Successful businesses use statistics as part of their daily operations to carry out their business plan objectives.

When creating a business plan, financial projections are a crucial element that can’t be overlooked. They help to provide a detailed roadmap for the economic success of the business by estimating future revenues, expenses, profits, and cash flow.

These estimations are essential for securing funding, setting goals and targets for growth while monitoring the business's financial performance.

But what is a financial projection exactly?

This article covers that question and all the processes you must follow to prepare and use financial statements in a business plan.

A financial projection is a document of your business plan that helps you find future investors and guide your company through a strategic plan.

Financial forecasting helps an organization plan ahead. They can find options with less risk for the short or distant future. The financial projections use the necessary financial statements, such as:

• Cash flow statements

• Income statements

• Profit and loss statements

• Annual income statements

• Historical financial statements

Altogether, they form a singular chart that helps decide the course of action and business plan, whether innovative or competitive.

Stakeholders will use financial statement analysis to understand the current company situation and see how revenues and expenses are going.

When talking about financial projections, there are two types you need to consider.

Short-Term Projections

These are yearly projections expressed in months that you can use to give insights about financial situations in the company that can be fixed within a year. This document requires a balance sheet projection, an expense projection, and an income statement projection to showcase the data correctly.

It can also show more accurate information if you use comparative historical data.

Long-Term Projections

On the other hand, long-term projections for a three to five-year projection. It’s often prepared to show to current and future investors while establishing a long-term business growth roadmap.

Every financial projection needs three financial statements. It doesn’t matter if you plan to boost your business or request a line of credit; you should have them ready.

1. Income statement: They provide information about revenue, profits, and expenses during a specific period. They are also called profit and loss statements.

2. Cash flow statements: They show how much money circulates in your business. The cash flow statement shows cash inflows and cash outflows from investments and financial operations related to your company.

3. Balance sheets: Shows the general state of your business. This includes assets, liabilities, and equity.

Inflows and outflows help you understand where your business needs a better strategy. The cash flow projection also shows investors if your financial goals are achievable.

Every new and existing business needs accurate financial projections to attract investments and apply for lines of credit for further expansion. There are also other reasons like:

• Check projected operating income: This helps potential investors see your expectations and business plans. It doesn’t matter if your operations haven’t started yet.

• Show financial stability: Investors and stakeholders love a projected income statement with historical financial data showing your business's stability. This indicates viability and lower interest rates in business loans.

• Helps to get credit: Financial forecast is mandatory when you want to get a loan. If you want to expand, improve or consolidate your business, show the company’s assets and financial model. Lenders will want to know if they can trust you and your repayment possibilities.

• Discover where you spend more money: If you are a new business, you may have monthly variable costs. Preparing financial projections help you with business planning to determine those expenses and align them with your fixed costs and financial goals. This also allows you to get financial institutions to trust you.

As you can see, existing businesses take financial planning seriously for several reasons.

The business plan is a document to determine the business’s short and long-term goals. It’s a roadmap that managers and business owners established to delimit marketing, financial and operational efforts.

It’s also present during internal and external audits or as proof of stability when looking for new investors. The business plan shows:

• Recurring expenses

• Cash flow projections

• Financial forecasts

• Sales forecasts

• Monthly sales

• Current and past credits (like bank loans)

• Business net income

• Operating expenses

• Promotional expenses

All these help establish direct costs of business operations and ensure there aren’t capital liabilities. A business startup would greatly benefit from creating a Business plan because, in the worst-case scenario, the company couldn’t withstand expenses.

With the business plan, you align your team and ensure financial viability while aiming for achievable goals.

You should include multiple documents in your business plan, such as sales projections, marketing costs, etc. However, there are six main statements that your plan must have:

Sales Forecast

The sales forecast statement helps you project how much your business is expected to sell in the market. This is not an issue for you if you are an existing business. You can use past performances to prepare monthly entries that show what was sold, price points, and the amount.

However, if you’re a new business, you may face issues preparing your first sales forecast. You don’t have real projections and can’t make a report out of guesswork. Instead, you must create realistic estimates based on your market and industry.

To do this, you must deeply understand your business and the niche you’re entering. It’s also important to see trends as opportunities to land sales.

Expenses Budget

All your sales have a cost before adding profits, and it’s accounted for as expenses. You must include this expense budget to show the gross margin between costs and revenue while identifying fixed and variable expenses.

Here are expense examples you can find on your business:

• Rent

• Insurance

• Salaries

• Advertising

• Debts

• Services

• Training

Once you identify your expenses, you can evaluate them to lower fixed costs or optimize them.

Cash Flow Statement

The cash flow statement is easy to undertand: it expresses how much money goes into your business and how much is going out.

This document needs a sales forecast and an expense budget to determine your business’s cash flow. This is because this statement takes into consideration previous sales and operations made by the company that requires money.

So, if you have contractors, you must pay them, which translates to an expense. And if you have lines of credit with certain customers, you probably expect them to pay you in 30, 60, or 90 days. You must account for this and express it in your cash flow statement.

Balance Sheet (Income Statement)

The balance sheet is a general statement showing your business’ assets and liabilities. Balance sheet items are far beyond previous documents' simple sales and expenses.

Here you include all products and services helping you run your business and passives you must pay. For example:

• Equipment

• Accounting software

• Unsold inventory

• Vehicles

• Buildings

• Bank loan

• Secure funding

• Unpaid invoices

• Taxes

Once you stop listing assets and liabilities, you should make a total of liabilities and assets and do a simple subtraction to know the real balance. You can use this document during your fiscal year or audits.

Most businesses use the balance sheet to get realistic numbers about their current situation and determine when they will break even.

Profit And Loss Statement

The profit and loss statement shows your expected benefits compared to all your losses. This document requires historical data, which is why new businesses need help estimating their revenue.

You must consider at least three years and separate them.

Break-Even Projections

The break-even projection is a document that shows when your sales are enough to cover expenses.

This statement needs all the other documents to identify when you start to make profits so you can present it to investors and stakeholders. It’s not expected to happen overnight and will probably take about a year or more.

Still, this is essential to your business plan to support any monetary or expansive request.

When preparing a financial projection for your business plan, you need to consider certain aspects to craft the document you need:

Get Used To Productivity Software

Financial projections and business plans require productivity software to be prepared. Programs like Microsoft Word help you create, edit and share documents while giving the format you establish.

You can use graphs, charts and add external links to improve readability. Your presentation counts for everything. So, if you are a startup business looking to attract investors, you should prepare high-quality documents that include all lenders that need to trust you. That includes:

• The financial section

• Cost assumptions

• Financing activities

• Capital expenditures

• Multi-year financial projections

Prepare Two Financial Scenarios

When attracting investors, you should give them two scenarios according to the business expectations. The first one is the best-case scenario where your company is successful and profitable. You also must include the worst-case scenario where your product or service isn’t attractive to potential customers.

If you give them more options, you could confuse them.

Make a Market Research And Market Analysis

Preparing market research is the best way to know if your products or services are in demand. Angel investors will want to know if their investments are secure and how long it will take for them to recover their money.

A market analysis will determine how hard it is for you to enter the market and your potential growth compared to other businesses already there.

Market research can be overly optimistic and a daunting task at the same time. So, explore multiple opportunities.

If you’re an existing business, you should prepare a market research report to know the current situation of your industry and learn new ways to reach potential customers.

You must take six steps to create a financial projection for your business plan. Let’s break them down:

1. Prepare a balance sheet: Before preparing a business plan, you must create a balance sheet to correctly identify your assets and liabilities. This will also express the resources needed to make your company operate and its costs.

2. Identify cash-flowing operations and prepare a financial projection: With the balance sheet prepared, you can build a cash flow projection. Whether you are a consolidated or new company, make a three-year estimation.

3. Set up achievable goals: Similar businesses to yours prepare goals they can achieve short and long-term. You should do the same throughout a specific period. Objectives must be aligned with growth, expansion, or consolidation.

4. Develop the business plan: Use the goals and statements above to create a business plan with different scenarios. This way, you can foresee daily operations, units sold, and profit throughout the subsequent years while also making other assumptions.

5. Prepare contingencies according to your plan: Every business plan needs contingencies. These are related to price changes, investment activities and payroll checks. You should have other ideas to back up every change.

6. Learn about your business money cycle: Finally, monitor your business development and cash flow cycle. This will help you avoid debt and use your resources wisely.

Whether a small business or a big corporation, you need spreadsheet software to prepare your statements.

Some professionals may suggest Palo Alto software, but this can be expensive if you are barely starting. Fortunately, Microsoft Office 2021 is available. You can use all its program suites to help you develop an excellent business plan that shows:

• Profitability

• Past results

• Owner’s equity

• Rent and payroll checks

• Liquidity analysis

And much more.

Tools like Microsoft Excel provide automation formulas to compare previous years and your statements to identify the projected break-even.

Microsoft Word and PowerPoint will also help you draft top-notch texts and a presentation for your business plan.

To start using these programs, you need to obtain an original Microsoft Office 2021 license from RoyalCDKeys and activate it.

Financial projections are a vital aspect of any well-constructed business plan.

They serve as a blueprint for financial business success and help identify industry challenges and opportunities. It’s also key to set realistic goals for growth and profitability.

Accurately forecasting future revenue, expenses, and cash flow is essential for securing financing, monitoring performance, and making informed business decisions.

It’s important to use realistic and conservative assumptions while also thinking about multiple scenarios when creating financial projections.

Overall, a well-planned and thoughtfully prepared set of financial projections can help ensure a business's long-term success.