Business Plan Guide: 11. Financial Projections

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Present key financial projections e.g. P&Ls (income statements), cash flows, balance sheets and key ratios.

If break even is expected to occur within a year, make the projections on a monthly basis for the first year and use quarterly thereafter. Otherwise, show monthly projections until the year in which break even (for profitability and cash flow) is anticipated. It is essential that all the financial statements be fully integrated and linked.

Most business plans include projections for either three or five years depending on their size and the amounts and timing of any external funding being sought. In exceptional cases, the financial projections may need to run for as long as twenty years to capture the totality of the business and its funding. In such cases, projections beyond five years are likely to be very speculative and illustrative rather than firm forecasts. Often, these projections would be associated with major investment or infrastructural projects being pursued in a very stable economic environment.

Financial projections must not be prepared in isolation from the rest of the plan. For example, the results of market research should flow into your sales projections which, in turn, should drive the revenue forecasts. Under no circumstances should you do the detailed financial projections and then write a plan to suit. By all means, do some high-level financial planning* at an early stage to get a feel for the basic figures and sensitivities but don't let the plan become a financially-driven document without any strong market basis. For further tips and traps, refer to the white paper on Preparing Financial Projections. Also, review the white papers dealing with Making Cashflow Forecasts and Managing Working Capital.

* You can use the Quik-Plan facility within Exl-Plan, our Excel-based business financial planner, to generate first-cut three/five year projections within minutes. Alternatively, you can try the free Online Financial Planner.

Under no circumstances, do the detailed financial projections and then write a plan to suit. By all means, do some high-level financial planning at an early stage to get a feel for the basic figures and sensitivities but do not let the plan become a financially driven document without any strong market basis. For further tips and traps, refer to the white paper on Preparing Financial Projections.

The presentation of financial projections is covered in five sub-sections as follows:

1. Key Assumptions
2. Income (P&L) Projections
3. Cash Flow Projections
4. Balance Sheet Projections
5. Ratio Analyses
6. Sensitivity Analyses
7. Overall Assessment

Note: Free-Plan, a comprehensive 150-page Business Plan Guide and Template based on this business plan guide, can be downloaded for free here.

Get Help with Financial Projections

	Exl-Plan - Integrated Multi- Year Financial Planner
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11.1. Key Assumptions

Use this section to review and pull together the key assumptions to be used in the financial projections. The following table indicates the diversity of assumption variables that may need to be considered in order to produce projected P&Ls, cash flows and balance sheets for a business.

Relate your assumptions for sales, costs, head count etc. to the detailed plans/schedules outlined in preceding sections. In most cases, it will suffice to refer the reader back to the appropriate subsection. For example:

The key assumptions have been based on the following:

• Sales projections derived in 7.4 Sales Forecasts at 7. Marketing Strategies, Sales Plans & Projections.
• R&D expenditure as described in 8. Technology and R&D.
• Operational plans and expense projections as presented in 9. Operational Plans.
• Funding of $xx (equity) and $xx (loans) will be secure in the first quarter of 20XX as proposed in 12. Funding below.
• and so on ......

Having covered the main assumptions within earlier sections of the plan, you will probably still need to insert a simple table here showing some elements of the projections that have not been mentioned previously. These could include:

• Depreciation rates for different types of fixed assets.
• Interest rates for loans and cash balances.
• Inventory stocking rates for finished goods, materials and bought-in items.
• Sales and value added tax rates for inputs and outputs and payment intervals.
• Credit terms for receivables (debtors) and payables (creditors).
• Anticipated external funding (see below).

When determining funding needs, consider the following approach:

1. Compile projections without any external funding and take note of the peak cash deficit and its timing. The total funding requirement is likely to correspond to this deficit. It should be injected (in one or more rounds) ahead of being required so as to eliminate (or minimize) unacceptable deficits and perhaps to create cash cushions.
2. Analyze the projected financial ratios (debt/equity, interest cover and current asset) to help determine the optimal mix of debt and equity.
3. Plan to finance the "most likely" case, or even "worst" case, rather than for the "best" case as revealed by sensitivity analysis. Whilst the "best" case may show the smallest funding need, it may be unattainable due to the inevitability of some aspect of the double (costs), double (time) and half (revenues) rule.

Having progressively built up tables for sales, costs, expenditure and staffing in earlier sections of the plan, you should now be in a position to develop pro-forma financial projections and to summarize them in the following subsections. Under no circumstances should you simply insert multiple pages of detailed spreadsheet output to cover these items. Instead, summarize the projections as per the suggested subsections and relegate all the detailed assumptions and output reports to appendices or simply retain them as working papers. The sample "pictures" shown in the subsections below are very clear and simple to follow. However, they have been backed up by about a dozen assumption and output reports that could be made available on request.

For help with financial projections, see Exl-Plan.

Place the details relating to assumptions in an Appendix.

11.2. Projected Income (P&L) Projections

Introduce the projected income statements (profit & loss accounts) using a short paragraph or bullet points highlighting the key expected outcomes for sales and income. Use simple tables to summarize the key figures and place all detailed analyses in appendices.

As shown below, simple charts (pasted from a set of Exl-Plan projections) can show trends and patterns very clearly. When presenting financial data in a table or chart, it can be useful to precede it by a short introductory sentence and following it by a short review of its contents. For example:

The following chart shows actual sales and income for Any Company Inc. for 20XX alongside projections for the following five years:

This table was "pasted in" as picture from Exl-Plan, PlanWare's Excel-based financial planner.

It shows that:

• Sales will increase from $380,000 in 20XX to $1.6 million after five years. This represents an average annual growth rate of 33% as explained in 7.4 Sales Forecasts at 7. Marketing Strategies, Sales Plans & Projections
• The net loss of $115,000 reported for 200XX will be transformed into net income before taxes of $123,000 by the fifth year when the net margin on sales is projected to reach 6%.
• The key factor in this improvement will be the widening of gross margins from 29% in 20XX to 39% as discussed in 9.4 Operating Cost Projections at 9. Operational Plans.

More detailed projections can be placed in an appendix for Finance.

11.3. Cashflow Projections

It is usual to give monthly cash flow projections for the first year, or longer, depending on the importance of cash flow and the time needed for the business to become cashflow positive. Use text and bullets to highlight and explain any key values or summarize the trends shown in tables or charts.

Many readers of your plan – bankers, venture capitalists and other investors – will pay far more attention to your cash flow projections than to the income statements. They will seek to establish that the business will not run out of cash before it reaches profitability – more businesses fail for lack of cash than for want of profit.

For more guidance, check the white papers on Making Cashflow Projections and Managing Working Capital. See also the Checklist for Improving Cashflow. A chart is ideal for illustrating monthly cash flows and balances. For example:

The following chart shows cash flows for Any Company Inc. for the initial 12 months covered by this plan:

This table was "pasted in" as picture from Exl-Plan, PlanWare's Excel-based financial planner.

This chart highlights the following cash movements:  

• Cash deficit will rise over the 12 months from $39,000 to $75,000.
• For most months, the underlying cash outflow is projected at about $5,000 per month. Inflows in October and November are related to planned equity injections by existing shareholders as explained in 11.1 Key Assumptions above .
• The outflows in December and January are linked to refurbishment of premises (see 9.3 Capital Expenditure Projections in 9. Operational Plans).

Less detailed projections (quarterly or annual) may suffice for subsequent years as per the next example:

The following table and chart summarizes cash flows and balances for Any Company Inc. for the 5 years commencing 20XX:

 
These items were "pasted in" as pictures from Exl-Plan, PlanWare's Excel-based financial planner.

These indicate the following:

More detailed projections can be placed in an appendix for Finance. For help with financial projections, see Exl-Plan.

11.4. Projected Balance Sheets

When presenting projected balance sheets, you will need to include an opening balance sheet that has been based on audited figures (for last year) or estimated data (for current year). If your business is a pure start-up, its opening balance sheet may contain no values.

 Here is an example of a projected balance sheet table and commentary:

The following table presents summary opening and five-year balance sheets for Any Company Inc.:

This table was "pasted in" as picture from Exl-Plan, PlanWare's Excel-based financial planner.

These summary balance sheets show that:

• Owners' equity will increase from £109,000 to $471,000 over the five years.
• Total assets will increase from $267,000 to $964,000 by January 20XX.
• Any Company Inc. will be solvent throughout the five years.

Note that the projected balance sheets must link back into the projected income statements and cash flow projections*. The owners' equity should reflect the transfers to reserves in 11.2. Income (P&L) Projections above and the cash movements and balances must tie in with the cash flow projections in 11.3. Cashflow Projections above.

* Projections generated using Exl-Plan are fully-integrated. This means that changes to assumptions value are immediately reflected in projected income statements, cash flows, balance sheets and related charts and tables.

11.5. Ratio Analyses

Highlight the key ratios and trends over time. To do this, it is essential that projected income statements, cash flow forecasts and balance sheets are linked and integrated with each other so that ratios can be calculated as the following example shows:

The following ratio analysis is based on the foregoing 5-year projections for Any Company Inc.:

This table was "pasted in" as picture from Exl-Plan, PlanWare's Excel-based financial planner. It is fully-integrated and
linked to cash flow forecasts and projected income statements and to a much more detailed analysis including many additional ratios.

The ratios highlight:

• Income margins rising from 1.4% of sales to 8.3% in 20XX.
• Income to total assets progressively rising from 2.6% to 13.7%.
• Debt declining from 188% of owners' equity in the first year to just 3% in 20XX.
• An improving trend in "per share" items.

Do a reality check to confirm that ratios are reasonable. For example, the following ratios could be cause for concern:

• Net income (profit) before taxes above 15-20% for any year.
• Sales below break even for more than one year.
• Sales/total asset ratio above 3-5 (times) in any year.
• Net debt/equity above 80% in any month or year.
• Current asset ratio below 1 in any month or year.
• Interest cover under 2 in any year.
• Return on total assets above 30% per year.

Compare projected financial ratios with industry norms and justify any significant deviations. For help with financial projections and ratio analyses, see Exl-Plan. For additional guidance, review the white papers dealing with the following:

Preparing Financial Projections

Making Cashflow Forecasts

Managing Working Capital.

11.6. Sensitivity Analyses

Present the key results of a 'what-if' analysis based on "best" and "worst" case scenarios. As a general guide, be conservative even when presenting the "best" case.

When planning scenarios*, take account of possible project start-up delays, sales volume shortfalls, lower price levels and higher costs. For example, what would be the financial outcome (or additional funding requirement) if sales volumes and prices are both 90% of targets but direct and overhead costs are each 110% of planned?

* All versions of Exl-Plan can be used to explore alternative scenarios. The more powerful versions contain facilities for doing 'high-level' sensitivity analyses; creating automatically-generated 'what-if' tables; and dynamically assessing future profitability as shown in the DuPont-type Profitability Planner below.

Indicate break even points and explore the consequences of incrementing volumes, prices and costs (e.g. by 10%, 15%, 20% etc.). Only present high-level summaries - relegate the details to an appendix for Finance or retain them in your working papers.

11.7. Overall Assessment

If the financial projections are complex, use this subsection to review them and to assess their implications. 6-8 bullet points should suffice.

Additional Help

The development of an integrated, error-free, spreadsheet-based financial planner is a difficult and time-consuming task even for experienced accountants and spreadsheet users. Bear in mind that you will not want to spend days developing a computer model when you should be really concentrating on planning your business.

All the charts and tables presented above were copied directly from output reports within Exl-Plan. This financial planner runs with Excel 5, 7, 8, 95, 97, 2000, XP, 2003 or 2007 with Windows 95/98/Me/NT/2000/XP/Vista. Eighteen variants are available to cover different sizes of businesses and accounting formats. Prices range from US$29 to US$289. Check the benefits of using Exl-Plan over building your own spreadsheet-based planner.

Typically, Exl-Plan produces fully-integrated 1-3-5 year financial projections - monthly for the first year, quarterly for second-third, and annual for fourth-fifth. Based on a user's assumptions, it generates an income statement, cash flow, balance sheet, ratios and charts for each period (month, quarter & year). Exl-Plan can be used in conjunction with Free-Plan, a comprehensive 150-page Business Plan Guide and Template based on this business plan guide.

Have a look at a trial version of Exl-Plan for ideas on the range of assumptions to be considered and the layout and contents of its projections. The Quik-Plan facility within Exl-Plan can be used to produce 'first-cut' projections. You can get detailed information about Exl-Plan and access trial version downloads.

There is also a free version called Exl-Plan Free which can be used to produce fully-integrated, high-level, financial projections. It is a useful tool in its own right as well as a great introduction to the more powerful versions of Exl-Plan.

Get Help with Financial Projections

	Exl-Plan - Integrated Multi- Year Financial Planner
	Requires: Excel 5, 7, 8, 95, 97, 2000, XP, 2003 or 2007 with Windows 95/98/Me/NT/2000/XP/Vista. Prices: Free to US$ 289.
	Details  Trial Downloads Buy + Use Now

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