Overview of Financial Projections
Now that you have an operational plan in place, it is time to develop financial projections for your business. Financial projections present a numerical model of your business. They reveal the entrepreneur’s basic assumptions about business potential and tell about the expectations for the business’ future. Perhaps, most importantly, they help the entrepreneur, lenders, and investors evaluate the business’ potential.
Format for Financial Projections
Unlike the previous, stand-alone business documents discussed in this book, business financial projections have a standard format. The basic portions are as follows:
- Assumptions – Assumptions are individual components of logic that are used to build a projection. They detail the individual assumptions about revenues and costs. For example, the assumptions will state the expected sale price as well as the expected cost per unit of a given raw material. These are the details that you will need to devise the financial statements.
- Income Statement – The income statement provides a projection about the sources and amount of revenue coming into the business, as well as the costs of operation. The income statement has the primary purpose of showing whether a business is profitable or no.
- Cash Flow Statement – The cash flow statement demonstrates the actual flow of cash in and out of the business over a given period. Its primary importance is that it allows for the entrepreneur to adequately plan for the use of cash.
- Projected Balance Sheet – The balance sheet is a snapshot in time of what the business owns and owes.
- Break Even Analysis – The break-even analysis is a simple calculation that demonstrates at what point the business’ revenue will cover its costs.
Other Tips About Financial Projections
- Financial projections should look out 5 years, with 1 year in detail.
- This regards the information that is taken for granted about the business.
- Projections may include various metrics, depending upon the use of the financials.
Learn to Create Financial Projections
The process for creation financial projections is covered in greater detail in the Accounting Resources.