What is Financial Projection: How to Make Financial Projections for Your Business Plan?

A financial projection is a primary building block for new and existing companies. As a business owner, you should plan for the future or to stay in line. These projections forecast your business cash flows and expenditures balance sheet and income.

Bankers and investors use these projections to know how to repay loans and what you will do when your business grows.

Incorpuk in this blog explains how to create a financial projection plan for your existing or start-up business to thrive.

What is the Financial Projection of your Business Plan?

Financial projection for your business represents a company forecast for its future monetary performance. Established companies use projections based on previous data to illustrate critical metrics. Expenses, profits, revenue, and cash flow are anticipated to evolve.

Many companies generate financial projections covering two to five years, and most review and update these forecasts once a year or more.

Creating financial projections is crucial when crafting a business plan. Accurate forecasts enable business owners to set objectives, manage cash flow, make informed decisions, attract investors and identify areas needing operational enhancement.

What are the uses of Financial Projections?

Business financial projections are vital for several reasons:

1. When starting a business, financial projections will help you plan for your start-up budget, estimate when the company will become profitable and establish benchmarks to achieve financial goals.
2. Having financial projections allows you to set goals and stay focused when already in business.
3. Established and start-up businesses must provide financial projections to demonstrate their growth to lenders and investors when securing external financing.

What Information do you Include in a Financial Projection for your Business?

Before creating the financial projections, you must collect some data. If you are already running a business, you can use three financial statements that you already possess. They include annual income statements, balance sheets and cash flow statements.

For a start-up owner, since you don't have historical data, ensure to do market research. Examine your competitors' pricing strategies, do a market analysis, and look at any available public data that will inform your financial projections. Start conservative estimates and straightforward calculations to help you start, and you can expand your projections with time.

Different financial projections may differ in data details; however, forecasts depend on the following items:

1. Cash flow statement

The cash flow statement indicates the money that flows in and out of a company at a specific time. Cash flows are categorised into three parts:

1. Operating activities: these cash flows are the core of business operations, including cash inflows from goods and services sales and expenses outflows such as salaries, taxes and rent.
2. Financial activities: These cash flows involve financial transactions like obtaining funds from investors through banks, paying debt interest, allotting or repurchasing shares, and dividend payments.
3. Investing activities: are cash flows associated with the purchase or sale of long-term investments, such as physical assets (property) and intangible assets (intellectual property). They also cover bonds, stocks, and other securities sold after holding them for at least a year.

2. Income statement

Projected income statements forecast a business revenue and outlay for a given time.

It is presented as a table with multiple line items for every category. The sales projections may consist of the sales forecast for each product or service, mainly broken down by month. Expenses follow a similar format, listing expected costs by category, including fixed expenses like rent salaries and variable costs (transport and raw materials).

The projected income statements also give you a net income projection calculated as the difference between the revenue and expenses, including interest payments and taxes. This figure forecasts your profits or losses, so this document is mainly called a profit and loss statement.

3. Balance sheet

A balance sheet portrays your business's financial position in a specific time frame. Your balance sheet should include these items:

Assets are tangible items a business possesses currently and in the future, such as equipment, money inventory and accounts receivable. There are also intangible assets such as trademarks, copyrights, intellectual property and patents.

Shareholder equity is determined by subtracting total liabilities from total assets. It shows the cash or capital the business would have left if it paid all its liabilities or liquidated. Business equity refers to the capital invested by the business's owners and members.

This document is also called a balance sheet because assets equals liabilities and shareholder equity.

Steps to Create Financial Projections for a Start-Up

Here are the steps to create financial projections for your business.

1. Project your sales and spending

When developing your business plan, you should list key expenditures and operating costs your business needs to start. You should include recurring expenses such as:

1. Rent
2. Gas
3. Salaries
4. Insurance
5. Raw materials
6. Marketing

Remember to include the one-time purchases like:

1. Website design
2. Machinery
3. Vehicles

Research industry spending to better estimate these costs. Also, develop sales forecasts to project predicted monthly revenues. Conducting a thorough analysis of your potential market will help you generate realistic figures.

2. Develop financial projections

Add your expenses and revenues in the cash flow projection, detailing monthly inflows and expenses in the first months of operations. From there, you can switch to creating quarterly or yearly projections for the second year.

If you want to develop financial projections, use an Excel spreadsheet or any accounting software. Remember, sales don't equal the money in the bank. Record them as cash only when you expect to receive payment, as per industry averages and your team's previous experiences.

You can develop annual projected income statements and balance sheet projections using cash projections.

3. Assess your financial requirements

The financial forecast will help you ensure that your business plan is realistic, identify shortfalls, and determine any financing needs. This document is also essential when developing a case for business loans.

4. Use your financial projection for planning

You can use projections in various cases, such as optimistic and pessimistic. These projections can be vital when forecasting financial impacts on each situation.

They also help you analyse the impacts of diverse strategies for your start-up. What if you sell at a different price? What if you collect bills quickly? What if you have more efficient equipment? Incorporating different options allows you to see how each decision would affect your finances.

5. Plan for contingencies

Always plan for any unexpected event that might disrupt your projections. You can do this by setting aside money just in case. Most business owners keep enough money for 90 days of operation in the bank or credit line.

6. Monitor your projections

Once you start your business operations, compare your financial projections against the actual results and see if you're on track or if you need to adjust. By monitoring, you will learn your business cash flow and identify potential shortfalls early, when they are typically easier to manage.

Creating a Financial Projection for an Existing Business

You can use these steps if your business is already in operation:

1. Determine your projections' purpose and timeframe

Your business projections details may vary based on their purpose. They depend on whether they are for:

1. Internal planning pitching investors
2. Monitoring business performance over time
3. Setting a time frame for monthly, quarterly, yearly, or multiyear dictates the rest of the steps.

2. Collect necessary financial data

You should collect relevant previous financial statements such as cash flow statements, balance sheets and annual income statements.

3. Forecast expenses

Identify business future spending depending on the direct cost of production operating expenses (one-time costs and recurring). Consider anticipated changes in expenses, as these can vary with business growth, market presence, and the introduction of new products.

4. Forecast sales

You should forecast sales for every revenue stream, segmented monthly. These forecasts are determined by market analysis or historical data, and they must account for foreseen or probable shifts in market demand and pricing.

5. Create your financial projections

After forecasting your revenue and expenses, you can add that data to the cash flow statement and cash flow calculator. Using this information, you can see your income statement.

Benefits of Financial Projections

Developing well-outlined financial projections for your start-up or existing company offers numerous advantages. Concentrating on developing and sustaining effective financial forecasting for your business will:

1. Assist you in fine-tuning your price list
2. Help you in making critical financial decisions for the company in future
3. It helps you to strategise for business growth and expansion
4. It helps in identifying vital financing needs in future
5. Show bankers how you will repay your loans
6. Illustrate to investors how you will repay them
7. It helps when strategising the production plan
8. It allows you to keep track of your cash flow in future
9. Financial projection is helpful when planning your expenditures strategically

Incorporate Your Company with Incorpuk Today

At Incorpuk, we will help you file accurate information when you register your company through us. We will help you with incorporation articles, a registered office address, and all you may need to register your company in the UK. Contact our team if you seek any information; we will gladly assist.

Winding Up

Financial projections are a vital part of business. You need them whether you're a start-up or an established company. It is advisable to follow the practices above to ensure you enjoy the full benefits of a comprehensive financial projection.

To make it easier, you can use an accounting software of your choice to help you develop financial forecasting. They can easily generate the reports you need, allowing you to view your business performance. Do you have any questions about how to make financial projections for your business plan? Kindly contact one of our experts here for assistance.