What is a financial projection?

How to create financial projections

Key elements of your financial projection

1. Income statement
2. Cash flow projection
3. Balance sheet

How to complete your financial projections

What is a financial projection FAQs

What is a financial projection? If you're a business owner trying to grow your business or get the attention of investors, you'll need to learn the answer to this question.

Financial projections help you predict the economic future of your business. You can use them to determine the sustainability of your business, to allocate resources, and to plan for the future.

Here's everything you need to know about making financial projections for your business. 

What is a financial projection?

Financial projections are an important part of a business plan, helping you forecast future revenues and expenses. Typically, the projection will account for internal or historical data and will include a prediction of external market factors.

It's useful to develop short-term and mid-term financial projections. A short-term projection accounts for the first year of business, normally outlined month by month.

A mid-term projection typically accounts for the coming three years of business, outlined year by year.

How to create financial projections

To create the most useful financial projections, consider these tips:

• Be realistic. Aim to make financial projections that are as realistic as possible. You want to avoid over- or under-estimating your business revenue.
• Include visuals. Include charts and tables in your financial projections to help explain the large amounts of numerical data. This format makes for a cleaner and more engaging presentation of financial information.
• Review and revise. Have a trusted friend or business partner review your financial projections to help catch any potential issues.

Key elements of your financial projection

All financial projections should include three types of financial statements:

1. Income statement

An income statement, also known as a profit and loss document, shows your revenues, expenses, and profit for a particular period. If you're developing projections before you start your business, this is where you'll want to do the bulk of your forecasting.

The key sections of an income statement are:

• Revenue – This is the money you earn from whatever goods or services you provide.
• Expenses – Includes direct costs (such as materials, equipment rentals, employee wages, your salary, etc.) and general and administrative costs (such as accounting and legal fees, advertising, bank charges, insurance, office rent, telecommunications, etc.).
• Total income – Your revenue minus your expenses, before income taxes.
• Net income – Your total income without income taxes. A positive net income indicates you've earned a profit. A negative net income means your business is operating at a loss.  

2. Cash flow projection

A cash flow projection demonstrates to a loan officer or investor that you are a good credit risk and can repay your loan if you get one. The three sections of a cash flow projection are:

• Cash revenues – This is an overview of your estimated sales for a given amount of time. Make sure you only account for cash sales you will collect, not credit.
• Cash payments – Look through your ledger and list all the cash expenditures you expect to pay that month.
• Reconciliation of cash revenues to cash payments – This one is pretty easy — just take the amount of cash payments and subtract it from your total cash revenue. If you have a balance from the previous month, you’ll want to carry this amount over and add it to your cash revenue total.

3. Balance sheet

This overview presents a picture of your business’s net worth at a particular time. It summarizes all your business’s financial data in three categories: assets, liabilities, and equity.

• Assets – These are the tangible objects of financial value owned by your company (such as inventory, computers, office furniture, and real estate).
• Liabilities – These are any debts your business owes to a creditor (such as loans, mortgages, or bank debt).
• Equity – The net difference between your organization’s total liabilities minus its total assets.

You'll want to make sure the information in your balance sheet is a summary of the information you previously presented in the income statement and cash flow projection.

How to complete your financial projections

Now that you have these key elements, you can create your financial projections using online templates to make your first draft. Once you feel more confident, you can create a spreadsheet template of your own.

To complete your financial projections, you’ll want to provide a quick overview and analysis of the information. Think of this overview as an executive summary, providing a concise overview of the figures you’ve presented.

To track financial data and pull the information you need to create financial forecasts for your business, check out QuickBooks Online accounting solutions.