How to Make a Financial Projection

by Grant Houston; Updated September 26, 2017
Financial projections are the most difficult part in developing your business plan and the most important in getting your business funded.

Making financial projections is part art and part science. The science is the research you conduct on your industry based on sales and price expectations obtained from your research. The art attempts to project sales and revenue numbers over a period of three to five years predicated on your assumptions. You will need to develop a sales and revenue projection spreadsheet, income statement, cash flow and use of funds statement, balance sheet, and a profit and loss statement.

Step 1

Purchase financial projection software that incorporates and calculates cost of goods sold, taxes and capital needs. The software will provide a balance sheet, income statement and cash flow statement. Also make certain the software provides various graphs and charts and develops a ratio analysis investors can use for information regarding return on investment and margin analysis.

Step 2

Review all the financial information contained in your business plan. You want to ensure the financial information in the business plan matches your financial projections.

Step 3

Develop your sales and revenue projections. There are a couple of methods to determine sales figures. One way is based on historical data of start-up companies in your sector. The second method is taking the market size and calculating the percentage of the market you anticipate capturing in each year of your three- to five-year projection.

Step 4

Write down all fixed assets such as property, physical plant, equipment and patents that are owned. Put together a list of all current assets that includes cash and cash equivalents, accounts receivable, inventories, equipment (computers/printers) and contracts. Then identify liabilities and shareholder equity.

Step 5

Develop your cash flow statement and use-of-funds spreadsheet. This document will provide a snapshot of the plant, property and equipment you will be buying, operating capital required, labor costs and miscellaneous expenses. The cash flow statement contains information on cash generated from operating, investing and financing activities.

Step 6

Draft your expense spreadsheet. All the research you have compiled will provide you the information you require: data on property taxes, insurance, payroll, payroll taxes, utilities, interest on debt service, salaries, benefits, accounts payable and inventory/raw material costs.

Step 7

Complete a balance sheet from your use-of-funds spreadsheet that lays out plant, property, equipment, furniture and fixtures costs. This document will have numbers that are substantiated by your research of the costs.

Step 8

Complete a profit and loss (P&L) statement. This is the final document you will need. Investors will request a P&L, which is the combination of your other statements. This provides investors a snapshot of the pre-money valuation of the company, which is the basis for the amount of money invested into the project.

Tips

  • Provide a worst- and best-case scenario for the investor. Make certain that you do five revisions on the business plan and triple-check your numbers and assumptions. Do not use a third party to complete your business plan.

Warnings

  • Make certain the financial information you use is verifiable. If you do not have third-party research supporting your financial projections, it will be much more difficult to fund your project.

About the Author

Grant Houston has been writing since 2000, covering various political, business and market events. With a Bachelor of Arts in economics and political science, he has written articles for "Political Economic Review," UmarKit, LLC and Shadow Company. Houston has also authored business plans and consulted with companies on capital acquisition strategies.

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