Disclosure: This post may contain affiliate links, meaning we get a commission if you decide to make a purchase through our links, at no cost to you. Please read our disclosure for more info.
Last Updated on June 22, 2023 by Work In My Pajamas
Financial projections are a way to get deeper, more nuanced insight into your company’s future. They help you anticipate expenses and profit growth and are vital for securing funding or loans and strategizing major business decisions.
A well-written financial projection can be a powerful enticement for investors, especially for startup businesses. A good projection will clearly show a date when the business breaks even, with more money coming in than going out.
Cash Flow Statement
As part of the financial section of a business plan, a cash flow projection helps you forecast your company’s revenue and expenses strategically. It is also helpful in demonstrating the profitability of your business to potential investors and lenders. Creating a cash flow projection involves predicting all cash inflows and outflows, including sales and accounts receivable, and estimating when you will pay creditors. It would help if you also forecast asset purchases, such as inventory or vehicles. Finally, it would help if you estimated when your business would need to make tax payments.
To create a cash flow projection, you need to use your list of assumptions and create a forecast for each component of the financial section of your business plan, and you can ask experts like Mark Hirschhorn for further details. For new businesses, this will include a sales forecast, expenses budget, cash flow statement, and balance sheet projection. For existing businesses, you may use historical data to create your projections.
Income Statement
Accurate financial projections will make your business plan more compelling whether you seek investors or business loans. You’ll need to include a sales forecast, expenses budget, cash flow statement, profit and loss (P&L) statement, and balance sheet. If you’re new to financial reporting, consult a qualified accountant for help.
Remember that your projections are based on assumptions, not guarantees. It’s best to avoid wildly optimistic projections that seem unrealistic to an objective audience. Investors can spot a fanciful projection from a mile away and may reject your plan. Ideally, you should offer two scenarios: a best-case and a worst-case scenario. Having both will give you more flexibility if you need to adjust your plans. It would help if you also prepared an expense projection, including the cost of goods sold (COGS), operating expenditures, and depreciation. The net income projection will be your revenue minus expenses. You should prepare a one-year projection and present it every month.
Balance Sheet
A business plan’s financial section is crucial for investors and lenders. It shows them that your company will be profitable, with more money coming in than going out. It also shows that you have a clear plan for how you will repay business loans and invest in your company’s growth.
The financial section of your plan should include a sales forecast, expenses budget, cash flow statement, and balance sheet. A balance sheet summarizes your company’s assets, liabilities, and shareholders’ equity. It is calculated by subtracting what you owe from what you own, giving you an idea of your company’s net worth.
On the asset side, you should list all items with a financial value, including physical assets such as machinery and vehicles and intangible assets such as copyrights. On the liability side, you should list all debts, including accounts payable (money owed to suppliers), mortgages, and loans.
Statement of Cash Flows
The statement of cash flows is a vital part of a business plan, but it can also be used as an ongoing tool to help you manage your financials. This document tracks estimated cash inflows and outflows, including investing activities, financing activities, and dividend payments. It can be a valuable tool for identifying the potential profitability of your business over the next 1-3 years.
Projecting your sales is the first step in creating a cash flow projection. This process can be based on past performance records for existing businesses, but for newer startups, it will need to be based more on research and industry analysis.
It would help if you also forecast your operating costs, such as wages and supplies. Additionally, you should include non-operating expenses like interest on loans and taxes. Finally, you will need to forecast your asset purchases and inventory. This is important because it helps you meet loan requirements stipulated by lenders, which can be a significant obstacle for startup businesses.
