10 Steps to Creating Financial Projections in a Business Plan

If I ask you now—“How long can your business stay afloat if sales dip next month?”—how confidently can you answer that?

As a business owner, you can expect questions like this, sooner or later, from your potential investors—and, while instinct and optimism have their place, they aren’t substitutes for solid data.

That’s where business plan financial projections come in—they give you a clear, data-driven outlook on where your business is headed in the future.

When you forecast your business finances—you’ll have an estimate of your business’s future financial position that will help better allocate your resources and plan for contingencies.

In this blog, we’ll break down why financial projections in business plans are so important, what they include, and how you can create one step-by-step for your business.

Components to be included in financial projections

No matter how many years you project, these components should be included in financial projections for a business plan and remain non-negotiable:

Cash flow statement

The cash flow statement indicates your business’s cash inflows and outflows within a given time. It helps potential investors assess your ability to repay loans or manage operational costs.

Here are the details you’ll find in your cash flow statement:

Operating activities: Recognizes the cash that comes in from the core operations of your business—such as salaries, taxes, and rent.

Financial activities: Stems from financial transactions—such as raising funding, obtaining loans, and distributing dividends.

Investing activities: Related to the acquisition or sale of long-term assets—such as physical property and intangible assets like intellectual property.

Income statement

An income statement is a business’s profit and loss statement that summarizes a company’s revenues, expenses, profits, and losses over a fixed period.

It consists of your business’s revenue, expenses, and net income—and helps your potential investors get an idea about how sustainable your financial practices are and how they line up long-term.

Here are the details you’ll find in your income statement:

Operating revenue: Income generated through a company’s primary activities—such as product sales.

Non-operating revenue: Income that’s generated through a company’s secondary and non-core activities—such as interests, and royalty payments.

Cost of sales: Refers to the expenditure incurred by small businesses to earn operating revenue—for example, a car manufacturer when he buys spare parts.

Gross margin: Calculated by subtracting the cost of sales from the operating revenue—a higher gross margin indicates that the business retains more capital for other expenses.

Non-operating expenses: Refer to the expenses unrelated to the primary business operations—but necessary for day-to-day activities.

Earnings before interest, tax, depreciation, and amortization (EBITDA): Derived by subtracting all non-operating expenses—excluding interest, tax, depreciation, and amortization—from the gross margin.

Additional expenses: These include costs like interest payments, income taxes, gains or losses from exceptional item sales, and depreciation or amortization expenses.

Net income/profit: Ultimate indicator of a business’s profitability, calculated by subtracting all expenses, including additional expenses, from the revenue.

Balance sheet

A balance sheet indicates your business’s financial position in a given time frame. It shows your company’s financial position at a glance—including financial statements, from your business’s liabilities, assets, and equity.

Assets represent everything the business owns that holds monetary value, including tangible items like cash, inventory, equipment, and property, as well as intangible assets such as trademarks, patents, and copyrights.

On the other hand, liabilities represent what the business owes to external parties. These can include loans, accounts payable, and bonds, which are further categorized as short-term or long-term obligations.

Finally, equity reflects the owners' stake in the business. It is determined by subtracting liabilities from assets and includes both contributed capital and retained earnings.

Steps for creating financial projections for your business plan

Follow these steps to create accurate financial projections in business plans:

1. Define your purpose

Before you start digging up the data—define your purpose. It’ll help you understand:

Who are you preparing it for?

Identify your audience—are you preparing for investors? Or is it for lenders? While you need to keep the focus on growth potential, scalability, and profitability for investors—you need to highlight cash flow stability or repayment capacity for lenders.

What do you want to achieve?

Are you forecasting to secure funding? Or just want to manage your cash flow? Knowing this will help you shape the focus of your projections.

How far ahead do you want to forecast?

Based on your purpose, your time frame for projections is decided. While short-term goals might require forecasting for a couple of years—long-term goals may need a longer forecast from 3 to 5 years.

2. Gather relevant data

Gather all the current and historical data you have in the repository. Even though most of the projection is assumption—the better data you feed, the more accurate your business predictions will be.

Organize your key financial statements—like income statements, cash flow statements, and balance sheets and sort out the data.

In the income statement, you’ll find financial information including:

• Revenue
• Cost of Goods sold (COGS)
• Operating expenses
• Interests
• Tax, depreciation
• Amortization

In the cash flow statement, you’ll find financial information including:

• Cash from sales
• Payments to suppliers and employees
• Operating expenses (rent, utilities, salaries)
• Taxes and interest paid/received
• Purchases/sales of assets (PPE, real estate)
• Investments bought/sold
• Loans made or repaid
• Proceeds from equity or loans
• Loan repayments
• Dividends paid
• Share buybacks

In the balance sheet, you’ll find financial information including:

• Cash
• Accounts receivable
• Inventory
• Property
• Equipment
• Investments
• Intellectual properties
• Accounts payable
• Short-term loans
• Mortgages
• Bonds
• Long-term loans

3. Decide a time frame for forecasting

It’s up to you to decide how far you want to go in the future—it can be month-to-year or even multi-year financial projections.

Ask yourself these questions to decide the time frame:

What type of goal do you have?

Is your goal short-term or long-term? For example—if you plan to track early performance and cash flow for a new product, short-term forecasts like 1 to 2 years might be apt.

For long-term goals like—securing investments and expanding operations, you’ll need at least a 3 to 5-year forecast.

How predictable is your industry?

Is your industry stable or quite volatile? In fast-paced sectors like technology and eCommerce, where the market frequently changes—shorter forecasts of 1 to 3 years.

Whereas, for stable industries, like retail or manufacturing, longer forecasts of 3 to 5 years are feasible.

What’s the stage of your business?

Is your company a start-up or an established one? A startup often lacks substantial data—which makes long-term projections unreliable. However, short-term forecasts of 1 to 2 years can help startups focus on immediate, actionable data like early sales trends, cash flow, and expenses.

For established businesses, long-term forecasts seem feasible because they have historical data and stable operations—making it easier to predict future performance.

4. Choose the forecasting approach

Now that you have all the data at your fingertips and decided on the time frame—choose a financial forecasting method to project your company’s future revenues.

There are two most-used approaches:

Let's say you run a hair serum company. If you’re an existing business, you can use quantitative forecasting to analyze past trends such as monthly or seasonal patterns, and occasional demands, and make data-driven predictions about future sales volumes.

But if you're a new business, you’ll have to prioritize qualitative forecasting—such as consultations with hair care experts, industry reports, etc.

5. Forecast expenses

Now, it’s time to forecast your expenses.

When you forecast your expenses, you get an estimate of the costs you’ll need to cover to produce goods or services and run the operations smoothly in the future.

Make a list of fixed and variable expenses which includes—administrative, operational, marketing, financial, and more relevant expenses.

While established businesses can categorize expenses by department or product line, considering both fixed costs and variable costs—start-ups can create a detailed breakdown of one-time startup costs.

Let’s take our hair serum example. 

First, start with predictable monthly expenses. Let’s say,

• Rent = $2,000
• Employee salaries = $3,000
• Utilities = $500

Total fixed cost = $5,500 per month

Now, it’s time to factor in your variable expenses. Calculate the cost per hair serum bottle:

• Ingredients = $8 per bottle
• Packaging = $2 per bottle
• Labor = $2 per bottle

Total COGS per bottle = $12

Now, let’s say you have a projected sales volume of 2,000 bottles in Month 1,

So, the production cost will be, $12 x 2,000 = $24,000

Add marketing costs, say $5,000, and shipping costs, say $2,000 to that—and, calculate your total variable costs.

Total variable cost = $31,000 per month

Now, to find your total expense, add up your fixed costs and variable costs.

Fixed Costs + Variable Costs = Total Expense

$5,500 (fixed costs) + $31,000 (variable costs) = $36,500

To prepare for unexpected price hikes, supply chain delays, or other disruptions, add a contingency margin to the total expense, say 10-15%.

$36,500 + 10% = $40,150 is the total monthly expense projection

6. Forecast sales

An accurate sales forecast will help your business—optimize resource allocation, ensure better cash flow management, and plan for growth.

To forecast your sales—start by gathering reliable data for your business. For established businesses, this means looking at historical sales data. While for new businesses, market research and competitor analysis are the only options.

Then choose a sales forecasting method. Though there are many methods to rely on, at the fundamental level—all you need is reliable data and the ability to derive informed references.

Let's take our hair serum example to forecast sales. 

Suppose your income statement shows sales for the past six months:

• Month 1: 800 bottles sold
• Month 6: 1,800 bottles sold

This shows consistent growth of 200 bottles per month. Based on this trend, your predicted sales will continue to grow by 200 bottles monthly.

Now, factor in market trends, let’s say—your last campaign brought you a 25% sales boost in the first month and 15% in the second month.

• Month 7: 1,800 bottles projected + 25% = 2,250 bottles
• Month 8: 2,250 bottles projected + 15% = 2,588 bottles

It’s now time to account for risks—maybe your consistent historical data shows supply chain issues by the end of the year.

Assuming the same, you can factor in potential supply chain issues and delay shipments in Month 9—reducing sales by 400 bottles:

• Month 9: 2,588 bottles - 400 bottles = 2,188 bottles

With operations back to normal, sales will now resume the initial growth trend.

• Month 10: 2,188 bottles + 200 bottles = 2,388 bottles

• Month 11: 2,388 bottles + 200 bottles = 2,588 bottles

In the 12th month, as per your business’ past trends, let’s say sales will increase by 25% during the holiday season:

• Month 12: 2,588 bottles + 25% = 2,875 bottles

This shows your sales forecast for the upcoming six months considering market conditions and risks. Now, you know how many bottles of hair serums you’ll sell.

Pro-tip

While it’s possible to create a sales forecast on your own, relying solely on assumptions or limited data can lead to inaccuracies that impact your business decisions. Experts at Plangrowlab have the tools, industry insights, and analytical skills to refine your projections, accounting for all variables.

Book free consultation

7. Use scenario analysis

We all want to focus on the best - but unfortunately, the worst comes tagging along. And, that’s why it’s always a good idea to stay prepared for your business’s both best-case and worst-case scenarios.

Before you start, determine the factors that can have the biggest impacts on your business’s revenue and expenses. Then, build a financial model for different progressive and aggressive situations.

Let’s say, for the best-case scenario, you can count on conditions like increased sales, reductions in manufacturing costs, and lower overheads.

For the worst-case scenario, you can assume conditions like an increase in customer churn rates, an increase in raw material costs, and a drop in demand.

8. Build a visual report

Instead of wading through rows of spreadsheets, visual reports like graphs, charts, and dashboards make it easy to spot trends and patterns at a glance.

Let's take the hair serum example to help you understand better. For example, maybe your initial forecast showed a steady sale of 1,000 bottles every month. But maybe, after one of the influencer videos went viral, your sales jumped to 1,500 bottles.

A line graph could easily reflect this unexpected spike in sales while a bar chart can compare actual sales numbers to your sales forecast.

Moreover, such visual reports also help to convey updates easily to stakeholders.

9. Create financial statements

Now that you have all your expenses, sales, revenue, and visuals—the next step is to compile this information into key financial statements.

Manually calculating everything is an option, but it can quickly become overwhelming and time-consuming. While AI tools can automate the process, they often rely on assumptions and pre-programmed logic, which may not account for the nuances of your specific business.

Financial forecasting experts, on the other hand, bring in-depth knowledge, industry experience, and the ability to adapt to unique business scenarios, giving your business plan financial projections, the precision and flexibility they need.

10. Track your forecast

Creating your financial forecast is only the beginning—the real value lies in continuously tracking and updating it as your business grows. There are a lot of numbers involved—and if there’s one slight change, the whole forecast might not make sense anymore.

Let's say, your hair serum brand launched with an initial projection of selling 1,000 bottles monthly. Over time, a seasonal spike in demand increases sales to 1,500 bottles, but production costs also rise due to limited supplier availability.

These are constant changes that will continue to happen in your business, and if you do not track them actively, your cash flow could eventually become stretched thin.

Why do you need financial projections in your business plan?

Financial projections give you the roadmap for your company's revenue, expenses, and profitability—but there are more reasons why you should include them in your business plan. Check them out:

• It breaks down your business goals into measurable targets.
• It becomes easier to segregate the budget and allocate resources.
• It provides insights into your funding needs and allocation plans.
• It helps you make important decisions for your business’s future.
• It demonstrates your repayment plans to investors and lenders.

Common mistakes to avoid in financial projections

Here are some of the common mistakes you need to avoid while preparing a business plan financial projections sample:

Don’t overestimate revenue

Overestimating revenue can result in overspending and cash flow issues—try to base your financial forecasts on real numbers and thorough market research.

Don’t overlook hidden costs

Variable and hidden costs can pile up over time and lead to fund shortages. So, always include all your potential costs including one-time, fixed, and even variable.

Don’t neglect cash flow projection

Don’t focus only on profits because a business may look profitable on paper. That’s why detailed monthly cash flow statement projections are required.

Don’t go slim on market research

Don’t ignore market research and base projections only on assumptions because the financial projections used, are only as good as your market research.

Don’t avoid stress-testing your projections

Evaluate how your forecasts stand against adverse business conditions, and create multiple financial projection scenarios to keep your contingency plans ready.

Project your financial future with Plangrowlab

By now, you know almost everything about creating financial projections for business plans from scratch. With the right effort, time, and tools, you can estimate future sales, map out expenses, and compile financial statements. There are even AI tools that can help you streamline the whole process.

But while these options work, they often fall short of providing the accuracy, insight, and adaptability that expert financial consultants bring to the table. Experts can analyze your business’s specific needs, industry trends, and potential risks to create tailored forecasts that align with your goals.

Our experts at Plangrowlab do exactly that. With our financial forecasting service, you can connect the dots between raw data and real-world decisions to present numbers that are both compelling to investors and practical for guiding your growth.