Financial projections are a key component of informed decision-making, providing startups and small businesses with a financial roadmap to help businesses set realistic goals and achieve them as they grow. This article discusses the key components of financial projections and best practices for creating them.

What Are Financial Projections?

Financial projections are estimates of a company’s future financial performance, based on historical data, assumptions about future conditions and events, and “what if?” financial modelling. Typically, financial projections anticipate revenues, expenses, and cash flow. Company leaders can use these figures to make informed business decisions and demonstrate anticipated financial performance to potential investors, loan providers, or acquiring companies.

A core part of the financial planning and analysis (FP&A) process, financial projections may include a number of specific financial estimates, including:

  • Balance sheet projections, which project the company’s financial position, including assets and liabilities, at a designated date in the future.
  • Cash flow projections, which forecast the inflows and outflows of cash over a period of time, highlighting cash generation capabilities.
  • Revenue projections, which predict future sales revenues.
  • Profit and loss (P&L) projections, which predict net income by taking predicted revenues and subtracting predicted expenses.

Importance of Financial Projections

Financial projections are important in helping businesses work out how much inventory or raw materials to order for a given period of time, how much they can borrow to support future sales, and whether they should adjust their headcount to align with business needs at a given point in time.

For small businesses and startups, providing financial projections are also necessary to secure investments or to establish the value of the business in order to sell it. In these scenarios, financial projections represent a pro forma statement, such as projected cash flow statements or income statements, that are hypothetical versions of standard financial statements that show a company’s expected performance.

The information provided by financial projections are important for a range of key startup and small business objectives, including:

  • Business expansion: Financial projections provide the information needed to help determine if and when a business is likely to have the funds to invest in expansion through new locations, new markets, or new products and services.
  • Securing funding: Financial projections give businesses the numerical support they need to attract investors because they demonstrate the potential and viability of the business over time.
  • Preparing for a sale: For many startup founders, the medium-term goal is to sell the business to a larger company or to go public. Financial projections give potential buyers and public markets insight into the company’s business value and growth potential.
  • Increasing profitability: Small businesses and startups often operate on smaller profit margins than their larger counterparts. By forecasting metrics such as revenues and expenses, financial projections can help businesses identify where efficiencies can be gained and costs reduced.

Distinguishing Financial Projections from Forecasting and Modelling

Financial projections are related to forecasting and modelling, but they’re not strictly the same, nor are they necessarily interchangeable. Financial forecasts estimate future financial outcomes for a business based on current conditions and information from the past.

Financial modelling, on the other hand, explores different future financial scenarios, over both the near and long term, based on “what if?” analyses. Scenario modeling is typically based on Monte Carlo simulations, which model the probability of numerous outcomes occurring given multiple variables. In this way, financial modelling is often a dynamic process, with different outputs depending on the inputs that are used for calculations. Similar to financial projections, financial models can be used to assist in decision-making, factoring in different scenarios under consideration at the organisation or various anticipated business conditions.

Financial projection Provides an estimate of future financial performance based on historical data and assumptions about future conditions.
Financial forecast Showcases where the business is likely headed, given past and current conditions.
Financial modelling Involves mathematical “what if?” representations of growth to analyse how variables affect performance.

Key Components of Financial Projections

Financial projections can consist of several key components, depending on the needs of the business. In most cases, a financial projection will include a sales forecast, an expense budget, a cash flow statement, and a balance sheet, among others.

  • Cash flow statement shows the amount of money expected to move in and out of the business during the period being forecasted. These may be based on previous balance sheets to create realistic estimates.
  • Income projection statement forecasts the company’s expected profit and loss over the period in question. As noted by the Australian Government, the income projection statement includes sales, expenses, and profit.
  • Sales forecast predicts expected sales over a particular period of time. In the case of businesses that sell physical products, the sales forecast might also include metrics such as price per unit sold.
  • Expense budget shows the expected amount it will cost the business to operate over the period covered by the financial projection. This typically includes operating expenses as well as the cost of sales.
  • Balance sheet accounts for the assets and liabilities of the business at a particular point in time. Because the balance represents the difference between the total value of assets and liabilities, it helps to indicate the value of the company.
  • Breakeven projections are an important metric for startups specifically, as they show the point at which the business is likely to break even when the money it is taking in overtakes the money it is spending.

Best Practices for Creating Financial Projections

There are a number of best practices startups and small businesses can follow to create and use accurate financial projections. These include:

  1. Use accurate information. OK, this is an obvious one, but it bears repeating that building useful financial projections require access to accurate past and current financial information. The income statement is often the best place to start, since it provides a reliable snapshot of revenue and expenses.
  2. Make it regular. For small businesses, and especially for startups, it’s a good idea to provide regular financial projections in relatively short intervals, such as every month or quarter during the first year or so of operation. These can be stretched out to annual projections in the years following.] Incomplete historical data is unlikely to result in trustworthy financial projections. This could become a problem if the projections are being used to inform investment decisions or by potential investors in a business.
  3. Process automation. The automation of financial reporting and modelling processes is key to producing reliable financial projections in a timely manner. I For example, Australian technology consultancy Ampion has used automation and event-based notifications built into its NetSuite ERP application to help ensure that its data—including timesheets, invoicing, financials, and more—is properly captured and synchronised. As a result, financial reports that previously took the company weeks to prepare now take less than a day.

Automate Your Financial Projection Processes With NetSuite Planning and Budgeting

NetSuite Planning and Budgeting, part of the NetSuite ERP suite of applications helps businesses automate financial planning and forecasting, run “what-if” scenarios, and produce detailed reports. Built-in AI capabilities can help finance teams easily generate commentary and narratives.

Financial Projection FAQs

How should a startup do revenue projections?

Revenue projections for start-ups can be calculated by first estimating how much the business will sell over the projected period, whether products or services, and multiplying the price per unit by the number of units sold.

How to create a financial forecast for a new business?

For a new business, creating a financial forecast involves estimating revenue, expenses and cashflow without the benefit of historical data. Instead, these estimates may take into account other factors such as industry trends or consumer behaviour.

What is a three-year financial projection?

A three-year financial projection is usually considered a midterm projection, often broken down year by year. A short-term projection is generally a shorter timeframe—a few months or a year or two.