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.
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. If planning to raise venture capital, business angel finance or bank loans, check the paper on Raising Finance.
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:
Note: Free-Plan, a comprehensive 150-page Business Plan Guide and Template based on this business plan guide, can be downloaded for free here.
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:
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:
When determining funding needs, consider the following approach:
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:
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:
This table was "pasted in" as picture from Exl-Plan, PlanWare's Excel-based financial planner.
Less detailed projections (quarterly or annual) may suffice for subsequent years as per the next example:
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:
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.
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:
Do a reality check to confirm that ratios are reasonable. For example, the following ratios could be cause for concern:
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:
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?
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. If planning to raise venture capital, business angel finance or bank loans, check the paper on Raising Finance.
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, 2007, 2010, 2013, 2016, 365 running on Windows 95/98/Me/NT/2000/XP/Vista/Win7,8,10. 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.