September 8, 2020 Forecasting en_US It is important to have realistic financial projections incorporated into your business plan. Learn how to get a handle on financial projections. Understanding financial projections and forecasting

Understanding financial projections and forecasting

By Megan Sullivan September 8, 2020

In order to get the attention of serious investors, it is important to have realistic financial projections incorporated into your business plan. Projections can be a tricky business as you try to anticipate expenses while trying to predict how quickly your business will grow. With a quick outline and some forethought, though, you can easily get a handle on your business’ financial projections.

What is a financial projection?

In its simplest form, a financial projection is a forecast of future revenues and expenses. Typically the projection will account for internal or historical data and will include a prediction of external market factors.

In general, you will need to develop both short- and mid-term financial projections. A short-term projection accounts for the first year of your business, normally outlined month by month. A mid-term financial projection typically accounts for the coming three years of business, outlined year by year.

Formatting your financial projection

There are many online templates for financial projections that are a good place to start when you are preparing to draft your projections. It is also recommended that you include charts and tables when explaining copious amounts of numerical data; it is a much cleaner and engaging presentation than just paragraphs of numbers and figures.

Key elements of your financial projection

All financial projections should include three types of financial statements:

1. Income Statement

An income statement shows your revenues, expenses and profit for a particular period. If you are developing these projections prior to starting your business, this is where you will want to do the bulk of your forecasting. The key sections of an income statement are:

  • Revenue – This is the money you will earn from whatever goods or services you provide.
  • Expenses – Be sure to account for all of the expenses you will encounter, including direct costs (i.e. materials, equipment rentals, employee wages, your salary, etc.) and general and administrative costs (i.e. accounting and legal fees, advertising, bank charges, insurance, office rent, telecommunications, etc.).
  • Total income – Your revenue minus your expenses, before income taxes.
  • Income taxes
  • Net income – Your total income without income taxes.

2. Cash flow projection

A cash flow projection will demonstrate to a loan officer or investor that you are a good credit risk and can pay back a loan if it’s granted. The three sections of a cash flow projection are:

  • Cash revenues – This is an overview of your estimated sales for a given time period. Be sure that you only account for cash sales you will collect and not credit.
  • Cash disbursements – Look through your ledger and list all of the cash expenditures that you expect to pay that month.
  • Reconciliation of cash revenues to cash disbursements – This one is pretty easy: you just take the amount of cash disbursements 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.

Note: One of the key pitfalls of working on your cash flow projections is being overly optimistic about your revenue.

3. Balance Sheet

This overview will present a picture of your business’ net worth at a particular time. It is a summary of all your business’ financial data in three categories: assets, liabilities and equity.

  • Assets – These are the tangible objects of financial value owned by your company.
  • Liabilities – These are any debts your business owes to a creditor.
  • Equity – The net difference between your organization’s total liabilities minus its total assets.

Note: You will want to be sure that the information contained in the balance sheet is a summary of the information you previously presented in the income statement and cash flow projection. This is the place to triple-check your work – investors and creditors will be looking for any inconsistencies, and that can greatly impact their willingness to extend your company a line of credit.

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

While preparing your financial projections, it’s most important to be as realistic as possible. You don’t want to over- or underestimate the revenue your business will generate. It’s a good idea to have a trusted friend or business partner review your financial projections. Also, be sure to avail yourself of all the online resources available – it’s best to learn from people who have created projections before.

This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. does not warrant that the material contained herein will continue to be accurate nor that it is completely free of errors when published. Readers should verify statements before relying on them.

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Megan Sullivan is a writer with experience in the advertising and digital media space. Read more