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A financial projection in a business plan is a prediction of your business's future financial performance, including income, expenses and cash flow.Ìý

It can help you with a wide range of decisions, from planning and setting goals to securing future investments and business loans.

Why is it important to include financial projections in your business plan?

The financial forecast is one of the key sections in your business plan.

You can use your projections to work out whether your idea – or even the entire business concept – is financially viable. It should also help you determine what risks you might face and the impact of specific adverse events on your company.

A good financial projection should also help you manage your cash flow and make informed decisions based on how much money is coming into the business and what expenses you are expecting.

Finally, your projections are really important for attracting future funding, whether that’s securing a business loan or attracting investors.Ìý

Financial institutions often want to see your projections before agreeing to lend to you, so they can do a risk assessment and determine whether you are likely to be able to repay what you owe. Equally, your investors need to see the company’s growth projections before committing any funds.

Read more:Ìý

• How to write a business plan

• How to get business funding

• Compare start-up business loans

What you need to include in your financial projections

Your financial projections should include balance sheets, income statements and cash flow statements for the next three to five years. You must base these projections on clear evidence and realistic assumptions. Over-optimistic forecasts or underestimated costs are a red flag to lenders and investors, and could damage your credibility in the long term.Ìý

These are some of the main elements to cover:

• Sales forecast

• Profit and loss statement

• Cash flow statement

• Balance sheet

• Capital expenditure budget

• Break-even analysis

You will probably need to draw on both internal and external data, such as your historical financial statements, current industry trends and estimated financial incomings and outgoings.

If you’re setting up a brand-new company, you need to conduct market research to come up with realistic projections and see what your competitors are charging for goods and services.

You may wish to consider different scenarios when working out your projections. For instance, what happens if sales are lower than expected or if your operating expenses increase? This will show whether your business is viable even if market conditions are tough.

Typically, financial projections cover between two and five years, and you should review them annually, including more up-to-date figures and analysis as you get them.

How to create financial projections for a business plan

Step one: Sales forecast

This is how much money you think you will earn from sales of your products or services. You should break your sales down by month for the first year, then annually for the following two to five years. If your company is up and running, you can use your immediate sales history to make these predictions. If the company is new, you should investigate what similar businesses are charging and how much they are selling.

Step two: Profit and loss statement

Sometimes known as an income statement, this document demonstrates how profitable your company will be over a set period. You start with the sales forecast but then include any costs you will incur. This could include office rent, cost of materials, energy bills, employee costs and any sales or marketing expenses you might have. You can use your revenue projections and your expenses to work out what your profits and losses (or net income) will be.

Step three: Cash flow statement

A cash flow statement details how money will flow in and out of a business over a specific period. It helps you show that the business will have enough liquidity by comparing when you expect clients to pay their invoices to when you need to spend money, for instance, to pay bills, salaries and creditors.Ìý

Many businesses struggle with uneven cash flow, especially in the early stages, because they need to pay bills immediately regardless of whether the cash they need has come in or not. Clients or customers who do not pay invoices on time can leave you struggling to pay your expenses unless you have enough liquidity in the business.

Publicly-listed companies and larger companies legally need to produce cash flow statements, but even for small and micro businesses, they are a valuable step in a business plan.

Step four: Balance sheet

This provides a snapshot of your business's financial health at a particular moment in time. It should include:

• All current assets, such as cash, inventory, accounts receivables, and fixed assets, like equipment, vehicles and patentsÌý

• All current liabilities, including rent, wages and accounts payable, and long-term liabilities, like loansÌý

• The owner or shareholders’ equity, which is the business's residual value after subtracting liabilities

Step five: Capital expenditure budget

Capital expenditure is the money you need for large expenses and long-term assets such as property, equipment, land, machinery, furniture, computers or software.

An expense only counts as capital expenditure if you are buying it rather than leasing it. If you rent something, then that is an operating expense instead.

You should list your capital expenditures on your financial projections, which means you need to think about what assets you might need in the future. These plans will impact your balance sheet (if you’ve already made the purchases) and your cash flow statement.Ìý

Step six: Break-even analysis

Your break-even analysis should use all the information in steps one to five to show when your company will be able to cover all its expenses and start making a profit.Ìý

If you’re starting a new business, this shows you how much start-up capital you will need, and if you’re looking for investment, it tells your potential investors when the business might start making money.

ÌýIt can also help you decide how much you need to charge for your products or services, and when you might make enough money to draw a salary you can live on.