that you are a good credit risk and can pay back a loan if it’s granted. The 3 sections of a cash flow projection are:

• Cash revenues : This is an overview of your estimated sales for a given time period. Be sure that you only account for cash sales you will collect and not credit.
• Cash disbursements : Look through your ledger and list all of the cash expenditures that you expect to pay that month.
• Reconciliation of cash revenues to cash disbursements : This one is pretty easy—you just take the amount of cash disbursements and subtract it from your total cash revenue. If you have a balance from the previous month, you’ll want to carry this amount over and add it to your cash revenue total.

Note : One of the key pitfalls of working on your cash flow projections is being overly optimistic about your future revenues. Be realistic in your estimates, and be prepared if they fall slightly short.

What is a cash flow projection example?

Cash is going to flow in and out of your business every month. Calculating how much money you expect to come in, versus how much money you expect to go out is a cash flow projection. This is calculated by totalling your accounts receivable and deducting it from your accounts payable, plus any cash on hand,

For example, if you have $2,000 in cash from the previous month and expect to spend $10,000 this month on expenses while earning $15,000, your cash flow statement for this month would be $7,000.

Cash flow projection = beginning cash + total accounts receivable - total accounts payable

3. Balance sheet

The balance sheet will present a picture of your business’s net worth at a particular time. It is a summary of all your business’s financial data in 3 categories: assets, liabilities, and equity.

• Assets : These are the tangible objects of financial value owned by your company. Assets can include anything from cash to real estate, all the way down to office furniture and supplies.
• Liabilities : These are any debts your business owes to a creditor. Liabilities can include upcoming payments for materials, bank loans, interest payments for a loan, payroll and payroll taxes, and mortgages.
• Equity : The net difference between your organisation’s total liabilities minus its total assets. If your business has $1 million in assets and $900,000 in liabilities, then the equity is $100,000.

Note : You’ll want to be sure that the information contained in the balance sheet is a summary of the information you previously presented in the income statement and cash flow projection. This is the place to triple-check your work—potential investors and creditors will be looking for any inconsistencies, and that can greatly impact their willingness to extend your company a line of credit.

To complete your financial projections, you’ll want to provide a quick overview and analysis of the included information. Think of it as an executive summary, providing a concise overview of the figures you’ve presented.

How to create financial projections

Before you start, collect all of your financial records. If you’re creating a projection for a brand-new business, use data and research on your industry. Keep in mind that although the projection is an estimate, the more data you use, the more reliable your estimate will be.

The steps for creating a financial projection include:

• Estimate your revenue and expenses
• Generate a balance sheet projection
• Create an income statement projection
• Create a cash flow projection
• Report and share your findings

Monitor performance

1. Estimate your revenue and expenses

Determine how much money you’ll be spending to operate the business (read more about how much money you need to start a business ). This includes payroll, rent, utilities, cost of materials, and more. Likewise, calculate how much revenue you expect to earn from your product or service.

2. Generate a balance sheet projection

If you haven’t already, create a balance sheet that includes all of your company’s assets, liabilities, and equity. Take note of upcoming expenses or payments and any expected increase in the value of your assets.

3. Create an income statement projection

Creating the income statement projection is simple. Also known as the profit and loss (P&L) statement, you just deduct your expenses from your revenue. If your expenses exceed revenue, look for ways to reduce costs or increase sales. Your projected income statement will show you how much net profit you’ll have after you’ve deducted all of your expected expenses.

4. Create a cash flow projection

Estimate how much cash will be collected and spent, and how much surplus cash you expect to have on hand at the end of each month. Having surplus cash is related to the ongoing health of your company, and having it on hand will help in the event of any unforeseen expenses.

5. Report and share your findings 

Compile your financial data and historical data into a repeatable report format that works well for your organisation. Consider including charts and tables when explaining copious amounts of numerical data—it will provide a much cleaner and engaging presentation than just paragraphs of numbers and figures.

Once your projections and report are complete, you can share them with your team members and external parties. These can include:

• Organisation leadership
• Other important members of your business

Sharing these projections with the right people is essential because they act as a bill of health for your company and help keep your leadership team in the loop.

6. Monitor performance

Periodically compare your projection to your company’s actual financial performance. Most organisations like to look at previous and upcoming quarters as well as year-over-year comparisons together with yearly projections. Make adjustments where needed and continually improve your projections to make them more reliable.

Creating realistic financial projections

As with any business reporting , it’s important to be as realistic as possible when preparing your financial projections. You don’t want to over or underestimate the revenue your business will generate. It’s a good idea to have a trusted friend or business partner review your financial projections . Also be sure to check out all of the online resources available — it’s best to learn from people who have created projections before.

Related Articles

Blank Invoice Template: Get in Word, PDF, and Excel Formats

September 23, 2020

February 10, 2023

What is an invoice?

December 16, 2021

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

• Canada (English)
• Canada (French)
• United Kingdom
• Other Countries

© 2022 Intuit Inc. All rights reserved.

Intuit, QuickBooks, QB, TurboTax, ProConnect, and Mint are registered trademarks of Intuit Inc. Terms and conditions, features, support, pricing, and service options subject to change without notice.

By accessing and using this page you agree to the Terms and Conditions.

ZenBusinessPlans

Home » Business Plans

How to Write a Business Plan Financial Projection [Sample Template]

How do you prepare a business plan financial statement? Do you need help developing business plan financial projections? Do you need a business plan projections template? Then i advice you read on because this article is for you.

What is a Business Plan Financial Statement?

The financial statement is a distinct section of your business plan because it outlines your financial projections. A business lives and dies based on its financial feasibility and most importantly its profitability. Regardless of how hard you work or how much you have invested of your time and money, people, at the end of the day, only want to support something that can return their investments with profits.

Your executive summary may be brilliantly crafted, and your market or industry analysis may be the bomb. But your business plan isn’t just complete without a financial statement to justify it with good figures on the bottom line.

Your financial statement is what makes or mars your chances of obtaining a bank loan or attracting investors to your business. Even if you don’t need financing from a third party, compiling a financial statement will help you steer your business to success. So, before we dig further into how to prepare a financial statement, you need to understand what a financial statement is not.

What’s the Difference Between a Financial Projection Statement and Accounting Statement?

However, you need to keep in mind that the financial statement is not the same as an accounting statement. Granted, a financial statement includes financial projections such as profit and loss, balance sheets, and cash flow, all of which makes it look similar to an accounting statement.

But the major difference between them is that an accounting statement deals with the past, while the financial projections statement of your business plan outlines your future spending and earnings. Having made this point clear, let’s now look at the steps involved on preparing a financial statement for your business plan.

So what exactly do you have to include in this section? You will need to include three statements:

• Income Statement
• Balance Sheet
• Cash-Flow Statement

Now, let’s briefly discuss each.

Components of a Business Plan Financial Statement

Income statement.

This beautiful composition of numbers tells the reader what exactly your sources of revenue are and which expenses you spent your money on to arrive at the bottom line. Essentially, for a given time period, the income statement states the profit or loss ( revenue-expenses ) that you made.

Balance sheet

The key word here is “ balance, ” but you are probably wondering what exactly needs to be weighed, right? On one side you should list all your assets ( what you own ) and on the other side, all your liabilities ( what you owe ), thereby giving a snapshot of your net worth ( assets – liabilities = equity ).

Cash flow statement

This statement is similar to your income statement with one important difference; it takes into account just when revenues are actually collected and when expenses are paid. When the cash you have coming in ( collected revenue ) is greater than the cash you have going out ( disbursements ), your cash flow is said to be positive.

And when the opposite scenario is true, your cash flow is negative. Ideally, your cash flow statement will allow you to recognize where cash is low, when you might have a surplus, and how to be on top of your game when operating in an uncertain environment.

How to Prepare a Business Plan Financial Projections Statement

1. Start by preparing a revenue forecast and a forecast profit and loss statement

Also, prepare supporting schedules with detailed information about your projected personnel and marketing costs. If your business has few fixed assets or it’s just a cash business without significant receivables, you don’t need a forecast balance sheet.

2. Using your planned revenue model, prepare a spreadsheet

Set the key variables in such a way that they can be easily changed as your calculations chain through. To ensure that your projected revenues are realistic and attainable, run your draft through a number of iterations. For each year covered in your business plan, prepare a monthly forecast of revenues and spending.

3. If you plan to sell any goods, then include a forecast of goods sold

This applies the most to manufacturing businesses. Give a reasonable estimate for this cost. And be of the assumption that the efficiency of your products would increase with time and the cost of goods sold as a percentage of sales will decline.

4. Quantify your marketing plan

Look at each marketing strategy you outlined in the business plan and attach specific costs to each of them. That is, if you are looking at billboard advertising, TV advertising, and online marketing methods such as pay-per-click advertising and so on; then you should estimate the cost of each medium and have it documented.

5. Forecast the cost of running the business, including general and administrative costs

Also, forecast the cost of utilities, rents, and other recurring costs. Don’t leave out any category of expenses that is required to run your business. And don’t forget the cost of professional services such as accounting and legal services.

6. In the form of a spreadsheet, forecast the payroll

This outlines each individual that you plan to hire, the month they will start work, and their salary. Also include the percentage salary increases (due to increased cost of living and as reward for exemplary performance) that will come in the second and subsequent years of the forecast.

Additional tips for Writing a Business Plan Financial Statement

• Don’t stuff your pages with lots of information, and avoid large chunks of text. Also, use a font size that is large enough. Even if these would spread out your statement into more pages, don’t hesitate to spread it out. Legibility matters!
• After completing the spreadsheets in the financial statement, you should summarize the figures in the narrative section of your business plan.
• Put a table near the front of your financial statement that shows projected figures, pre-tax profit, and expenses. These are the figures you want the reader to remember. You can help the reader retain these figures in memory by including a bar chart of these figures, too.

As a final note, you should keep in mind that a financial statement is just an informed guess of what will likely happen in the future. In reality, the actual results you will achieve will vary. In fact, this difference may be very far from what you have forecast.

So, if your business is a start-up, prepare more capital than your projections show that you will need. Entrepreneurs have a natural tendency to project a faster revenue growth than what is realistic. So, don’t let this instinct fool you.

More on Business Plans

More From Forbes

Without sound financial projections your business plan is merely conceptual.

• Share to Facebook
• Share to Twitter
• Share to Linkedin

Sustainability Consultant | Business Coach & Educator | Founder of  The Academy of Human Potential.

The financial section of your business plan might be intimidating to tackle, especially if you are a new business owner with little to zero financial history recorded. But it is arguably the most essential piece to master when laying out the foundation of a new business model. In fact, financial projections are also equally as important to existing businesses in order to set new and recurring goals, monitor progress and act as a warning system when things fall off track. 

For these reasons among a few others, financial projections are an essential business planning tool that should be carefully considered, and not having them can be detrimental to your business' sustainability. Here are the top four ways having sound financial projections will set you up for long-term success in your business venture.

Validating Your Business Model

I've seen how common it is to see entrepreneurs get excited at the possibility of starting a new business venture. Frequently, business plans highlight the best-case scenarios and focus on industry analysis, overall strategy and products and services. But when it comes to the financial section, assumptions are oftentimes questionable, and critical numbers tend to get glossed over. An entrepreneur’s best opportunity to truly understand the viability of their business idea and gauge its potential return on investment is to scrutinize these other factors. 

Furthermore, a lot can be revealed in the process. Although you may be focusing on the next 12 to 60 months in initial projections, you’ll also be conducting research and calculating the size of your total addressable and serviceable markets , target markets and market shares. Additionally, financial projections will show you the likely outcomes of different pricing strategies in order to make a profit, scale your business and eventually reach a point of sustainability. 

Without a clear financial plan that analyzes costs, other critical decisions will be impacted such as how big your marketing budget can be, how much overhead you can take on and who you can afford to hire at startup and during expansion. Without knowing your net profit margins, you will struggle to establish feasible milestones and create systems that efficiently maintain operational costs. 

Identifying Funding Requirements

One of the most significant threats to new and existing companies is the cash-flow gap. Many entrepreneurs focus on the potential of the endeavor without considering the associated risks involved. Although you might be able to launch lean and initially bootstrap your business, there may be a point where you run out of seed capital due to supplier issues, unexpected events or an influx of business that requires more resources. This can happen whether you are a brand new business or recasting your finances for expansion. 

Having solid financial projections requires entrepreneurs to ask key questions such as how much money is needed and, importantly, by when. Specifically, you’ll need to know what is required to reach profitability and get to the next milestone or funding round. This will help you identify areas for cutting unnecessary costs so that you can cover cash flow dips to stay afloat. Your projections will tell you how much runway you have before you run out of cash and how much debt you can take on if necessary. After you know this, you can decide which types of financing are best for your company. This can range from requiring angel funding, business lines of credit or even personal loans. 

Getting Buy-In From Stakeholders

Without buy-in from essential figures including people such as lenders, investors, industry partners, employees and other key players, it may prove difficult to gain traction. Financial projections, which are core to completing important documents such as business plans and pitch decks, are required to present to key stakeholders. That is why financial projections are needed to forecast valuations and returns, including when investments will yield a profit. You might even have team members who will be investing their time rather than their finances, or both, so being able to give them a clear indication of how much time is required of their effort will maintain momentum and provide good faith in your leadership. Essentially, all of your stakeholders are going to want to know the potential of your business and that you know what you’re doing. 

Setting Milestones

Financial projections also provide your business with revenue and profit goals. Without having these milestones, you may become stagnant. When mapping out your financials, think about what it is that you want to accomplish. 

For existing businesses, it is critical to periodically update financial projections whenever operational changes have been made, such as switching suppliers, hiring new personnel, adding a new location or expanding products and services. As things change, it is critical to assess the financial impact these developments will have on your business. Remember that milestones are essential to continual growth and having them will inspire and motivate your team to reach new heights.

Where should you start?

Financial projections are always educated guesses. To make yours as accurate as possible, do your homework and get some help. Begin with data that you acquired when you researched for your business plan. You will find that a lot of information is available from industry associations, various government sources and similar companies in your industry. I recommend using a robust financial template that includes the main financial statements, detailed revenue and operating expenses, as well as financial ratio analyses. I also suggest working with an experienced accountant in your industry to help fine-tune your finances. 

Once you complete your financial projections, keep them up-to-date and refer to them regularly by comparing them to your actual financial statements to see how well your business is doing. If you find that your projections are either too optimistic or bleak, this is your opportunity to make them more accurate and use them as a tool to keep moving forward.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?

• Editorial Standards
• Reprints & Permissions

Falling leaves. Falling prices 🍂 70% Off for 3 Months. Buy Now & Save

70% Off for 3 Months Buy Now & Save

Wow clients with professional invoices that take seconds to create

Quick and easy online, recurring, and invoice-free payment options

Automated, to accurately track time and easily log billable hours

Reports and tools to track money in and out, so you know where you stand

Easily log expenses and receipts to ensure your books are always tax-time ready

Tax time and business health reports keep you informed and tax-time ready

Automatically track your mileage and never miss a mileage deduction again

Time-saving all-in-one bookkeeping that your business can count on

Track project status and collaborate with clients and team members

Organized and professional, helping you stand out and win new clients

Set clear expectations with clients and organize your plans for each project

Client management made easy, with client info all in one place

Pay your employees and keep accurate books with Payroll software integrations

• Team Management

FreshBooks integrates with over 100 partners to help you simplify your workflows

Send invoices, track time, manage payments, and more…from anywhere.

• Freelancers
• Self-Employed Professionals
• Businesses With Employees
• Businesses With Contractors
• Marketing & Agencies
• Construction & Trades
• IT & Technology
• Business & Prof. Services
• Accounting Partner Program
• Collaborative Accounting™
• Accountant Hub
• Reports Library
• FreshBooks vs QuickBooks
• FreshBooks vs HoneyBook
• FreshBooks vs Harvest
• FreshBooks vs Wave
• FreshBooks vs Xero
• Partners Hub
• Help Center
• 1-888-674-3175
• All Articles
• Productivity
• Project Management
• Bookkeeping

Resources for Your Growing Business

How to make financial projections for business.

Writing a solid business plan should be the first step for any business owner looking to create a successful business. 

As a small business owner, you will want to get the attention of investors, partners, or potential highly skilled employees. It is, therefore, important to have a realistic financial forecast incorporated into your business plan. 

We’ll break down a financial projection and how to utilize it to give your business the best start possible.

Key Takeaways

Accurate financial projections are essential for businesses to succeed. In this article, we’ll explain everything you need to know about creating financial projections for your business. Here’s what you need to know about financial projections:

• A financial projection is a group of financial statements that are used to forecast future performance
• Creating financial projections can break down into 5 simple steps: sales projections, expense projections, balance sheet projections, income statement projections, and cash flow projections
• Financial projections can offer huge benefits to your business, including helping with forecasting future performance, ensuring steady cash flow, and planning key moves around the growth of the business

Here’s What We’ll Cover:

What Is a Financial Projection?

How to Create a Financial Projection

What goes into a financial projection, what are financial projections used for.

Financial Projections Advantages

Frequently Asked Questions

What Is Financial Projection?

A financial projection is essentially a set of financial statements . These statements will forecast future revenues and expenses. 

Any projection includes your cash inflows and outlays, your general income, and your balance sheet. 

They are perfect for showing bankers and investors how you plan to repay business loans. They also show what you intend to do with your money and how you expect your business to grow. 

Most projections are for the first 3-5 years of business, but some include a 10-year forecast too.

Either way, you will need to develop a short and mid-term projection broken down month by month. 

As you are just starting out with your business, you won’t be expected to provide exact details. Most financial projections are rough guesses. But they should also be educated guesses based on market trends, research, and looking at similar businesses. 

It’s incredibly important for financial statements to be realistic. Most investors will be able to spot a fanciful projection from a mile away. 

In general, most people would prefer to be given realistic projections, even if they’re not as impressive.

Financial projections are created to help business owners gain insight into the future of their company’s financials. 

The question is, how to create financial projections? For business plan purposes, it’s important that you follow the best practices of financial projection closely. This will ensure you get accurate insight, which is vital for existing businesses and new business startups alike.

Here are the steps for creating accurate financial projections for your business.

1. Start With A Sales Projection

For starters, you’ll need to project how much your business will make in sales. If you’re creating a sales forecast for an existing business, you’ll have past performance records to project your next period. Past data can provide useful information for your financial projection, such as if your sales do better in one season than another.

Be sure also to consider external factors, such as the economy at large, the potential for added tariffs and taxes in the future, supply chain issues, or industry downturns. 

The process is almost the same for new businesses, only without past data to refer to. Business startups will need to do more research on their industry to gain insight into potential future sales.

2. Create Your Expense Projection

Next, create an expense projection for your business. In a sense, this is an easier task than a sales projection since it seems simpler to predict your own behaviors than your customers. However, it’s vital that you expect the unexpected.

Optimism is great, but the worst-case scenario must be considered and accounted for in your expense projection. From accidents in the workplace to natural disasters, rising trade prices, to unexpected supply disruptions, you need to consider these large expenses in your projection. 

Something always comes up, so we suggest you add a 10-15% margin on your expense projection.

3. Create Your Balance Sheet Projection

A balance sheet projection is used to get a clear look at your business’s financial position related to assets, liabilities , and equity, giving you a more holistic view of the company’s overall financial health. 

For startup businesses, this can prove to be a lot of work since you won’t have existing records of past performance to pull from. This will need to be factored into your industry research to create an accurate financial projection.

For existing businesses, it will be more straightforward. Use your past and current balance sheets to predict your business’s position in the next 1-3 years. If you use a cloud-based, online accounting software with the feature to generate balance sheets, such as the one offered by FreshBooks, you’ll be able to quickly create balance sheets for your financial projection within the app.

Click here to learn more about the features of FreshBooks accounting software.

4. Make Your Income Statement Projection

Next up, create an income statement projection. An income statement is used to declare the net income of a business after all expenses have been made. In other words, it states the profits of a business.

For currently operating businesses, you can use your past income statements and the changes between them to create accurate predictions for the next 1-3 years. You can also use accounting software to generate your income statements automatically. 

You’ll need to work on rough estimates for new businesses or those still in the planning phase. It’s vital that you stay realistic and do your utmost to create an accurate, good-faith projection of future income. 

5. Finally, Create Your Cash Flow Projection

Last but not least is to generate your projected cash flow statement. A cash flow projection forecasts the movement of all money to and from your business. It’s intertwined with a business’s balance sheet and income statement, which is no different when creating projections. 

If your business has been operating for six months or more, you can create a fairly accurate cash flow projection with your past cash flow financial statements. For new businesses, you’ll need to factor in this step of creating a financial forecast when doing your industry research. 

It needs to include five elements to ensure an accurate, useful financial forecast for your business. These financial statements come together to provide greater insight into the projected future of a business’s financial health. These include:

Income Statement

A standard income statement summarizes your company’s revenues and expenses over a period. This is normally done either quarterly or annually.

The income statement is where you will do the bulk of your forecasting. 

On any income statement, you’re likely to find the following:

• Revenue: Your revenue earned through sales. 
• Expenses: The amount you’ve spent, including your product costs and your overheads.
• Pre-Tax Earnings: This is your income before you’ve paid tax.
• Net Income: The total revenues minus your total expenses. 

Net income is the most important number. If the number is positive, then you’re earning a profit, if it’s negative, it means your expenses outweigh your revenue and you’re making a loss. 

Cash Flow Statement

Your cash flow statement will show any potential investor whether you are a good credit risk. It also shows them if you can successfully repay any loans you are granted.

You can break a cash flow statement into three parts:

• Cash Revenues: An overview of your calculated cash sales for a given time period. 
• Cash Disbursements: You list all the cash expenditures you expect to pay.
• Net Cash Revenue: Take the cash revenues minus your cash disbursements.

Balance Sheet

Your balance sheet will show your business’s net worth at a given time.

A balance sheet is split up into three different sections:

• Assets: An asset is a tangible object of value that your company owns. It could be things like stock or property such as warehouses or offices. 
• Liabilities: These are any debts your business owes.
• Equity: Your equity is the summary of your assets minus your liabilities.

Looking for an easy-to-use yet capable online accounting software? FreshBooks accounting software is a cloud-based solution that makes financial projections simple. With countless financial reporting features and detailed guides on creating accurate financial forecasts, FreshBooks can help you gain the insight you need to let your business thrive. Click here to give FreshBooks a try for free.

Financial projections have many uses for current business owners and startup entrepreneurs. Provided your financial forecasting follows the best practices for an accurate projection, your data will be used for:

• Internal planning and budgeting – Your finances will be the main factor in whether or not you’ll be able to execute your business plan to completion. Financial projections allow you to make it happen.
• Attracting investors and securing funding – Whether you’re receiving financing from bank loans, investors, or both, an accurate projection will be essential in receiving the funds you need.
• Evaluating business performance and identifying areas for improvement – Financial projections help you keep track of your business’s financial health, allowing you to plan ahead and avoid unwelcome surprises.
• Making strategic business decisions – Timing is important in business, especially when it comes to major expenditures (new product rollouts, large-scale marketing, expansion, etc.). Financial projections allow you to make an informed strategy for these big decisions.

Financial Projections Advantages 

Creating clear financial projections for your business startup or existing company has countless benefits. Focusing on creating (and maintaining) good financial forecasting for your business will:

• Help you make vital financial decisions for the business in the future
• Help you plan and strategize for growth and expansion
• Demonstrate to bankers how you will repay your loans 
• Demonstrate to investors how you will repay financing
• Identify your most essential financing needs in the future
• Assist in fine-tuning your pricing
• Be helpful when strategizing your production plan
• Be a useful tool for planning your major expenditures strategically
• Help you keep an eye on your cash flow for the future

Your financial forecast is an essential part of your business plan, whether you’re still in the early startup phases or already running an established business. However, it’s vital that you follow the best practices laid out above to ensure you receive the full benefits of comprehensive financial forecasting.  

If you’re looking for a useful tool to save time on the administrative tasks of financial forecasting, FreshBooks can help. With the ability to instantly generate the reports you need and get a birds-eye-view of your business’s past performance and overall financial help, it will be easier to create useful financial projections that provide insight into your financial future. 

FAQs on Financial Projections

More questions about financial forecasting, projections, and how these processes fit into your business plan? Here are some frequently asked questions by business owners.

Why are financial projections important?

Financial projections allow you to gain insight into your business’s economic trajectory. This helps business owners make financial decisions, secure funding, and more. Additionally, financial projections provide early warning of roadblocks and challenges that may lay ahead for the company, making it easier to plan for a clear course of action.

What is an example of a financial projection?

A projection is an overall look at a business’s forecasted performance. It’s made up of several different statements and reports, such as a cash flow statement, income statement, profit and loss statement, and sales statement. You can find free templates and examples of many of these reports via FreshBooks. Click here to view our selection of accounting templates.

Are financial forecasts and financial projections the same?

Technically, there is a difference between forecasting and projections, though many use the terms interchangeably. Financial forecasting often refers to shorter-term (<1 year) predictions of financial performance, while financial projections usually focus on a larger time scale (2-3 years).

What is the most widely used method for financial forecasting?

The most common method of accurate forecasting is the straight-line forecasting method. It’s most often used for projecting the growth of a business’s revenue growth over a set period. If you notice that your records indicate a 4% growth of revenue per year for five years running, it would be reasonable to assume that this will continue year-over-year. 

What is the purpose of a financial projection?

Projection aims to get deeper, more nuanced insight into a business’s financial health and viability. It allows business owners to anticipate expenses and profit growth, giving them the tools to secure funding and loans and strategize major business decisions. It’s an essential accounting process that all business owners should prioritize in their business plans.

Michelle Alexander, CPA

About the author

Michelle Alexander is a CPA and implementation consultant for Artificial Intelligence-powered financial risk discovery technology. She has a Master's of Professional Accounting from the University of Saskatchewan, and has worked in external audit compliance and various finance roles for Government and Big 4. In her spare time you’ll find her traveling the world, shopping for antique jewelry, and painting watercolour floral arrangements.

RELATED ARTICLES

Save Time Billing and Get Paid 2x Faster With FreshBooks

Want More Helpful Articles About Running a Business?

Get more great content in your Inbox.

By subscribing, you agree to receive communications from FreshBooks and acknowledge and agree to FreshBook’s Privacy Policy . You can unsubscribe at any time by contacting us at [email protected].