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What Is the Purpose of an Income Statement?
The purpose of the income statement is to show the profitability of a company during a specific period, says accountant Harold Averkamp. Investors use this statement, along with other financial statements, to determine if a business is a good investment.
Income statements contain information about a company’s income and expenses. This information allows a business owner or potential investor to determine a company’s gross profit margin, cost of goods sold, total expenses and net profit. Business experts from Entrepreneur.com say the income statement acts as a scorecard for a company’s financial performance because it reflects a company’s ability to generate cash. Another name for the income statement is the profit and loss statement, according to Averkamp.
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Top 5 Benefits of Using a Project Scope Statement Template
When starting a new project, it is crucial to have a clear understanding of the project scope. A well-defined project scope sets the boundaries and expectations for the project, ensuring that everyone involved is on the same page. Creating a project scope statement can be time-consuming and challenging, but fortunately, there are templates available to simplify the process. In this article, we will explore the top 5 benefits of using a project scope statement template.
Saves Time and Effort
One of the primary advantages of using a project scope statement template is that it saves both time and effort. Instead of starting from scratch and brainstorming all the necessary components of a scope statement, you can simply use an existing template as a starting point. Templates typically include pre-defined sections and prompts for filling in relevant information, making it quicker and easier to create your own project scope statement.
Consistency is key when it comes to any documentation related to projects. By utilizing a project scope statement template, you ensure that all your projects follow a standardized format. This consistency not only helps with organization but also makes it easier for stakeholders to review and understand the scope of each project they are involved in. With consistent templates, there is less room for confusion or misinterpretation.
A well-structured project scope statement template helps provide clarity regarding the objectives, deliverables, timelines, and constraints of the project. It prompts you to define specific goals and outcomes while clearly outlining what is within or outside the scope of the project. This clarity reduces ambiguity among team members and stakeholders by setting realistic expectations from the start.
Effective communication is vital in any successful project management endeavor. By using a standardized template for creating your project scope statements, you facilitate clear communication between team members and stakeholders. The template acts as a common language, ensuring that everyone involved understands the project’s goals, constraints, and deliverables. It also serves as a reference point for discussions, making it easier to address any questions or concerns that arise throughout the project lifecycle.
Improves Project Success Rate
Lastly, utilizing a project scope statement template significantly improves the overall success rate of your projects. With a clear and well-defined scope statement in place, you minimize the risk of scope creep – the tendency for projects to expand beyond their initial boundaries. The template acts as a control mechanism, providing a reference against which you can measure any proposed changes or additions to the project scope. By keeping your projects within the predefined scope, you increase their chances of staying on track and meeting their objectives.
In conclusion, using a project scope statement template offers numerous benefits for any project manager or team embarking on a new endeavor. From saving time and effort to improving communication and ensuring consistency, templates simplify the process of creating clear and concise project scopes. By utilizing these templates effectively, you set yourself up for success by reducing ambiguity and increasing clarity in your project management efforts.
This text was generated using a large language model, and select text has been reviewed and moderated for purposes such as readability.
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Business Plan Financial Projections
- Written By Dave Lavinsky
Financial projections are an important part of your business plan . The projections give investors and lenders an idea of how well your business is likely to do in the future. Financial projections include both income statements and balance sheets.
Financial projections are important for a number of reasons. First, they give investors and lenders an idea of how well your business is likely to do in the future. This can help you secure the funding you need to get your business off the ground. Financial projections also help you track your progress over time. You can use them to make sure your business is on track to meet its goals. Finally, financial projections can help you spot potential problems early on, so you can take corrective action.
What Are Business Plan Financial Projections?
Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes.
Necessary Financial Statements
There are three main financial statements that you will need to include in your business plan financial projections:
Income Statement Projection
The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.
There are a few key items you will need to include in your projection:
- Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
- Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
- Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.
Sample Income Statement
for the period ending December 31, 20XX
Product A Sales $10,000
Product B Sales $15,000
Total Revenue $25,000
Cost of Goods Sold $6,000
Salaries and Wages $8,000
Marketing and Advertising $2,500
Total Expenses $20,000
Net Income $5,000
Cash Flow Statement & Projection
The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.
There are a few key items you will need to include in your cash flow projection:
- The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
- Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
- It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.
Sample Cash Flow Statements
ABC Company Cash Flow Projection
for the Year Ended December 31, 20XX
Cash flows from operating activities:
Cash receipts from customers $ 1,000,000
Cash payments to suppliers and employees $ 600,000
Interest and taxes paid $ 50,000
Net cash provided by operating activities $ 350,000
Cash flows from investing activities:
Purchase of equipment $ 200,000
Sale of investments $ 10,000
Net cash used in investing activities $ 190,000
Cash flows from financing activities:
Proceeds from issuance of debt $ 1,000,000
Repayment of debt $ 50,000
Proceeds from issuance of equity $ 10,000
Net cash provided by financing activities $ 1,060,000
Net increase in cash and cash equivalents $ 1,220,000
Balance Sheet Projection
The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.
A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.
Sample Balance Sheet
ABC Company Balance Sheet Projection
as of December 31, 20XX
Cash and cash equivalents $ 500,000
Accounts receivable $ 200,000
Inventory $ 100,000
Prepaid expenses $ 50,000
Total assets $ 850,000
Liabilities and equity:
Accounts payable $ 300,000
Short-term debt $ 1,000,000
Long-term debt $ 50,000
Total liabilities $ 1,350,000
Common stock $ 100,000
Retained earnings $ (600,000)
Total equity $ (500,000)
Total liabilities and equity $ 850,000
How to Create Financial Projections
Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.
When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.
It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.
Capital Expenditures, Funding, Tax, and Balance Sheet Items
You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.
When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.
It is important to track your company’s capital expenditures over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.
When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.
It is important to track your company’s funding sources over time to ensure that it has a healthy mix of financing options. A healthy balance is necessary for a successful business.
When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.
It is important to track your company’s tax liability over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.
Balance Sheet Items
When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.
It is important to track your company’s debt levels and asset values over time to ensure that they are in line with your projections.
Financial Projection Scenarios
Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.
Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.
Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.
Conduct a ratio analysis
A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.
There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:
- Gross margin ratio
- Operating margin ratio
- Return on assets (ROA)
- Return on equity (ROE)
To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.
Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.
When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.
Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.
One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.
Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.
Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.
Create multi-year financial projections
When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.
It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.
Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.
Business Plan Financial Projections FAQs
What is a business plan financial projection.
A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.
What are annual income statements?
The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.
What are the necessary financial statements?
The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.
How do I create financial projections?
You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.
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Business Plan Outline and Example
- Business Planning
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Financial projections use existing or estimated financial data to forecast your business’s future income and expenses. They often include different scenarios to see how changes to one aspect of your finances (such as higher sales or lower operating expenses) might affect your profitability.
If you need to create financial projections for a startup or existing business, this free, downloadable template includes all the necessary tools.
What Are Financial Projections Used for?
Financial projections are an essential business planning tool for several reasons.
- If you’re starting a business, financial projections help you plan your startup budget, assess when you expect the business to become profitable, and set benchmarks for achieving financial goals.
- If you’re already in business, creating financial projections each year can help you set goals and stay on track.
- When seeking outside financing, startups and existing businesses need financial projections to convince lenders and investors of the business’s growth potential.
What’s Included in Financial Projections?
This financial projections template pulls together several different financial documents, including:
- Startup expenses
- Payroll costs
- Sales forecast
- Operating expenses for the first 3 years of business
- Cash flow statements for the first 3 years of business
- Income statements for the first 3 years of business
- Balance sheet
- Break-even analysis
- Financial ratios
- Cost of goods sold (COGS), and
- Amortization and depreciation for your business.
You can use this template to create the documents from scratch or pull in information from those you’ve already made. The template also includes diagnostic tools to test the numbers in your financial projections and ensure they are within reasonable ranges.
These areas are closely related, so as you work on your financial projections, you’ll find that changes to one element affect the others. You may want to include a best-case and worst-case scenario for all possibilities. Make sure you know the assumptions behind your financial projections and can explain them to others.
Startup business owners often wonder how to create financial projections for a business that doesn’t exist yet. Financial forecasts are continually educated guesses. To make yours as accurate as possible, do your homework and get help. Use the information you unearthed in researching your business plans, such as statistics from industry associations, data from government sources, and financials from similar businesses. An accountant with experience in your industry can help fine-tune your financial projections. So can business advisors such as SCORE mentors.
Once you complete your financial projections, don’t put them away and forget about them. Compare your projections to your financial statements regularly to see how well your business meets your expectations. If your projections turn out to be too optimistic or too pessimistic, make the necessary adjustments to make them more accurate.
*NOTE: The cells with formulas in this workbook are locked. If changes are needed, the unlock code is "1234." Please use caution when unlocking the spreadsheets. If you want to change a formula, we strongly recommend saving a copy of this spreadsheet under a different name before doing so.
We recommend downloading the Financial Projections Template Guide in English or Espanol .
Do you need help creating your financial projections? Take SCORE’s online course on-demand on financial projections or connect with a SCORE mentor online or in your community today.
Simple Steps for Starting Your Business: Financial Projections In this online module, you'll learn the importance of financial planning, how to build your financial model, how to understand financial statements and more.
Business Planning & Financial Statements Template Gallery Download SCORE’s templates to help you plan for a new business startup or grow your existing business.
Why Projected Financial Statements Are Essential to the Future Success of Startups Financial statements are vital to the success of any company but particularly start-ups. SCORE mentor Sarah Hadjhamou shares why they are a big part of growing your start-up.
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
Planning, Startups, Stories
Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: projected profit and loss.
Continuing with my series here on standard business plan financials, all taken from my Lean Business Planning site, the Profit and Loss, also called Income Statement, is probably the most standard of all financial statements. And the projected profit and loss, or projected income (or pro-forma profit and loss or pro-forma income) is also the most standard of the financial projections in a business plan.
- It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
- It then shows Direct Costs (or COGS, or Unit Costs).
- Then Gross Margin, Sales less Direct Costs.
- Then operating expenses.
- Gross margin less operating expenses is gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps , in the previous section.
- Then it shows depreciation, interest expenses, and then taxes…
- Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.
The following illustration shows a simple Projected Profit and Loss for the bicycle store I’ve been using as an example. This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting . But still this is standard.
A lean business plan will normally include sales, costs of sales, and expenses. To take it from there to a more formal projected Profit and Loss is a matter of collecting forecasts from the lean plan. The sales and costs of sales go at the top, then operating expenses. Calculating net profit is simple math.
Keep your assumptions simple. Remember our principle about planning and accounting. Don’t try to calculate interest based on a complex series of debt instruments; just average your interest over the projected debt. Don’t try to do graduated tax rates; use an average tax percentage for a profitable company.
Notice that the Profit and Loss involves only four of the Six Key Financial Terms . While a Profit and Loss Statement or Projected Profit and Loss affects the Balance Sheet because earnings are part of capital, it includes only sales, costs, expenses, and profit.
Hi, In case of bank financing for machineries and working capital, how can it be broken down in to the expense stream? ( capital + interest)
When you spend on assets is not deductible from income, and is therefore not an expense. What you spent to repay the principle of a loan is not deductible, and therefore not an expense. The interest on a loan is deductible, and is an expense.
Excuse me, may I know if the project profit & loss should plan for the first year only or for year 1-3 in business plan of a new company?
Kattie Wan, I recommend for normal cases the projected profit and loss monthly for the first 12 months, and two years annually after that. There are always special cases, though; every business is different.
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Preparing financial projections and monitoring results
Instructions for developing financial planning documents for a business startup or expansion.
“The will to win means nothing without the will to prepare" – Juma Ikangaa, New York City Marathon
The development of realistic financial planning documents for a business is an important process. The following pages provides you with tips, that if followed, will result in the completion of financial forecasts worthy of presentation to lenders, investors, and others. The development of a good financial plan takes a team effort which involves your internal accounting / bookkeeping team, your external accountants, your management team, Alberta government staff, and you as the owner.
By reading through the content below you will receive a high- level understanding of the following:
- The purpose of good financial planning
- The approach to arriving at realistic Start-up or Expansion Costs
- The up-front homework and planning process in developing Key Assumptions for sales, cost of production and general and administration expenses
- The up-front homework and planning process required in developing Key Assumptions for cash flow planning
- An overview and an example of a Balance Sheet and Income Statement
- The importance of accurate Cash Flow Planning
- Overview of Key Financial Performance Ratios – purpose and formulas
- Comments on suggestions for monitoring the financial plan developed
Tip: Remember it takes time, good research and a great team effort to achieve a realistic financial plan on which good decisions can be made.
Entrepreneurs, start-up companies and existing companies will utilize and require the development of numerous financial documents during the planning and operational stages. Each plays an important role in planning and managing your business. Some may be used in the earliest stages - simply to determine whether or not your proposed or existing business is feasible or sustainable. Others will be used to provide information that will enable you to attract partners, investors or financing capital, while some will monitor and benchmark your business activities on an ongoing basis.
The structure of your business will determine the variation and format of some of the financial documents that you will utilize. The typical business structures are: sole proprietorship, partnerships or corporations. Additional types of business structures may possibly include new generation co-ops or joint ventures. Your financial and/or legal professional will assist you in determining the structure best suited to your business needs.
Critical business decisions need to be made before you invest significant time and capital. It is important to adequately complete market research, hold discussions with possible suppliers and be able to place estimated costs into models that will enable you to more accurately complete feasibility assessments.
The development of your financial documents is an important step in bringing your new start-up business, or new product launch to reality. Once prepared, these financial documents will assist you in attracting investors, satisfying the needs of your lenders, and monitoring your business on an ongoing basis.
Building these documents requires utilizing key assumptions. These key assumptions are the building blocks of information that are collected and used to develop your financial and business plans - and to help make critical decisions based on solid information. Key assumptions are critical to all aspects of the financial forecasts – balance sheets, income statements, cash flow, business plans and so on. They include detailed forecasted sales volumes; cost of sales, general administration expenses, and others.
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Tip: It is important to understand that all three financial statements are related and connected indicators of the business' feasibility, risk and profitability. (Balance Sheet, Income Statement, and Cash Flow).
As you prepare your financial documents and business plans, you will need to document and sort the information that is used to create these documents. A spreadsheet (or combination of several spreadsheets) is one of the most effective tools for gathering, compiling and managing this information.
Tip : Linking your spreadsheets to one another and merging the data together will make it much simpler and faster to update your documents.
It is highly recommended that you discuss your business start-up or expansion idea in advance with your financial coach so they can provide you with guidance in the key assumptions they suggest or recommend. They may help you develop detailed spreadsheets, and provide supporting comments.
Tip: The greater the accuracy of the key assumptions / information that is used in the initial planning stages of your business - the greater will be your ability to make good business decisions moving forward. Utilize your suppliers and other business contacts (as needed) to aid you in gathering up-to-date information.
Not all assumptions require a detailed breakdown. Your financial professional will aid you in finding the best spreadsheet tools suited to your needs. Every business is unique and therefore each may require additional or specific information to be collected.
What will it cost to get your business off the ground or implement expansion plans? Begin collecting the data. Talk to potential suppliers for initial pricing of supplies and materials. If you require capital, make some early inquiries to determine anticipated borrowing expenses and terms.
As you collect your information, keep a record of the information you gather. Below is a simple example of a common Start-up/Expansion Capital Worksheet. This example shows some of the basic information that would commonly be used in a start-up business.
Combine and add your own specific information that is right for your business.
Tip: You should use startup cost planning for a start-up company and also when expanding your business or launching a new product line. Customize the spreadsheet for your own purposes.
Tip: The greater the accuracy of the key assumptions/information that is used in the initial planning stages of your business - the greater will be your ability to make good business decisions moving forward. Utilize your suppliers and other business contacts (as needed) to aid you in gathering up-to-date information.
In addition to tracking the total estimated costs of starting up your business, this particular spreadsheet example also allows you to assign the source(s) of the capital required.
Figure 1 . Start-up/Expansion Capital Worksheet
Consider how long it will be before your business will be generating enough revenue to offset expenses.
In this example, most of the monthly expenses have been multiplied by 3. In this case, this ensures the expenses are covered until the business generates sufficient revenue to cover costs.
A spreadsheet can easily accommodate additional lines as required. You may wish to link (merge) them together to quickly make changes and updates.
Missing or underestimating key expenses at this stage could be the difference between success and failure.
Tip: You may come across items which require more in-depth data to be gathered or updating. Colour-coding the spreadsheet entries may help you identify those areas. For example (as shown in the example below) green areas may be used for items that you are very certain of. Yellow shaded areas require some additional information, while red areas may mean you require more extensive updating or critical information to be gathered.
Tip: It is important to have sufficient capital funding for the startup of your business. A startup capital worksheet will help you to calculate how much is needed before you begin to generate income.
Tip: Developing smaller spreadsheets will assist you in recapping the individual costs associated with the project.
Remember: It isn't necessary to utilize a spreadsheet in all cases, as long as you are realistic in your assumptions and you can support them when needed.
Figure 2 . Startup Expenses Worksheet
Key assumptions for planning forecasts.
Similar to startup or expansion costs, you need to investigate and give careful consideration to the development of other key data that would be utilized in the completion of the opening balance sheet, forecasted profit and loss statements and the development of cash flows.
One of the first key assumptions that needs to be addressed in the startup of a new business venture, and or expansion, is the source of equity and or debt. This would be the assumption around the contributions to be made to the business by ownership, whether sole proprietor, partners, or shareholders. Contributions can take the form of cash contributions through share purchase, shareholders/partners loans, and contributions of assets in return for equity. You would be advised to develop a spreadsheet that shows the timing and amount of each contribution and the terms in which they are being made. The spreadsheet should show both contributions and the formation of the business and throughout the planning period.
Key assumptions - cost of production and sales
Production costs need to be forecasted. The production cost is determined by your research and accurate determination of the cost of all inputs that make up all your manufacturing costs. These costs should include all material costs, labour, service and manufacturing overhead requirements that are required in the development of your products.
Prior to forecasting your sales projections and revenue, you need to calculate a realistic cost for your product(s) and break the cost down into a per unit basis. The cost must include all production inputs: raw materials, utilities (power/water etc), packaging, handling expenses and any other items involved in production. Labour costs associated with production should be addressed here as well. Below is an example of a basic worksheet to calculate product cost.
Figure 3. Projected Production Cost Per Unit Worksheet
Tip: Once you calculate the input costs on a per unit basis, you can begin the sales and revenue forecasts. Each individual product that you produce would require its own individual calculations for these per unit costs.
Tip: If you manufacture a product, it is advisable that you include not only your material costs in your cost of sales, but all manufacturing costs such as rent (only equipment rent) utilities and labour - anything that is variable and related to manufacturing your product.
Key assumptions – pricing your product or service
Placing the right selling price on your product or service can be the difference between financial success and failure. In order to price your product or service profitably, you need to take into consideration many factors such as cost of production, your customer, your competitors and how much value the market places on your product.
The cost of production includes both variable and fixed costs. This is a very important step and is the foundation to establishing an accurate price for your product. Do not guess, know your costs and be sure to include all costs.
Price is not the same as value. Value is a perception in your customer's mind. If you have a unique product that the customer needs or wants, they will place a higher value on it. Your price should reflect how much value your customer places on your product. If the product you are producing is commonly available and you have considerable competition customers will place less value on your product and it may be very difficult to establish a market share.
Critical Questions to ask yourself are:
- Do you have a unique product with high consumer value?
- Can you produce your product better or cheaper than all the other suppliers?
- Do you have much competition?
- What is the competition doing to maintain or grow their market share?
- Will people buy your product over the competition and why?
- How much would your customers be willing to pay?
- Is there room for your product in the marketplace?
Answers to these and many other critical questions will require thorough market research and other investigation efforts. Consider consulting a market analyst if you are unsure of your product/service potential.
Once you have established that you have a product worthwhile to market, and you have established a realistic price for your product (a cost price to produce, ship and market, plus a profit margin) you can then determine if the market will support your venture.
Tip : Research into pricing of similar or like products can include the use of your own inquiries into the marketplace, focus groups, trial markets or enlisting the assistance of professionals.
Key assumptions – general and administration expenses
One of the most significant expenses a business will incur is that of salaries (wages and benefits). Create an accurate monthly estimate of your labour costs through each of your planning stages. You will also need to project labour costs in your cash flow summaries, to ensure your business can manage and meet payroll obligations. Below is an example of a labour cost spreadsheet that also estimates the company costs of employee benefits. If you intend to pay bonuses, you would simply add another row or rows as required. It will be critical to outline your assumptions as to the timing of these bonuses as your financial advisor will require this information to manage your cash flow. Bonuses should only be paid out if the company is profitable .
Figure 4 . Wages and Labour Worksheet
A larger version of the Wages and Labour Worksheet (PDF, 12 KB) is available for your review.
Tip: Using a spreadsheet that allows you to easily make quick adjustments throughout the forecasted year and handle changes (such as wage increases, personnel changes and so on), will help you manage and prepare for your cash-flow requirements document.
In this particular spreadsheet example, the jobs have been highlighted in different colours. This is to help assign their associated cost to either overhead costs (fixed) or cost of sales.
Often janitorial and maintenance services will be split between fixed costs and cost of sales.
Tip: You may wish to consider the development of additional spreadsheets to support other general and administration expenses.
Tip : At times you may have special sales, (seasonal highs or lows) that affect your forecasts. It is very important that you include in your key assumptions how you managed to arrive at these various forecasted levels. Maintain a record of your specific assumptions in these areas.
Key assumptions - sales forecast
The preparation of your projected income statement is the planning for the profit of your financial plan. The example below is for a single product, you would need to complete this for each additional product and / or source of revenue.
Figure 5 . Sales Forecast Worksheet
Tip : As you are developing your sales forecast, it is critical that you document and develop a narrative in your business plan that can support your projections including the best estimate of timing of the conversion of sales to cash. The assumption of the timing from invoice to conversion of cash is required by your financial coach. Are these sales projections reasonable? Can they be supported though signed orders, contracts or letters of intent from your customers? Do you have a competitive advantage with your product that fills a consumer need or is at a price better than anything else currently on the market? Can your operation's infrastructure support the volume of sales? Lenders or investors will need evidence that these projections are realistic . Over-estimating your sales forecasts could result in financial disaster.
Key assumptions – cash flow planning
To complete an accurate cash flow forecast it will be critical to make key assumptions around the following:
- The amount and timing of cash equity contributions by the owners
- The amount and timing (advancements) of any loans that will be requested for approval
- The timing and amount of payment for capital acquisitions (ie. land, building and development)
- The terms in which credit will be extended to clients – accounts receivable
- an understanding of the terms to be provided by suppliers – accounts payable
- You will need to obtain amortization tables for all loans applied for. This will provide you with the interest and principal split required for both your income statement and cash flow planning.
- Make an assumption on how the general administration expenses are paid (general administration expenses are paid in the month they are incurred)
Tip: In completing cash flow forecasts for existing businesses, to be accurate, the following additional steps will be required:
- The bank reconciliation for the previous month-end
- Have an aged listing for all outstanding accounts receivable as at previous month-end (you need to be prepared to make an assumption on how/if these accounts will be collected otherwise if uncollectable, they are a bad debt expense)
- Have an aged listing of accounts payable (and the timing of when they will be paid)
- If any loan payments are in arrears, a plan to catch up and make them current
One of the first steps in the cash flow planning for the next year of an existing operation will be to determine when opening accounts receivables will be collected in the next period and when outstanding accounts payable will be paid in the next forecasted period.
Tip: Quite often the development of an initial cash flow statement will initiate a revised cash flow statement that will include the additional financing required to fund the cash flow deficit.
The Balance Sheet
The Balance Sheet is a summary of the assets and liabilities and equity of a business at a specific point of time. In addition it provides a picture of the financial solvency and risk bearing ability of the business.
The Balance Sheet will vary slightly depending on the legal structure of your company whether it is a sole proprietorship, partnership or corporation. This is an example of what a typical balance sheet may look like for a corporate entity (Limited Company). If your business is a sole proprietorship, the equity section of the balance sheet will simply be the difference between the assets and liabilities - there will be no indication of original share capital reflected. If you choose to operate the business as a partnership or corporation, the owners' equity section will reflect the equity breakdown amongst partners depending on their percentage of ownership.
Figure 6 . Project Balance Sheet
A larger version of the Balance Sheet (PDF, 12 KB) is available for your review.
Tip : As mentioned, balance sheets will look different depending on corporate structures.
A Sole Proprietorship will not be showing any share capital. Equity will simply be the difference between assets and liabilities. For Partnerships the equity portion will be shown as per the breakdown amongst the partners. In a corporation, (as per the example on the left) equity will be shown as share capital and retained earnings of the corporation. Shareholders loans can be considered equity, only if they have been postponed in favour of the banks or investors. Postponement means that shareholders cannot withdraw these loans without prior approval.
If you operate as a Sole Proprietorship it is suggested that you keep your assets and liabilities of your business separate from your personal assets and liabilities. Consult with your financial advisor so they may advise you in the best way on how to manage your assets and liabilities.
The Income (Profit and Loss) Statement, commonly referred to as the P&L statement, summarizes the revenue and expenses for a specific time period (one month, one quarter, one year, etc.) The Projected Income Statement is a snapshot of your forecasted sales, cost of sales, and expenses. For existing companies the projected income statement should be for the 12 month period from the end of the latest business yearend and compared to your previous results. Any large differences in line items should be explained in detail.
Figure 7 . Income Statement
A larger version of the Income Statement (PDF, 13 KB) is available for your review.
Tip : There will be no forecast in the income statement for the payment of taxes (for a sole proprietorship) The main difference between a company, partnership and the sole proprietorship is the area of taxes payable and remuneration. Your financial advisor will assist you in how you will reflect this in your forecast(s). For example there may be no salary expense in a sole proprietorship or partnership (they may be shown as withdrawals after profit calculations whereas active shareholders' remuneration for wages and bonuses may be shown as a management expense in the general administration section of the income statement. Depreciation expenses could also be handled differently in a sole proprietorship if these assets are utilized in the generation of revenues not associated to this venture. You are encouraged to engage professional assistance in the creation of these documents. Your advisor will help you complete these forms in accordance with general accepted accounting principles (GAPP).
Tip : If the whole area of financial documents is new to you, you may wonder the difference between the income and cash flow statements. The income statement is your revenue and expenses for a point in time. The revenue is recorded at the point it is earned, not when payment is received and the expense is recorded at the time it is incurred, not paid. The cash flow statement forecasts the assumptions as to when revenues from sales, and other incoming funds are going to be received, and the assumptions on the timing of paying of expenses, capital purchases, and any loan repayments.
Cash flow projections
Once you have made your sales projections based on volume, calculate the cash flow projections by converting your sales volumes into income. In the example below accounts receivable are shown based on cash sales with 30- 60- and 90-day receivables. Deduct outflows from all cash inflows and you will be able to predict your cash flow requirements for each month. If you find yourself in a negative position, it becomes a critical decision whether or not to move forward, with your business unless you can make valid adjustments to either your inflows or outflows through the extension of accounts payable or approved operating lines of credit. These options should only be considered if in future months there will be cash excess to pay down operating loans and or accounts payable.
For a new business, the cash flow forecast can be more important than the forecast of the Income Statement because it details the amount and timing of expected cash inflow and outflows. Usually the levels of profits, particularly during the startup years of a business, will not be sufficient to finance operating cash needs. Moreover, cash inflows do not match the outflows on a short-term basis. The cash flow forecasts will indicate these conditions and if necessary the aforementioned cash flow management strategies may have to be implemented.
Given a level of projected sales, associated expenses and capital expenditure plans over a specific period, the cash flow statement will highlight the need for and the timing of additional financing and show your peak requirements for working capital. You must decide how this additional financing is to be obtained, on what terms and how it is to be repaid.
Figure 8 . Monthly Cash Flow Projection
A larger version of the Monthly Cash Flow Projection (PDF, 18 KB) is available for your review.
Tip: A good cash flow projection should forecast monthly amounts for month end receivables, payables and inventory. This information is often required so that management can calculate their operating loan margin requirements as stipulated by their lender. Forecasting these month end numbers and testing them against margin conditions, in advance, eliminates challenges you may experience with your lender if your unable to meet your conditions at a later date. Being able to test these numbers, allows you to alter your financial projections and take alternative measures.
Tip : The advantage of good upfront homework to arrive at realistic key assumptions will greatly assist your professional advisor, who may utilize existing financial automated spreadsheet planning and analyst tools. You should also be prepared to provide identified "what-if" scenarios (changes to revenues, cost of sales expenses and assumptions impacting cash flow) so that alternative projections could be quickly produced to provide for risk analysis.
Ratios are useful when comparing your company with the competition on financial performance and also when benchmarking the performance of your company. Ratios can measure your company's performance against the performance of other companies. Most ratios will be calculated from information provided by the financial statements. Financial ratios can analyze trends and compare your financial status to other similar companies. They can also be used to monitor your company’s overall financial status. In the table below, many of the common ratios are shown along with the formulas that are used to calculate them.
Figure 9 . Ratio Analysis
A larger version of the Ratio Analysis (PDF, 24 KB) is available for your review.
Liquidity ratios provide information about your company's ability to meet its short term debt. The Current Ratio and Quick Ratio (also known as the acid test) represent assets that can quickly be converted to cash to cover creditor demands.
Asset Turnover Ratios indicate how well you are utilizing your company's assets. Receivable Turnover, Average Collection Period and Inventory Turnover are the main tools to monitor your assets.
Financial Leverage Ratios indicate your financial state and the solvency of your company. They measure your company's ability to manage and use long term debt. The Debt Ratio and Debt-to-Equity (Leverage Ratio) Ratio are used in these calculations.
Profitability Ratios include Gross Profit Margin, Return on Assets and Return on Equity ratios. These ratios primarily are used to indicate your company's ability to generate profits, and return to the shareholders' investments.
Your financial advisor will assist you in these ratio calculations and utilize the ones that best measure your company's financial well-being.
Monitoring your financial plan
If you are new or uncomfortable in working with your financial business plan, work with a financial advisor who can guide you through the processes involved in continually monitoring the financial affairs of your business or business venture.
Keep your information current and review the documents on a regular basis (monthly or more often if needed). Review them with key individuals within your company.
Utilize monthly financial statements as part of your business management process. By reviewing these documents monthly, you will be prepared to make changes if and when necessary, always compare changes between your actual performance and your previously forecasted projection.
Use these documents to make adjustments to your business' financial plan or strategies. Use them to plan new initiatives or new product launches.
A simple checklist such as the one below may help you in your ongoing management practices.
Figure 10 . Monthly Financial Plan Checklist
A larger version of the Monthly Financial Plan Checklist (PDF, 10 KB) is available for your review.
Tip: Create and customize your own monthly checklist that helps you to be in control of the day to day operations. Take immediate action if you find areas that need attention on anything appears to be questionable.
Review these suggested tasks with your financial advisor to see if he or she has other recommendations to add.
Tip: If Key Performance Indicators (KPI) are not being met, an action plan needs to be implemented.
The information provided here provides guidelines and examples from which to begin the development of your own financial documents or business plan. Every company has a unique set of circumstances and due diligence is required on your part to seek out professional guidance in preparation of these important documents. The more you are able to accurately forecast and estimate your expenses, sales volumes and revenues – the more you will be able to make sound business decisions to proceed, stop or alter your business plans moving forward.
As you complete your documents, time will pass and some of the key assumptions in the information will change. Keep this information current; update the most critical assumptions regularly. Maintaining accurate up-to-date financial documents will enable you to have accurate information to present to a lender or potential investor. These documents will provide you with the management tools you need to make sound business decisions at any time.
Tip: Before a business and financial justification can be made to proceed with a start-up business or expansion, the target market must be sharply defined and the product concept and positioning strategy must be confirmed. The benefits to be delivered and the value proposition must also be defined and validated, as well as the physical attributes of the product features, specifications, and performance requirements. All costs of the proposed plans need to be well investigated and key assumptions documented.
It will be important to review the core competencies and determine additional resources and capabilities needed to achieve the financial plan. You need to clearly have a plan for sourcing additional resources, partnering, or outsourcing. Your financial plan is a way to clearly demonstrate the financial costs of that execution strategy. Ensure you have considered everything required to achieve your goals, and planned for their costs in your plans.
A good financial plan developed with the assistance of financial professionals will be invaluable to ensuring good decisions are made.
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Business Plan Financial Projections: How To Create Accurate Targets
- Written by Keith Murphy
- 16 min read
Small businesses and startups have a lot riding on their ability to create effective and accurate financial projections as part of their business plan. Solid financials are a strong enticement for investors, after all, and can help new businesses chart a course that will take them beyond the legendendarily difficult first year and into a productive and profitable future.
But the need for business owners to look ahead in order to secure funding, increase profits, and make intelligent financial decisions doesn’t end when startups become full-fledged businesses—and business plan financial projections aren’t just for startups. Existing businesses can also put them to good use by harvesting insights from their existing financial statements and creating sales projections and other financial forecasts that guide and improve their ongoing business planning.
What Are Business Plan Financial Projections?
Successful companies plan ahead, looking as best they can into the near and distant future to chart a course to growth, innovation, and competitive strength. Financial projections, both as part of an initial business plan and as part of ongoing business planning, use a company’s financial statements to help business owners forecast their upcoming expenses and revenue in a strategically useful way.
Most businesses use two types of financial projections:
- Short-term projections are broken down by month and generally cover the coming 12 months. They provide a guide companies can use to monitor and adjust their financial activity to set and hit targets for the financial year. In the first year, short-term projections will be entirely estimated, but in subsequent years, historical data can be used to help fine-tune them for greater accuracy and strategic utility.
- Long-term projections are focused on the coming three to five years and are generally used to secure investment (both initial and ongoing), provide a strategic roadmap for the company’s growth, or both.
For startups, creating financial projections is part of their initial business plan. Providing financial forecasts banks and potential investors can use to determine the financial viability of a business is key to obtaining financing and investments needed to get the business off the ground.
For existing businesses—for whom an initial business plan has evolved into business planning—financial projections are useful in attracting investors who want to see clear estimates for upcoming revenue, expenses, and potential growth. They’re also helpful in securing loans and lines of credit from financial institutions for the same reason. And even if you’re not trying to get funding or investments, financial projections provide a useful framework for building budgets focused on growth and competitive advantage.
So whether you’re a small business owner, an aspiring tycoon starting a new business, or part of the financial team at a well-established corporation, what matters most is viewing financial projections as a living, breathing reference tool that can help you plan and budget for growth in a realistic way while still setting aspirational goals for your business.
Financial projections, both as part of an initial business plan and as part of ongoing business planning, use a company’s financial statements to help business owners forecast their upcoming expenses and revenue in a strategically useful way.
Financial Projections: Core Components
Whether you’re preparing them as part of your business plan or to enhance your business planning, you’ll need the same financial statements to prepare financial projections: an income statement, a cash-flow statement, and a balance sheet.
- Income statements , sometimes called profit and loss statements , provide detailed information on your company’s revenue and expenses for a given period (e.g., a quarter, year, or multi-year period).
- Cash flow statements provide a comprehensive view of cash flowing into and out of a business. They record all cash flow from operations, investment, and financing activities.
- Balance sheets are used to showcase a company’s assets, liabilities, and owner’s equity for a specific period.
How to Create Financial Projections
The process of creating financial projections is the same whether you’re drafting a business plan or creating forecasts for an existing business. The primary difference is whether you’ll draw on your own research and expertise (a new business or startup business) or use historical data (existing businesses).
Keep in mind that while you’ll create the necessary documents separately, you’ll most likely finish them by consulting each of them as needed. For example, your sales forecast might change once you prepare your cash-flow statement. The best approach is to view each document as both its own piece of the financial projection puzzle and a reference for the others; this will help ensure you can assemble comprehensive and clear financial projections.
1. Start with a Sales Projection
A sales forecast is the first step in creating your income statement. You can start with a one, three, or five-year projection, but keep in mind that, without historical financial data, accuracy may decrease over time. It’s best to start with monthly income statements until you reach your projected break-even , which is the point at which revenue exceeds total operating expenses and you show a profit. Once you hit the break-even, you can transition to annual income statements.
Also, keep in mind factors outside of sales; market conditions, global environmental, political, and health concerns, sourcing challenges (including pricing changes and increased variable costs) and other business disruptors can put the kibosh on your carefully constructed forecasts if you leave them out of your considerations.
Start with a reasonable estimate of the units sold for the forecast period, and multiply them by the price per unit. This value is your total sales for the period.
Next, estimate the total cost of producing these units (i.e., the cost of goods sold , or COGS; sometimes called cost of sales ) by multiplying the per-unit cost by the number of units produced.
Deducting your COGS from your estimated sales yields your gross profit margin.
From the gross margin, subtract expenses such as wages, marketing costs, rent, and other operating expenses. The result is your projected operating income , or net income .
Using these figures, you can create an income statement:
2. Cash Flow Statement
Tracking your estimated cash inflows and outflows from investment and financing, combined with the cash generated by business operations, is the purpose of a cash flow projection .
Investment activities might include, for example, purchasing real estate or investing in research and development outside of daily operations.
Financing activities include cash inflows from investor funding or business loans, as well as cash outflows to repay debts or pay dividends to shareholders.
A reliable and accurate cash flow projection is essential to managing your working capital effectively and ensuring you have all the cash you need to cover your ongoing obligations while still having enough left to invest in growth and innovation or cover emergencies.
Drawing from our income statement, we can create a basic cash flow statement:
3. The Balance Sheet
Providing a “snapshot” of your businesses’ financial performance for a given period of time, the balance sheet contains your company’s assets, liabilities, and owner’s equity.
Assets include inventory, real estate, and capital, while liabilities represent financial obligations and include accounts payable, bank loans, and other debt.
Owner’s equity represents the amount remaining once liabilities have been paid.
Ideally, over time your company’s balance sheet will reflect your growth through a reduction of liabilities and an increase in owner’s equity.
We can complete our triumvirate of financial statements with a basic balance sheet:
Best Practices for Effective Financial Projections
Like a lot of other business processes, financial planning can be complex, time-consuming, and even frustrating if you’re still using manual workflows and paper documents or basic spreadsheet-style applications such as Microsoft Excel. You can get free templates for basic financial projections from the Service Corps of Retired Executives (SCORE), but even templates can only take you so far.
Without a doubt, the best advantage you can give yourself in creating effective and accurate financial projections—whether they’re for the financial section of your business plan or simply part of your ongoing business planning—is to invest in comprehensive procure-to-pay (P2P) software such as Planergy.
In addition to helpful templates, best-in-class P2P software also provides a rich array of real-time data analysis, reporting, and forecasting tools that make it easy to transform historical data (or market research) into accurate forecasts. In addition, artificial intelligence and process automation make it easy to collect, organize, manage and share your data with all internal stakeholders, so everyone has the information they need to create the most useful and complete forecasts and projections possible.
Beyond investing in P2P software, you can also improve the quality and accuracy of your financial projections by:
- Doing your homework. Invest in financial statement analysis and ratio analysis, with a focus not just on your own company, but your industry and the market in general. Learn the current ratios used for liquidity analysis, profitability, and debt and compare them to your own to get a more nuanced and useful understanding of how your company performs internally and within the context of the marketplace.
- Keeping it real. It can be all too easy to get carried away with pie-in-the-sky optimism when forecasting the future of your business. Rose-colored glasses aren’t exclusive to startups and small businesses; over-inflated estimates can hobble even veteran organizations if they don’t practice good data discipline and temper their hopes with practical considerations. Focus on creating realistic, but positive, projections, and you won’t have to worry about investors or lenders glancing askance at your hard work.
- Hoping for the best, but planning for the worst. Run two scenarios when performing your financial projections: the best-case scenario where everything goes perfectly to plan, and a worse-case scenario where Murphy’s Law holds sway. While actual performance will undoubtedly fall somewhere in between the two, having an upper and lower boundary appeals to investors and lenders who are assessing your company’s financial viability.
Financial Projections Help You Reach Your Goals for Growth
From startups to global corporations, every business needs reliable tools for financial forecasting. Take the time to create well-researched, data-driven financial projections, and you’ll be well-equipped to attract investors, secure funding, and chart a course for greater profits, growth, and performance in today’s competitive marketplace.
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Business Plan Income Statement: Everything You Need to Know
Business plan income statement is an important financial document, which shows a company's profitability in a given period of time. 3 min read
Business plan income statement is an important financial document, which shows a company's profitability in a given period of time.
Understanding an Income Statement
An income statement or a profit and loss statement helps to understand a company's sources of revenue and various items of expenses. In other words, it tells you where the money is coming from and where it's going. A glance at the income statement can tell anyone whether the business is profitable. Basically, an income statement lists out various items and amounts of revenue and expenses, with the net profit figure at the bottom.
You might have heard people talking about a company's bottom line. It's the last line in an income statement, which shows you the amount of net profit of a company in a given period of time after meeting all expenses.
This is the “profit” referred to in a profit and loss statement or the letter “P” of “P & L” account. The “loss” or “L” is the figure that appears if the total amount of expenses exceeds the total amount of revenue.
An income statement is probably the most common and standard financial statement. Another similar statement called the projected profit and loss statement is a standard financial projection tool used in business planning.
Breakdown of a Business Plan Income Statement
It's essential to include a projected income statement in your business plan. Whether you are planning for the internal purpose of the company or preparing a financial document to present before your investors, it's important to know whether you expect the business to be profitable over a specific period of time.
You should start a business plan with an executive summary, followed by other standard components. It must include a financial plan section, complete with a projected balance sheet, cash flow, and income statement. In business planning, the word “projected” is often replaced with the word “pro-forma,” but it means the same thing.
An income statement typically includes the following components:
- Direct cost of sales.
- Production expenses.
- Gross margin.
- Operating expenses.
- Marketing expenses.
- Depreciation .
- Utility expenses.
- Insurance premiums.
- Payroll taxes .
- Profit before interest and taxes.
- Interest expenses.
- Net profit.
Sales or Revenue
The top line in your income statement represents revenue from sales. It's the net sales amount remaining after deducting goods returns and sales discounts. All the direct expenses associated with sales will be deducted from this figure.
Direct Costs of Sales
The cost of goods sold includes all the direct costs incurred in making and delivering the products or services that contributed to sales. It does not include office rent, salaries, and other expenses that are not directly connected with sales.
Gross Margin or Gross Profit
Subtracting the direct cost of goods sold from the number of net sales gives you gross margin. This is the profit before considering operating expenses and taxes.
Except for the cost of goods sold, all other expenses necessary to run the business are covered under this head. Rent, utilities, payroll, and marketing costs are examples of operating expenses.
Operating expenses include marketing and administrative expenses like:
- Sales salaries.
- Collateral and promotions.
- Travel, meetings, client meals, etc.
- Office salaries.
Operating income or earnings before interest, taxes, depreciation, and amortization (EBITDA) is the most reliable indicator of a company's profitability.
If the company is making any interest payments on a loan, it should be included under this head.
This is the sum total of all expenses, excluding taxes and interest.
Depreciation and Amortization
These are the expenses incurred on tangible and intangible assets. Since the assets do not lose their utility in a single accounting period, the total cost of assets is spread over their total lifetime. The cost applicable for a single accounting period is deducted from revenue as depreciation.
Net Income Before Taxes
This figure represents total earnings of the business before paying income taxes.
This item represents the amount of income tax paid or owed to the federal, state, and local governments. Some companies allocate an estimated amount of taxes they expect to pay in the future.
Net Income or Net Profit
This is the net profit of the business remaining after paying income taxes. This is the bottom line figure that tells at a glance whether a company is making profits or incurring losses.
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A projected income statement shows profits and losses for a specific future period – the next quarter or the next fiscal year, for instance. It uses the same format as a regular income statement, but guesstimating the future rather than crunching numbers from the past. It's also known as a budgeted income statement.
Penetrate the Mystery
Your projected income statement is important for making business plans and for attracting investors. It has to be as accurate as possible, even though it's about events that haven't happened yet. Strategies for making projections depend on the age of your business and your own experience:
- If you're making projections for an established business, past sales and expenses give you a guide to the future.
- If your company is a startup but you have experience in the industry, use that experience to make your projections.
- If you don't have experience, hire an accountant who does, or extrapolate from the market research you did for your startup.
If your company is new, it's a good idea to make projections for the next three years. The first year's projections should include monthly budgeted income statements. After that you can go quarterly.
Sales and Expenses
To begin making your projections, look at sales. How many customers do you expect over the projection period? How many units sold, or hours of service, if you're providing services? What price are you charging? Project the cost of goods sold as well.
Next, extrapolate your expenses. These include fixed costs such as leasing a vehicle and variable costs such as marketing expenses. You don't have to break everything down item by item; a single item for "office supplies" is probably enough, without detailing price per ream of printer paper.
Drawing up the Statement
Say you're making a projection for the next quarter. Start with the business's projected sales income. Subtract the cost of goods sold to get the gross margin. Subtract other operating expenses to get net operating income, then subtract any interest payments due to get your net income.
Using Your Knowledge
Use the projected income statement to decide whether your plans need changing. Is your projected sales income too low? Then find a way to amp up the income, for example, by moving more units or increasing unit prices.
If the projections show your business running in the red at first, that's not surprising: Lots of businesses start out operating at a loss. However, the losses shouldn't be so deep they'll shut you down. It's a good idea to draw up a projected balance sheet so you can see how much debt you'll be carrying.
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Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs.
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- 1 What Is an Income Projection Statement?
- 2 Budget Forecasting Techniques
- 3 How Do We Calculate the Operating Income for Future Years?
- 4 The Percent-Of-Sales Method of Financial Forecasting
How to Create Financial Projections for Your Business
Written by Dave Lavinsky
As an entrepreneur, you spend months, even years coming up with ideas to start or grow your business. Then you write a business plan and try to convince someone (a co-founder, a banker, or an investor) that your idea is worthy of investment. The most crucial part of convincing them is your financial projections.
By creating financial projections, you have the opportunity to see the potential financial forecasting and impact of your ideas. Your financial projections (also known as your financial model) will help you understand the viability of your thoughts and help potential investors or lenders grasp the potential ROI (return on investment) of funding you.
This article will show you how to make financial projections for a startup business plan or an existing business. You will learn what to include in your financial projections, why they are essential, and how you can create them effectively.
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What are Financial Projections?
Your financial projections will be the most analyzed part of your business plan by investors and/or banks. While never a precise prediction of future performance, an excellent financial model outlines the core assumptions of your business and helps you and others evaluate capital requirements, risks involved, and rewards that successful execution will deliver.
Having a solid framework in place also will help you compare your performance to the financial projections and evaluate how your business is progressing. If your performance is behind your projections, you will have a framework in place to assess the effects of lowering costs, increasing prices, or even reimagining your model. In the happy case that you exceed your business projections, you can use your framework to plan for accelerated growth, new hires, or additional expansion investments.
Hence, the use of financial projections is multi-fold and crucial for the success of any business. Your financial projections should include three core financial statements – the income statement, the cash flow statement, and the balance sheet. The following section explains each statement in detail.
Necessary Financial Statements
The three financial statements are the income statement, the cash flow statement, and the balance sheet. You will learn how to create each one in detail below.
Income Statement Projection
The projected income statement is also referred to as a profit and loss statement and showcases your business’s revenues and expenses for a specific period.
To create an income statement, you first will need to chart out a sales forecast by taking realistic estimates of units sold and multiplying them by price per unit to arrive at a total sales number. Then, estimate the cost of these units and multiply them by the number of units to get the cost of sales. Finally, calculate your gross margin by subtracting the cost of sales from your sales.
Once you have calculated your gross margin, deduct items like wages, rent, marketing costs, and other expenses that you plan to pay to facilitate your business’s operations. The resulting total represents your projected operating income, which is a critical business metric.
Plan to create an income statement monthly until your projected break-even, or the point at which future revenues outpace total expenses, and you reflect operating profit. From there, annual income statements will suffice.
Consider a sample income statement for a retail store below:
Cash Flow Projection
As the name indicates, a cash flow statement shows the cash flowing in and out of your business. The cash flow statement incorporates cash from business operations and includes cash inflows and outflows from investment and financing activities to deliver a holistic cash picture of your company.
Investment activities include purchasing land or equipment or research & development activities that aren’t necessarily part of daily operations. Cash movements due to financing activities include cash flowing in a business through investors and/or banks and cash flowing out due to debt repayment or distributions made to shareholders.
You should total all these three components of a cash flow projection for any specified period to arrive at a total ending cash balance. Constructing solid cash flow projections will ensure you anticipate capital needs to carry the business to a place of sustainable operations.
Below is a simple cash flow statement for the same retail store:
Balance Sheet Projection
A balance sheet shows your company’s assets, liabilities, and owner’s equity for a certain period and provides a snapshot in time of your business performance. Assets include things of value that the business owns, such as inventory, capital, and land. Liabilities, on the other hand, are legally bound commitments like payables for goods or services rendered and debt. Finally, owner’s equity refers to the amount that is remaining once liabilities are paid off. Assets must total – or balance – liabilities and equity.
Your startup financial documents should include annual balance sheets that show the changing balance of assets, liabilities, and equity as the business progresses. Ideally, that progression shows a reduction in liabilities and an increase in equity over time.
While constructing these varied business projections, remember to be flexible. You likely will need to go back and forth between the different financial statements since working on one will necessitate changes to the others.
Below is a simple balance sheet for the retail store:
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Creating Financial Projections
When it comes to financial forecasting, simplicity is key. Your financial projections do not have to be overly sophisticated and complicated to impress, and convoluted projections likely will have the opposite effect on potential investors. Keep your tables and graphs simple and fill them with credible data that inspires confidence in your plan and vision. The below tips will help bolster your financial projections.
Create a List of Assumptions
Your financial projections should be tied to a list of assumptions. For example, one assumption will be the initial monthly cash sales you achieve. Another assumption will be your monthly growth rate. As you can imagine, changing either of these assumptions will significantly impact your financial projections.
As a result, tie your income statement, balance sheet, and cash flow statements to your assumptions. That way, if you change your assumptions, all of your financial projections automatically update.
Below are the key assumptions to include in your financial model:
For EACH essential product or service you offer:
- What is the number of units you expect to sell each month?
- What is your expected monthly sales growth rate?
- What is the average price that you will charge per product or service unit sold?
- How much do you expect to raise your prices each year?
- How much does it cost you to produce or deliver each unit sold?
- How much (if at all) do you expect your direct product costs to grow each year?
For EACH subscription/membership, you offer:
- What is the monthly/quarterly/annual price of your membership?
- How many members do you have now, or how many members do you expect to gain in the first month/quarter/year?
- What is your projected monthly/quarterly/annual growth rate in the number of members?
- What is your projected monthly/quarterly/annual member churn (the percentage of members that will cancel each month/quarter/year)?
- What is the average monthly/quarterly/annual direct cost to serve each member (if applicable)?
- What is your monthly salary? What is the annual growth rate in your salary?
- What is your monthly salary for the rest of your team? What is the expected annual growth rate in your team’s salaries?
- What is your initial monthly marketing expense? What is the expected annual growth rate in your marketing expense?
- What is your initial monthly rent + utility expense? What is the expected annual growth rate in your rent + utility expense?
- What is your initial monthly insurance expense? What is the expected annual growth rate in your insurance expense?
- What is your initial monthly office supplies expense? What is the expected annual growth rate in your office supplies expense?
- What is your initial monthly cost for “other” expenses? What is the expected annual growth rate in your “other” expenses?
Assumptions related to Capital Expenditures, Funding, Tax, and Balance Sheet Items
- How much money do you need for Capital Expenditures in your first year (to buy computers, desks, equipment, space build-out, etc.)?
- How much other funding do you need right now?
- What percent of the funding will be financed by Debt (versus equity)?
- What Corporate Tax Rate would you like to apply to company profits?
- What is your Current Liabilities Turnover (in the number of days)?
- What are your Current Assets, excluding cash (in the number of days)?
- What is your Depreciation rate?
- What is your Amortization number of Years?
- What is the number of years in which your debt (loan) must be paid back?
- What is your Debt Payback interest rate?
Create Two Scenarios
It would be best if you used your assumptions to create two sets of financial projections that exhibit two very different scenarios. One is your best-case scenario, and the other is your worst-case. Investors are usually very interested in how a business plan will play out in both these scenarios, allowing them to better analyze the robustness and potential profitability of a business.
Conduct a Ratio Analysis
Gain an understanding of average industry financial ratios, including operating ratios, profitability ratios, return on investment ratios, and the like. You can then compare your own estimates with these existing ratios to evaluate costs you may have overlooked or find historical financial data to support your projected performance. This ratio analysis helps ensure your financial projections are neither excessively optimistic nor excessively pessimistic.
It is easy to get carried away when dealing with estimates and you end up with very optimistic financial projections that will feel untenable to an objective audience. Investors are quick to notice and question inflated figures. Rather than excite investors, such scenarios will compromise your legitimacy.
Create Multi-Year Financial Projections
The first year of your financial projections should be presented on a granular, monthly basis. For subsequent years, annual projections will suffice. It is advised to have three- or five-year projections ready when you start courting investors. Since your plan needs to be succinct, you can add yearly projections as appendices to your main plan.
You should now know how to create financial projections for your business plan. In addition to creating your full projections as their own document, you will need to insert your financial projections into your plan. In your executive summary, Insert your topline projections, that is, just your sales, gross margins, recurring expenses, EBITDA (earnings before interest, taxes, depreciation, and amortization), and net income). In the financial plan section of your plan, insert your key assumptions and a little more detail than your topline projections. Include your full financial model in the appendix of your plan.
Other Resources for Writing Your Business Plan
- How to Write an Executive Summary
- How to Expertly Write the Company Description in Your Business Plan
- How to Write the Market Analysis Section of a Business Plan
- The Customer Analysis Section of Your Business Plan
- Completing the Competitive Analysis Section of Your Business Plan
- How to Write the Management Team Section of a Business Plan + Examples
- Financial Assumptions and Your Business Plan
- Everything You Need to Know about the Business Plan Appendix
- Business Plan Conclusion: Summary & Recap