Drafting the financial projections within a business plan takes a bit of time and data referral to properly detail information as it pertains to your startup’s finances. Are you unfamiliar with what it means to cover your business plan’s financial projections? We’re here to help you out.
What are financial projections?
A business plan essentially acts as a blueprint for your startup. You might begin to outline goals and milestones that you’d like your startup to reach within the next few years in business.
Additional information — including descriptions of your products and services, an industry analysis, and a snapshot of the startup’s finances — are also included.
That specific snapshot of the startup’s finances is housed in a business plan’s financial projections. This section is dedicated to the startup’s current cash flow.
Information that covers a sales forecast, cash flow statement, expenses budget, breakeven analysis, and balance sheet for the next three years may all be found in the financial projections.
Typically, this information is presented through charts and tables to make it a bit more digestible and easier to review.
If it’s your first time writing about the financial projections of your startup, you may find the process is a bit intimidating. You might even run up against common questions about financial projections including the following:
- Which items should always be addressed?
- How far out should you plan for financial projections?
- What if your startup is brand new? How can you create accurate financial projections for a company that has little cash flow?
- Are there templates or spreadsheet software available to help out?
5 key areas to cover in a business plan’s financial projections
There are five key items that need to be addressed in every financial projection.
- Sales forecast.
- Cash flow statement.
- Expenses budget.
- Breakeven analysis.
- Balance sheet.
Here’s a brief primer for what to cover in the financial projections of your business plan.
1. Sales forecast
Technically, there isn’t a specific sequence for writing financial projections. However, many startups choose to start this section by covering their sales forecast.
Rather than guessing monthly sales, a sales forecast gives entrepreneurs a realistic look at current and anticipated sales numbers. Add a sales forecast spreadsheet into your financial projections with a recommended sales projection over the next three years.
Detail what the current monthly sales look like during your first year in business. Some aspects you might cover here include the cost of the products/services you’re selling and the number of customers you have and expect to expand in growth.
After year one, break this timeline down by sales based on a monthly, or quarterly, basis for every year thereafter. This allows you to further forecast the startup’s revenue.
At the end of the day, a business’s growth is measured by its sales. A sales forecast may not be able to determine the entire financial future of a startup.
However, it does offer practical insight into how to budget and manage expenses for the business and forecast when the business may become profitable.
2. Cash flow statement
Three statements should be included in a startup’s financial projections:
- Cash flow statement
- Income statement (or profits and loss statement)
- Balance sheet
Cash flow statements are fairly simple to estimate. This statement shows physical dollars moving in the business and the money that is exiting the business. This is typically shown over a specified period of time, such as a monthly basis. Incoming funds and money are known as revenue. Money being spent is the startup’s expenses.
Understanding cash flow allows for a closer look at how much money is coming in and out of the business on a monthly basis.
Without a cash flow statement, the startup may assume that because it has revenue, it is profitable, even if it really is not.
Estimate cash flow allows startups to adjust budgets accordingly. Take note over time of any changes or trends as they pertain to your startup’s return on investment (ROI).
If you find your startup is spending too much on an initiative with little ROI for the startup, you may scale back spending in that department and place your financial focus elsewhere.
3. Expenses budget
Now that you have a forecast of anticipated sales, you’ll likely have expenses associated with operating the startup to reach these sales. The simplest way to break down an expense budget is through identifying items that are fixed costs and variable costs.
Think about your startup’s location rent or internet bills. Variable costs, as their name suggests, vary depending on the needs of the business.
For example, you might hire an employee for seasonal work or decide to spend more money on advertising and marketing. Determine the general figures on both costs to determine which expenses have the most — and least — risk to the business.
4. Break-even analysis
This is the magic moment when your business is able to have its overall revenue cover, and exceed, all of its expenses.
Break-even analysis is calculated using fixed and variable costs. It is a necessary inclusion in your financial projections. This analysis does more than show that your data is reliable and projected properly with expenses able to match sales over a specific timeline. It also shows investors that business is on the rise and will continue to keep rising.
5. Balance sheet
As mentioned earlier, your business plan’s financial projections require the inclusion of a balance sheet as part of the necessary financial statements. The balance sheet provides further information about the owner’s assets and liabilities as well as the owners’ equity.
Assets may include items you own of assigned value, like property or inventory. These items may provide future benefits to the startup. For instance, inventory may be sold which allows for an increase in sales. Liabilities are obligations, or debts, owed to other parties.
A good example of a liability would be a small business loan that you are working to pay off and took out on behalf of the business.
Once all liabilities have been repaid, you may make note of this in the owners’ equity section of the balance sheet.
The balance sheet is the perfect space to house assets and liabilities that are not already accounted for in your P&L statement. This gives you a better idea of the net worth of your startup at the end of the year.
Wrapping up your business plan’s financial projections
We’re not quite finished with financial projections for your small business. What else should you know about this section moving forward?
Make room for additional financial information
What else do you need to cover besides income statements, cash flow statements and operating expenses in your financial projections?
You might find you need to expand on additional information in your financial projections. For instance, you may also form a profits and lost (P&L) statement or look into financial ratios for the business.
You might also include an appendix. This touches on additional information that may be requested from you, such as your credit history or resume.
The items listed above will help you get started with financial projections but are solely not limited to these financial documents.
Calculate for 3-5 years into the future
Financial projections are living, educated guesses for running the finances of your business. Whether your business just got its start or has been operating for a few months, estimating its financial projections for three years out into the future allows you to receive a better glimpse of the company’s financial performance.
If possible, try to calculate beyond three years. Aim for a five-year financial timeline. It’s a bit like drafting a business plan in that way.
Financial projections guide a business towards interest in investors, which is key for its overall growth and future.
Utilize free templates and software
Need a template to work with to set up your financial projections? You may use spreadsheet software, like Excel from Office 365, to help create financing tables and charts.
Additionally, templates are available to download through resources like SCORE. These templates can help you create documents from scratch or enter in information from previously created documents.
Ask for professional help
If you genuinely don’t know where to start or need help creating financial projections, don’t feel compelled to go it alone. Reach out to a legal professional or accountant for assistance. They will be able to provide guidance and answer any questions you may have as it pertains to your financial projections.
Always consult an attorney or tax professional regarding your specific legal or tax situation.
Update and maintain for COVID-19 purposes, as necessary
Remember, much like a business plan, you may always return to your financial projections. Note the date in which you were able to break even with your startup.
If your projected sales forecast radically shifted in a certain year, detail the shift in numbers and perhaps cite the cause for the shift. This may include unprecedented events, such as COVID-19, and the timeline length for their impact on the business.
Unprecedented moments are beyond the control of any business, regardless of size or length of time in operations. They still must be accounted for and so must information about how you were able to pivot the company moving forward.
Did you introduce a new product or service during this time to help with the economic slowdown that turned out to be a boom for business?
Make note of this offering and add it to your sales forecast. Investors will be especially interested in learning how you were able to navigate the coronavirus and remain in operations. However unprecedented the time, it shows that your business remained resilient and agile in making a successful pivot.
We hope that these tips will help you when putting together your business plan’s financial projections. Nothing is ever certain in life or in business, but with this guide, you will be able to better protect and move your own small business forward.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.