A financial projection is a forecast of future inflows and outflows for a business. They are used to plan the finances of everything from personal budgets to large corporations. In order to create accurate projections, it is important to make reasonable assumptions about future sales, expenses, and other key factors.
Accountants or other financial experts can create financial projections, but there is no reason why you can’t prepare your own projection models for your budgeting needs.
Why Do I Need Financial Projections?
Financial projections are often used in a business plan to support the feasibility of a new business or expand an existing business. A bank or investor will require the projections to evaluate the expectation that the business owner can pay the loan back or to make a return on their investment.
Financial projections are needed to identify the potential impact of economic changes on the balance sheet, income statement, and cash flow statement. The results can help you monitor balance sheet health, track profitability over time, and develop a strategy for managing your finances better. A company can use historical financial statements to build a model looking into the future.
If you own a business or expect to start one soon, creating financial projections is essential in taking charge of your financial future.
How to Create a Financial Projection Model
There are many different spreadsheets and accounting software programs that can be used to create financial projections, and most of these programs have pre-made templates that you can use. If you’re not comfortable using one of these programs, you can always create a spreadsheet in Microsoft Excel or Google Sheets.
When creating a projection model, you will need to input historical data from the business’s past performance and future key assumptions. The historical data should include the past three years of balance sheets, income statements, and cash flow statements. The future assumptions should consist of projected sales, costs, and other financial factors.
Once you have entered all the data, you can use the built-in formulas to calculate balance sheets, income statements, cash flow statements, and balance sheet changes over time.
Most financial projections look at a three-year time period, though a five-year forecast may be needed for some longer-term projects.
What’s Included in the Financial Projections?
The financial projections will include the projected income and operating expenses from the company’s operations.
For income, you will want to include the cash sales projections by month, accounts receivable sales, and any non-business income such as interest. When creating the sales projections, the assumptions used to get to the figure should be shown, so the person reading the plan can understand where the numbers came from. For example, a restaurant could estimate revenues by estimating the expected number of customers per lunch and dinner, then multiply these with the average check per meal to arrive at weekly or monthly projected sales figures.
When estimating expenses, categorize them into one-time start-up expenses (e.g., pre-opening advertising expenses, incorporation fees) and regular monthly operating expenses such as wages, payroll taxes, advertising, rent, utilities, etc.
Ultimately, financial projections end up with multiple statements – the income statement, cash flow statement, and balance sheet.
The income statement shows how much money (or loss) was made in a specific period. The balance sheet changes throughout the projection are calculated by subtracting the beginning balance from the ending balance.
The cash flow statement shows where money is coming from and going to, along with any other sources or uses of cash during the analyzed period. It can also indicate whether there are positive or negative cash flows beyond the balance sheet.
The balance sheet formula is calculated by taking beginning balance plus ending balance minus any closing entries for the year. The income statement is usually produced on an annual basis. Cash flow statements are often generated monthly or quarterly.
Last, the balance sheet provides information about the current state of the company’s assets, liabilities, and equity. It is essential to balance all three elements at each point in time. The balance sheet formula is calculated by taking beginning balance plus ending balance minus any closing entries for the year.
Financial Projections Examples
To help you get started with your own financial projection, we have created some free financial projection templates that you can download and use. The files are in Microsoft Excel and Google Sheets formats.