The purpose of a five-year business projection is to provide an indication of how a company will perform financially over the next five years. It shows the profit potential of the business, the amount of capital the company needs and the expected cash flow. Creditors typically require this type of information before lending money to a business. The document should feature monthly projections for the first year of the plan and quarterly or yearly projections for years two through five.
Compile background information. The projections you make must be justified with historical financial data or background research. If the business is already established, provide financial performance data from the past three to five years for context. This includes income statements, balance sheets and cash-flow statements for each year that you have been in business, up to five years. If you’re starting a new business, conduct research to back up your financial projections. For instance, reference industry data from trade associations and speak to other people in the industry.
Prepare income statement projections to show the amount of revenue you expect the company to bring in and the expenses it will incur. List all of the company’s sources of income and expenses, and estimate the amount of each item for each monthly, quarterly or annual period throughout the five-year projection period. Add up the income sources and expenses for each respective period. Subtract the expenses from the income to show how much of a profit or a loss the business is expected to incur in that period.
Prepare balance-sheet projections to show how the company’s overall financial position is expected to change over time. List all of the company’s assets, such as cash, inventory and accounts receivable; liabilities, such as accounts payable and accrued expenses; and sources of equity, such as common stock and preferred stock. Calculate the initial value of each asset, liability and source of equity in the first column of the balance sheet. In subsequent columns, show the estimated values of these items during each monthly, quarterly or annual period within the five-year projection period.
Prepare cash-flow projections to show the amount of cash that you expect the company to receive and pay out over time. List each source of incoming and outgoing cash. Estimate the amount of cash to be received and spent on each item during each monthly, quarterly or annual period within the five-year projection period. At the bottom of each column, show the amount of cash that the company is projected to have at the beginning and end of the respective period.
- Hemera Technologies/Photos.com/Getty Images