Financial Projections: An Extensive Financial Forecasting Guide
Writing a solid business plan should be the first step for any business owner looking to create a successful business.
As a small business owner, you will want to get the attention of investors, partners, or potential highly skilled employees. It is therefore important to have a realistic financial forecast incorporated into your business plan.
We’ll break down what a financial projection is and how to utilize them to give your business the best start possible.
Here’s What We’ll Cover:
What Is a Financial Projection?
A financial projection is essentially a set of financial statements. These statements will forecast future revenues and expenses.
Any projection tends to include your cash inflows and outlays, your general income and your balance sheet.
They are perfect for showing bankers and investors how you plan to repay business loans. They also show what you intend to do with your money and how you expect your business to grow.
Most projections are for the first 3-5 years of business, but some include a 10-year forecast too.
Either way, you will need to develop both a short and mid-term projection that is broken down month by month.
As you are just starting out with your business, you won’t be expected to provide exact details. Most financial projections are rough guesses. But they should also be educated guesses based on market trends, research and looking at similar businesses.
It’s incredibly important for financial statements to be realistic. Most investors will be able to spot a fanciful projection from a mile away.
In general, most people would prefer to be given realistic projections, even if they’re not as impressive.
How to Create a Financial Projection
You will be able to find a lot of basic templates for creating a financial projection online.
These are a great place to start, but make sure you personalize yours so it doesn’t look like every other projection out there.
It’s important to showcase not only your sales forecast but also what your business is all about.
It’s also important to make sure that whatever you create is easy to read and understand. Therefore it’s best to keep the formatting as clear as possible and easily digestible.
Here is a breakdown of what most financial projections are made up of:
A standard income statement summarizes your company's revenues and expenses over a given period. This is normally done either quarterly or annually.
The income statement is where you will do the bulk of your forecasting.
On any income statement, you’re likely to find the following:
- Revenue: Your revenue earned through sales.
- Expenses: The amount you’ve spent, including your product costs and your overheads.
- Pre-Tax Earnings: This is your income before you’ve paid tax.
- Net Income: The total revenues minus your total expenses.
Net income is the most important number. If the number is positive then you’re earning a profit, if it’s negative it means your expenses outweigh your revenue and you’re making a loss.
Cash Flow Statement
Your cash flow statement will show any potential investor whether you are a good credit risk. It also shows them if you can successfully pay back any loans you are granted.
You can break a cash flow projection into three parts:
- Cash Revenues: An overview of your calculated cash sales for a given time period.
- Cash Disbursements: Here you would list all of the cash expenditures that you’d expect to pay.
- Net Cash Revenue: Take the cash revenues and minus your cash disbursements.
Your balance sheet will show your business’s net worth at a given point in time. It’s essentially the summary of all of your financial data.
A balance sheet is split up into three different sections:
- Assets: An asset is a tangible object of value that is owned by your company. It could be things like stock or property such as warehouses or offices.
- Liabilities: These are any debts your business owes.
- Equity: Your equity is the summary of your assets minus your liabilities.
Your financial forecast is an important part of your business and business plan.
Even if you aren’t looking for investors, it’s a good idea to create and look over your financial forecasting. They are a great way to keep a track of your business finances and help build a steady cash flow.
Are you looking for more business advice on everything from starting a new business to new business practices?
Then check out our FreshBooks Resource Guide.