How to Make Financial Projections

This is a series of posts setting out how to make financial projections for a business plan. Accordingly this post will act as a general index and be a place to reference all the posts in the series.

Accordingly we have designed the series as an overview to walk you through the process of creating your business plan financial projections using the free template.

Financial Projections Template

When using the template, simply amend the highlighted input elements to suit your purposes, and the template does the rest.

The financial projections template contains a selection of useful financial ratios for comparison purposes, together with revenue, net income, cash balance, and cumulative free cash flow by year in graph form for easy reference.

Outline Task List – How to Make Financial Projections

We have set out below a handy reference task list showing how to make financials for a business plan using the free business plan financial projections template, follow the links for further details and information. If you’re not yet sure whether your business idea is viable, it might be worth carrying out a break even analysis before preparing a full financial business plan.

Income Statements

1. Estimate revenue
2. Calculate or estimate your gross margin.
3. Estimate operating expenses
4. Decide on the depreciation rate
5. Find the interest rate
6. Find the tax rate

In summary the Income Statement shows:

Revenue - Expenses = Net income

Balance sheets

Start Up

1. Estimate start up expenses
2. Estimate start up assets
3. Estimate startup capital (equity)
4. Calculate start up debt finance required

Opening Balance Sheet

1. Enter fixed assets opening balance
2. Enter cash opening balance
3. Enter opening accounts receivable
4. Enter opening inventory
5. Enter opening accounts payable
6. Enter opening other liabilities balance
7. Enter opening debt
8. Enter the opening debt payment term
9. Enter opening capital

Projected Balance Sheets

1. Determine days sales outstanding
2. Determine inventory days
3. Determine days payable outstanding
4. Determine other liabilities days outstanding

To summarize the balance sheet shows:

Assets = Liabilities + Equity

Cash flow Statements

1. Estimate capital expenditure
2. Estimate new debt
3. Enter the new debt payment term
4. Estimate new equity capital

In summary the cash statement shows:

Cash in - Cash out = Cash flow

Financial Model Reality Check

It is important to realize that it is unlikely that the first draft from the financial projections template will be perfect. Consequently review the financial model output and make changes to see how they affect the projections. Repeat the process until the income statements, balance sheets, and cash flow statements represent your proposed business plan activity, and the financial model behaves and responds in the way you expected it to.

How to make Financial Projections Conclusion

When considering how to make financial projections remember that you should include all 3 financial statements, income statement, balance sheet and cash flow statement including details of any financing arrangements. The template will ensure that the projections add up, but its important to understand how the financial statements inter-relate.

In conclusion try to keep the business model and projections simple, remember less is more. Additionally do not over complicate the projections with extra lines or too many scenarios. Provide reasonable projections which you can justify, do not be too aggressive or over-optimistic when preparing them, particularly the revenue projections.

As has been noted the post is one of a series covering the process of how to do financial projections for a business plan to start your business. Consequently this post will act as a general index and be a place to reference all the posts in the series.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.