financial projections for a business plan

Business Plan Financial Projections

Written By Dave Lavinsky

Financial Projections for a New and Existing Business

Financial projections are an important part of your business plan. The projections give investors and lenders an idea of how well your business is likely to do in the future. Financial projections include both income statements and balance sheets.

Financial projections are important for a number of reasons. First, they give investors and lenders an idea of how well your business is likely to do in the future. This can help you secure the funding you need to get your business off the ground. Financial projections also help you track your progress over time. You can use them to make sure your business is on track to meet its goals. Finally, financial projections can help you spot potential problems early on, so you can take corrective action.

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.

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Writing a Business Plan—Financial Projections

Spell out your financial forecast in dollars and sense

Creating financial projections for your startup is both an art and a science. Although investors want to see cold, hard numbers, it can be difficult to predict your financial performance three years down the road, especially if you are still raising seed money. Regardless, short- and medium-term financial projections are a required part of your business plan if you want serious attention from investors.

The financial section of your business plan should include a sales forecast , expenses budget , cash flow statement , balance sheet , and a profit and loss statement . Be sure to follow the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board , a private-sector organization responsible for setting financial accounting and reporting standards in the U.S. If financial reporting is new territory for you, have an accountant review your projections.

Sales Forecast

As a startup business, you do not have past results to review, which can make forecasting sales difficult. It can be done, though, if you have a good understanding of the market you are entering and industry trends as a whole. In fact, sales forecasts based on a solid understanding of industry and market trends will show potential investors that you've done your homework and your forecast is more than just guesswork.

In practical terms, your forecast should be broken down by monthly sales with entries showing which units are being sold, their price points, and how many you expect to sell. When getting into the second year of your business plan and beyond, it's acceptable to reduce the forecast to quarterly sales. In fact, that's the case for most items in your business plan.

Expenses Budget

What you're selling has to cost something, and this budget is where you need to show your expenses. These include the cost to your business of the units being sold in addition to overhead. It's a good idea to break down your expenses by fixed costs and variable costs. For example, certain expenses will be the same or close to the same every month, including rent, insurance, and others. Some costs likely will vary month by month such as advertising or seasonal sales help.

Cash Flow Statement

As with your sales forecast, cash flow statements for a startup require doing some homework since you do not have historical data to use as a reference. This statement, in short, breaks down how much cash is coming into your business on a monthly basis vs. how much is going out. By using your sales forecasts and your expenses budget, you can estimate your cash flow intelligently.

Keep in mind that revenue often will trail sales, depending on the type of business you are operating. For example, if you have contracts with clients, they may not be paying for items they purchase until the month following delivery. Some clients may carry balances 60 or 90 days beyond delivery. You need to account for this lag when calculating exactly when you expect to see your revenue.

Profit and Loss Statement

Your P&L statement should take the information from your sales projections, expenses budget, and cash flow statement to project how much you expect in profits or losses through the three years included in your business plan. You should have a figure for each individual year as well as a figure for the full three-year period.

Balance Sheet

You provide a breakdown of all of your assets and liabilities in the balances sheet. Many of these assets and liabilities are items that go beyond monthly sales and expenses. For example, any property, equipment, or unsold inventory you own is an asset with a value that can be assigned to it. The same goes for outstanding invoices owed to you that have not been paid. Even though you don't have the cash in hand, you can count those invoices as assets. The amount you owe on a business loan or the amount you owe others on invoices you've not paid would count as liabilities. The balance is the difference between the value of everything you own vs. the value of everything you owe.

Break-Even Projection

If you've done a good job projecting your sales and expenses and inputting the numbers into a spreadsheet, you should be able to identify a date when your business breaks even—in other words, the date when you become profitable, with more money coming in than going out. As a startup business, this is not expected to happen overnight, but potential investors want to see that you have a date in mind and that you can support that projection with the numbers you've supplied in the financial section of your business plan.

Additional Tips

When putting together your financial projections, keep some general tips in mind:

Get comfortable with spreadsheet software if you aren't already. It is the starting point for all financial projections and offers flexibility, allowing you to quickly change assumptions or weigh alternative scenarios. Microsoft Excel is the most common, and chances are you already have it on your computer. You can also buy special software packages to help with financial projections.
Prepare a five-year projection . Don’t include this one in the business plan, since the further into the future you project, the harder it is to predict. However, have the projection available in case an investor asks for it.
Offer two scenarios only . Investors will want to see a best-case and worst-case scenario, but don’t inundate your business plan with myriad medium-case scenarios. They likely will just cause confusion.
Be reasonable and clear . As mentioned before, financial forecasting is as much art as science. You’ll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective you’ll be at collecting on accounts receivable. It’s best to be realistic in your projections as you try to recruit investors. If your industry is going through a contraction period and you’re projecting revenue growth of 20 percent a month, expect investors to see red flags.

How to Create Financial Projections for Your Business

Written by Dave Lavinsky

Growthink Business Plan Financial Projections

As an entrepreneur, you spend months, even years coming up with ideas to start or grow your business. Then you write a business plan and try to convince someone (a co-founder, a banker, or an investor) that your idea is worthy of investment. The most crucial part of convincing them is your financial projections.

By creating financial projections, you have the opportunity to see the potential financial forecasting and impact of your ideas. Your financial projections (also known as your financial model) will help you understand the viability of your thoughts and help potential investors or lenders grasp the potential ROI (return on investment) of funding you.

This article will show you how to make financial projections for a startup business plan or an existing business. You will learn what to include in your financial projections, why they are essential, and how you can create them effectively.

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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.

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.

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.

Below is a simple balance sheet for the retail store:

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Creating 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?

Assumptions related to 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 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.