Inside every entrepreneur’s business plan is a glimpse into the startup’s future, beginning with an executive summary and ending with an appendix. Tucked in the middle of the document, typically in between the market analysis and funding request, are the financial projections.
These projections offer an objective look into the startup’s financial forecast for the next three to five years, giving outside investors the chance to see how they can be a part of its growth.
But how are financial projections calculated?
While it is true they do include some estimates (usually for sales and revenue), you shouldn’t just guesstimate what components to include when creating financial projections. From historical financial data to a breakeven analysis, here are five areas to highlight in the financial section of a business plan.
1. Historical and prospective financial data
What do we mean when we say “financial data?” This refers to a trio of statements including income sheets, balance sheets and cash-flow statements for each year the company has been in business. Investors typically request statements from the past three to five years. For established businesses, historical financial data consists of these three statements plus any additional collateral used for a loan.
New startups have to provide the same kind of data, but depending on how long they’ve been in business, the amount will likely be smaller than their reputable counterparts. These statements showcase the startup’s past, present and future by showcasing how it is able to pay bills, the brand’s current value, and how it can continue to earn a profit.
Prospective financial data is the financial forecast for everything the startup plans to do financially in the next three to five years. Again, income statements, balance sheets and cash flow statements are required for new and established businesses, along with capital expenditure budgets. When planning this far ahead, it is recommended that you separate data into monthly and quarterly projection batches. It is also important that projections match up with funding requests.
Since creditors will have an eagle-eye on data for inconsistencies, summarize a realistic growth forecast.
Offer sales and revenue estimates that represent what is happening in the brand now instead of assuming the business will have instant success.
2. Sales forecast
At the end of the day, a business’s growth is measured by its sales. While a sales forecast can’t determine exactly how everything will pan out for the startup, it does offer insight into how to budget and manage expenses for the business. Add a sales forecast spreadsheet into your financial projections with a recommended sales projection over the next three years.
3. Cash-flow statement
As mentioned earlier, this is one of the three statements to include as financial data. Cash-flow statements show physical dollars moving in (revenue) and out (expenses) of the business. Examining cash flow allows for a closer look at how much money is truly coming into the business over a specified period of time.
Without a cash-flow statement, the startup may assume that because it has revenue, it is profitable, even if it really is not.
Established businesses should add in profit and loss statements and balance sheets from previous years to determine what cash flow looks like, while new startups should break down cash flow into 12 months.
4. Breakeven analysis for financial projections
This is that magic moment when your business is able to have its overall revenue cover, and exceed, all of its expenses. Breakeven analysis is calculated using fixed and variable costs and is a necessary inclusion in your financial projections, as it shows investors that business is on the up and up.
5. Analysis of financial information
Briefly include a section with notes on the historical and prospective ratio and trend analysis for all of the startup’s financial statements. Rather than write it out, illustrate the point with graphs, including charts, formulas, tables and spreadsheets for investors to review. These visuals provide a closer look at how well the business is truly operating.
Finally, take the time to add an appendix that includes additional information that might be requested later on, such as your credit history or resume. While this wraps up the key elements to include in your financial projections, Inc.com recommends taking time to revisit this portion of your business plan at least once a month to evaluate how estimated numbers are meeting their reality and adjust future financial projections as needed.
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.