• What is a financial projection?
• Steps to create financial projections
• Key elements of your financial projection
• Best practices for financial projections
• Financial projections made simple
• FAQ

As a business owner, you regularly have to make tough decisions around whether to push for growth, manage cash flow, reduce expenses, or renegotiate supplier terms.

Making the right calls on these business decisions comes down to reliable foresight. Financial projections—built on historical data, scenario planning, and cash flow projections—can help you prepare for what’s ahead, so you can make confident, informed choices.

While they don’t guarantee outcomes, financial projections provide a clear picture of how your business might perform under different scenarios.

Discover what financial projections are, what to include in them, how to create them step by step, and practical tips for making them more accurate—so you can build a financial roadmap that supports smarter decisions.

What is a financial projection?

A financial projection estimates how well your business will do financially in the future. Basically, it’s a calculated guess based on your current financial data and expert market insights. 

For businesses looking to plan ahead, financial projections have multiple uses:

• Allowing you to figure out when to hire employees, grow your business, or reduce expenses
• Assuring lenders and investors that you can pay them back or make money
• Providing your leadership team with a roadmap for the next 12 to 36 months
• Helping you plan how to keep your business profitable when the market shifts. 

Think of these projections as a working model you can adapt when your costs change, demand swings up or down, or you're planning to enter a new market.

Usually, short-term projections cover the first year, month by month. Medium-term projections generally span 3 years and are broken down yearly. These forecasts can help you determine if your decisions today will likely pay off in the future.

Steps to create financial projections

Following these steps isn’t just about crunching numbers—it’s to create financial projections that show where your business is headed and help you prepare for potential challenges down the road.

Most business owners can apply this step-by-step process, but the details for each step may vary depending on your industry.

1. Estimate expenses

First, list your regular expenses, like rent, utilities, payroll, and insurance.  Next, include regular payments like maintenance fees, software subscriptions, or professional services. Then, add one-time or irregular costs, like new equipment, office renovations, and marketing campaigns. To see your costs more clearly and pinpoint where you can save money, split your expenses into fixed costs (those that don't change from month to month, like rent) and variable costs (those that do change monthly, like shipping or raw materials).

2. Build cash flow projections

Cash flow projections reveal when money actually enters and leaves your accounts. They can help you see whether you have enough cash on hand to cover your business expenses when they come due. This is especially important for any business with clients that pay on 60- or 90-day terms—which can create cash flow gaps, even when your sales are strong.

3. Prepare revenue forecasts

Revenue forecasts, unlike cash projections, show whether your sales margins are large enough to keep your business running and growing, offering you a snapshot of your company’s overall profitability. To forecast your revenue, first estimate your future sales. 

Then, factor in your expected expenses to project your profits or, in the worst-case scenario, losses. This way, you can make informed decisions about expanding your business or investing in new opportunities.

4. Draft balance sheet projections

Balance sheet projections show what your assets, debts, and equity will likely look like at a specific point in time. Banks and investors use these numbers to assess your company’s overall financial strength.

• Assets: What your business owns that has value (cash, equipment, inventory).
• Liabilities: What your business owes (loans, accounts payable, other debts).
• Equity: The portion of the business owned outright, showing how much value you’ve built.

Unlike cash flow projections, which track the timing of incoming and outgoing funds, or revenue forecasts, which estimate sales and profitability, balance sheet projections give banks and investors you find a snapshot of your company’s net worth and long-term financial health.

5. Factor in financial needs

After building your projections, ask yourself whether you need more funding to reach your business goals. Do your upcoming projects call for additional personnel, larger facilities, or new equipment? To handle seasonal slowdowns or cover significant upfront expansion costs, will you require additional working capital? 

By identifying these financial needs early, you can investigate financing options, such as business loans, credit lines, or venture capital before the shortfall in funds becomes critical.

6. Mitigate risks

Ask yourself questions like:

• If your biggest client abruptly stops placing orders, what should you do?  
• What happens if the cost of your supplies increases by 15% or more? 

These scenarios can significantly impact your bottom line. But if you’ve already factored in contingency plans into your projections, you’ll be ready to act swiftly and decisively. Including "what if" scenarios, such as finding alternative suppliers or tapping into a line of credit, gives you more options. Instead of scrambling for last-minute solutions, you'll have a clear roadmap to keep your business strong. 

7. Monitor and adjust

You can't just set and forget the financial projections you build. You need to keep tabs on them regularly. Every three months, check your actual results against your projections to see how close your estimates were to the real figures. If there is a big difference, find out why.

•  Were your sales lower than you expected them to be? 
• Were your costs higher than anticipated? 
• Did the market shift lately? 

Use these insights to improve your assumptions and adjust your projections for the future.

Key elements of your financial projection

Every solid financial projection should include three core statements: your income statement, cash flow projection and balance sheet. Each one shows your business from a different angle. Together, they give you a complete view of financial health and resilience.

Income statement

Income statements show revenues, expenses, and profit over a specific period of time. Small and mid-sized businesses often create income statement versions for different scenarios: one for when sales stay the same, another for when they rise, and yet another for when they dip. 

Cash flow statement

Cash flow statements track incoming and outgoing money over a specific period, including operating, investing, and financing activities. This is where you'll see holes in your budget due to late client payments or high seasonal costs. 

Balance sheet

Balance sheets provide a snapshot of your assets, debts, and equity. It helps investors and lenders gauge your financial stability. 

Together, these 3 statements provide a complete picture of where your business is headed and how resilient it might be if conditions change.

Best practices for financial projections

When preparing your financial projections, use realistic assumptions and these tips as a starting point: 

1. Instead of making guesstimates, use past performance, industry benchmarks, and market research to arrive at your numbers. This makes sure that your forecasts are based on facts and can be trusted by banks, investors, and other stakeholders.
2. Create multiple scenarios, like the best, worst, and most likely case, so you can see how your business reacts to changes in sales, costs, or market conditions.
3. Conduct sensitivity analysis, like asking yourself what would happen if your payroll costs rose by 10% or if a major client didn’t pay you on time. These “what ifs” reveal the risks you may face and get you ready to act decisively, rather than reacting under pressure.

Remember, your projections are not set in stone. Updating your forecasts every three months, as conditions change, keeps them relevant. And when you show your numbers to decision-makers like banks or investors, use persuasive, easy-to-understand charts and tables to help them quickly see the strength of your business case. 

Financial forecasting methods

Business owners generally rely on a mix of quantitative and qualitative methods to build their financial projections. 

Quantitative methods draw on historical numbers and patterns to predict future outcomes. Qualitative methods add expert and market insights to fill the gaps where data alone may not be enough. 

Using both quantitative and qualitative data can provide you with a more balanced and realistic view of your business. 

Here are some of the most common methods you can apply to your own projections: 

• Percent of sales: This assumes costs like COGS rise in proportion to your sales (helpful if your costs line up with your revenue).
• Straight line: This projects growth at the same rate as past years. It's easy to do, but it doesn't factor in shocks like supply chain problems.
• Moving average: This uses averages from previous periods to make projections (useful for making short-term sales forecasts).
• Regression analysis: This method looks at relationships between different variables (like how marketing spend impacts sales growth).
• Expert input: The Delphi method or market research can help you when historical data isn't enough.

Tools and templates for financial projections

You don't always need advanced software to make projections. Many small and mid-sized businesses start out with spreadsheets or templates, but when things get more complicated, they switch to accounting software.

Here are some common templates companies use: 

• Templates for short-term planning that show what will happen in the next 12 months.
• Templates for 3- or 5-year projections for planning in the medium and long term.
• Templates for break-even analysis to see when income will start to cover costs. 

With QuickBooks projections, you can pull in real-time data to test different business scenarios—without relying on static spreadsheets. 

Tools like QuickBooks Online Advanced also provide access to real-time financial data that reduces unnecessary manual entry. 

To stay on top of your business expenses, use the QuickBooks Expense Tracker app. It keeps all your expenses in one place, automatically imports transactions from your bank, and organizes receipts with just a snap of your phone—so you can make smarter business decisions and be better prepared at tax time.

Mid-sized business scenarios

Here are some examples of how financial projections might work in different mid-sized business scenarios:

• Hiring staff: If your projections show that your revenue keeps rising but your margins keep shrinking, you might want to delay new hires until your cash flow improves.
• Opening a new location: Balance sheet projections can show whether your equity is strong enough to secure funding.
• Purchasing equipment: Cash flow projections show if major purchases will squeeze liquidity during slow periods.
• Responding to downturns: Worst-case projections help you plan how to cut costs before a crisis hits your business.

Financial projections made simple

At first glance, financial projections may seem hard to grasp. But they're essentially well-structured estimates based on what you already know, like your past revenue and projected expenses. 

The goal here isn't perfection. It's to get a clear snapshot of your business. That clarity is what gives a financial projection meaning. These forecasts show you if your current path is paying off and help you pivot if it isn't. 

Creating and updating your financial projections is much easier with QuickBooks Online Advanced. 

QuickBooks gives you the tools to keep track of your expenses, link your revenues, and generate reports in real time—so your projections are always based on up-to-the-minute information.