Starting a business can be an exciting venture, but when it comes to growing it long-term or seeking out investment for an existing one, it’s important to have a solid plan in place before taking the plunge.
One of the most critical components of any business plan is financial projections for a business plan, which help determine the viability of your business idea and its potential profitability.
However, creating financial statements for a business plan can be very taxing, especially if you are not familiar with accounting or finance. Not to worry, though.
In this review, we’ll guide you through making financial plans for your business plan step by step. Whether you’re an aspiring entrepreneur or an experienced business owner, our tips and tricks will help you create realistic and accurate financial plans that will impress potential investors and help you make realistic decisions about the future of your business.
So, grab a pen and paper (or your favorite spreadsheet software), and let’s get started!
Table of contents
What is a Financial Projection?
Financial projections for a business are an essential component of a well-crafted business plan. It provides a roadmap for the future of your business by outlining potential revenue, expenses, and cash flow over a set period.
In simpler terms, financial projection tells about the future financial forecast of your business, including your anticipated expenses, returns, and revenues. But financial projections are more than mere predictions – an adequately written financial projection highlights the business goals and realistic steps to turn them into results.
Depending on your business type, financial projections could be short-term or long-term, lasting 12 months to years. At the same time, short-term financial plans should be outlined by months for at least one year. Long-term projections should include a quarterly breakdown of your financial targets spreading over the plan’s design period.
How are Financial Projections for a Business Plan Determined?
A financial projection shows the financial forecast of a business. You may use your financial statement internally to monitor the company’s budget or present it to external bodies. When prepared for external use, it is mainly to impress potential investors and secure the funding you need to make your business dreams a reality.
Understanding your business’s financial history and potential for growth is essential to develop realistic projections that investors and lenders can trust. There are several critical components of financial projections, including revenue, expense, and cash flow projections. Revenue projections estimate how much money the business will generate from its products or services. Expense projections estimate the industry’s costs, including salaries, rent, and supplies. Cash flow projections estimate the amount of cash coming into and leaving the business, which ensures the company has enough money to cover its expenses.
How do you Write Financial Projections for a Business Plan?
As you begin to expand your business, the need for external funding becomes necessary. This is where your financial projections for a business plan come in – they show investors your revenue history and future financial expectations.
How do you write a Financial projection for your business plan?
Create your Sales Assumptions:
Gather financial statements from the past 3-5 years to establish a revenue, expenses, and cash flow baseline. This information will help you make informed assumptions about future financial performance.
When you develop your sales assumptions, highlight the most critical financial implications your business may require over time. It’s okay to make healthy assumptions about the business’s cost, including recurring expenses such as equipment, materials, gas, and maintenance—research businesses’ spending in similar industries to get better estimates.
Identify market trends:
Research market trends and industry benchmarks to estimate future demand for your product or service. This will help you project future revenue. A thorough market study enables you to come up with reasonable numbers.
Estimate revenue:
After you have identified your market trends in your financial projections for a business plan, the next is to estimate your revenue. Based on your historical data and market research, evaluate your future income. Use conservative estimates to ensure that your projections are realistic.
See also: Coffee Shop Business Plan| A Realistic Plan for 2023
Project expenses:
Estimate your expenses by forecasting your rent, salaries, supplies, and other overhead costs. Make sure to include both fixed and variable costs.
As you develop your financial plans, you will need accounting tools for collecting financial information. Find an effective spreadsheet for gathering your data together. Collect your estimations – this includes expenses likewise your revenues into the software or online tool for managing financial projections for a business plan.
Document your plans, then merge the data into a file for further updates.
Altogether, it’s best to create long-term financial projections to help you assess your company’s performance over time.
Calculate net income:
Subtract your projected expenses from your projected revenue to calculate your net income. This will give you an idea of how profitable your business will be.
Estimate cash flow:
Calculate your cash flow by projecting the amount of money coming into and out of your business. This will help you determine whether your company has enough cash to cover its expenses.
Also, include plans for contingencies under your cash flow. Since we like to stay within our budget, you cannot predict some events. Therefore, it’s best to set aside enough cash for unexpected events.
Create multiple scenarios:
Additionally, create scenarios that reflect further revenue growth and expense assumptions. Multiple strategies help you prepare for different outcomes and make more informed decisions about your business.
Developing unforeseen financial scenarios – favorable and adverse- helps you better determine your decisions beforehand.
Review and revise:
Finally, review your financial projections regularly and revise them as needed. Revisions help you stay on track and adjust your plans as your business evolves. And if you’re launching into the business world, consult a financial advisor to assist you in developing a financial projection for a business plan.
For internal business management, adopt monthly financial plans to help you better track your company’s economic progress. Remember that your financial projections for a business plan are assumptions. Thus, you should only partially rely on it but consider reviewing it occasionally to keep it updated.
What Should be Included in Financial projections for Business Plans?
Setting financial projections for a business plan helps you to monitor your goals and stay on track.
What should be included in a financial projections template:
- Startup expenses
- Payroll costs
- Sales projection
- Operational cost
- Outline of expenditures
- Income statements
- Balance sheet
- Ratio analysis
- Break-even analysis
- Cost of goods sold
- Business analysis, including appreciations and depreciations.
A typical financial projections template should cover all the listed items above. But writing financial projections for a business plan can be tricky, especially for a new business owner. So how can you go about creating a roadmap without feeling overwhelmed? We have provided some downloadable financial projections template samples in the following outline. Follow through.
Financial Projections Template
The financial projections template is related and crucial to a startup’s milestone. Each covers your feasibility, profitability, and risks spreading over five years. You’ll find a link to download a copy of the business plan financial template below.
- Cash Flow Statement
See also: What Every Entrepreneur Must do After Writing a Business Plan
- 2. Balance Sheet
- 3. Analysis Ratio
- 4. Cash Flow Statement
Download the Financial Projections for a Business Plan Template here.
Financial Projections Examples for Startups
Developing a reasonable financial projection for startups requires the collective efforts of the financial team members of a business. Note that it takes intentionality, research, invested time, and actions on your part and your teams to come up with an excellent financial projection. But in the end, the result is worth the effort.
Startups will need financial plans at one point or another for different purposes. At the onset, you may require a financial plan to decide if a market is feasible and has potential. Howbeit, a financial plan may become necessary for attracting external funding. Your financial plan will help you determine your startup’s operational activities in the long run.
Your business structure will tell the type of financial documents you need in the future. The most common types of business structures are a partnership, sole proprietorships, and co-ops. But with modern inventions, other types of business structures have evolved. The best tip is to contact a financial advisor for suitable financial projections for your startup. However, every financial document developed is integral to managing your business’s growth.
Startup Cost
The startup cost covers the initial financial requirement of setting up your business, including the cost of purchase, materials, expenditures, and accrued debts. Collect and gather the information into a database for future reference, especially when you intend to expand or start a new product line.
Filling in all the spaces in the spreadsheet may be optional. As you enter the information, it is okay to leave room for adjustments, although some information may require more data than expected.
Key Assumptions
Because a startup will come under debt or equity, one of the key questions your financial plan for startups should address is the contributions ownership attracts. In order words, in what terms should a shareholder contribute to the company, and what percentage in equity should a stakeholder have in exchange for their contributions? This stage in your financial projection is called forecast planning.
Production Cost
Also, it helps if you determine your production cost before projecting your sales and revenue. You assess your Cost assumption by putting together all the manufacturing costs, including the cost of materials, labor, branding, service, overhead, and delivery. To get accurate figures for your cost of production, break your calculation into a per unit basis.
Calculate each unit of a product by the cost of all the materials and labor required for production. A typical spreadsheet should include a list of raw materials used, quantity of raw materials, cost of purchase, unit of products, and cost per product.
After you have put together all the requirements for production, you can begin the product or service pricing assumption.
Product or Service Pricing Assumption
The product pricing of your financial projection for startups is significant if you aim to make more profits and break even. Reasonable pricing for a product should consider the value of the market, per unit cost of production, customer base, and competitors’ strength. Product pricing should be distinct from the weight of the product. The value of a product is determined by the customer’s perception. While pricing may be the monetary value of a product, it also influences the perception customers to create about your product. Therefore, high-priced products with low competition will likely earn more value than a similar product with strong competitors.
After you have concluded the pricing of your product, the next step in line is:
The cost of labor (salary and wages)
Please make sure to calculate the cost of production before the cost of labor, as in most cases, and it can cause an imbalance. Keep an accurate figure of the monthly expenses going into salaries and wages. If there are other things like bonuses, highlight them and indicate whether the bonuses are monthly, quarterly, or annually.
Here is an example of how your cost of labor spreadsheet should look like
Sales Forecast
Next is the sales forecast. The sales forecast stage in your financial projections for startups determines your company’s profit over time. Be careful to estimate your sales forecast accurately, as it can lead to financial loss for the company. Nevertheless, startups intending to seek external funding in the future will need to project their sales statement very accurately.
Finally, in the assumptions statement is the cash flow. This statement covers the company’s loans, credit system, and equity holdings.
Balance Sheet
The balance sheet is one of the critical components of financial projections for a business plan. A balance sheet gives a brief of the business’ assets, liabilities, and stake holdings in the form of equity. Balance sheets also demonstrate a business’s financial strength in cases of bankruptcy, insolvency, and or economic threats.
A balance sheet could differ depending on the operational structure of your startup. Thus, there is no size-fit-all balance sheet for business plans. Expect some variations in the financial goals for sole proprietorship compared to partnerships. A sole proprietor may not need to reflect shared ownership as it is for alliances.
Since sole-proprietorships can result in confusing personal assets with business assets, it is advisable for businesses operating with this structure to consult a financial expert for better clarity.
In summary, financial projections are an essential component of any business plan. By carefully analyzing market trends and historical data, you can create projections that accurately reflect the financial performance of your business and help you make informed decisions about its future.
Frequently Asked Questions
There are multiple steps to make financial projections for a business plan accurate. Some forms are: Utilizing scenarios, determining your expenses and project assumptions, outlining a sales plan, conducting market research, reviewing, assessing, and monitoring.
Startup companies should ideally utilize accounting software such as balance sheets, cash flow, income spreadsheets, ratio analysis boards, and cloud storage systems. Combining these helps you manage your financial projections for a business plan.
The three most important sections in your financial projections for a business plan are the balance sheet, income statement, and cash flow plan. These three elements are significant determinants of a business’s financial standpoint.
References
- Alberta.ca – Financial Projections for startups
- PlanProjections.com – Financial Projections Template
- Score.org – Financial Projections for a business plan
- Entrepreneur – What is Financial Projection
- BDC – What is Financial Projection
- Youtube – Step-by-step Guide to Writing Financial Projections for a Business Plan
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