What are Financial Projections
A forecast of future revenues and expenses for a business, organization, or country. A financial projection
will typically take into account both internal information such as historical income and cost data, and estimates of the development of external market factors, providing estimated figures in addition to projections of the general financial condition of the company in the future.
- Why do financial planning?
Regular planning also helps your company deal with change, both inside and outside the company. By constantly re-evaluating your company's strengths, markets, and competition, you're better able to recognize problems and opportunities. You can react to new developments, rather than simply plugging along.
All projections should be broken out by months for at least one year. If you choose to include additional years, they generally do not need to be any more detailed than by quarters for another year and then annually after that.
Creating financial projections
is an important part of your startup’s business plan. If you’re seeking financing, financial projections
help convince prospective lenders and investors that your business will be profitable by offering them a good return on their investment. If you’re not seeking finance, you may think you don’t need financial projections and can just “wing it.” Big mistake. Financial projections are vital to you, too. First, they enable you to plan and budget for your new business. Second, they serve as a yardstick.
By comparing your actual financial statements to your projections, you’ll be able to see if your business is consistently falling short of your projections or surpassing them. If your projections are falling behind, then you’ll need to make some changes by raising prices, cutting costs, or rethinking your business model. Conversely, if your income surpasses your projections, then you may need to hire employees, expand your facility or seek finance sooner than you expected.
Financial projections include three basic documents that make up a business’s financial statements.
This projects how much money the business will make by projecting income and expenses, such as sales, cost of goods sold, expenses, and capital. For your first year in business, you’ll want to create a monthly income statement. For the second year, quarterly statements will suffice. For the following years, you’ll just need an annual income statement.
The cash flow statement is kind of like a checking account register but goes into more detail on how much money will it show into (income) and out of (expenses) your business. At the end of each period (e.g. monthly, quarterly, annually), you’ll tally it all up to show either a profit or loss.
The balance sheet shows the business overall finances including assets, liabilities, and equity. Typically you will create an annual balance sheet for your financial projections.
Projecting three years in the future should enable you to forecast the break-even point, which is the point at which your business stops operating at a loss and starts to turn a profit. Most startups break even in about 18 months, although that threshold will vary based on your business model and industry.
Along with your financial statements and break-even analysis, include any other documents that explain the assumptions behind your financial projections.