Everything that you need to know to start your own business. From business ideas to researching the competition.

Practical and real-world advice on how to run your business — from managing employees to keeping the books

Our best expert advice on how to grow your business — from attracting new customers to keeping existing customers happy and having the capital to do it.

Entrepreneurs and industry leaders share their best advice on how to take your company to the next level.

  • Business Ideas
  • Human Resources
  • Business Financing
  • Growth Studio
  • Ask the Board

Looking for your local chamber?

Interested in partnering with us?

Run » finance, how to create a financial forecast for a startup business plan.

Financial forecasting allows you to measure the progress of your new business by benchmarking performance against anticipated sales and costs.

 A man uses a calculator with a pen and notebook on his desk.

When starting a new business, a financial forecast is an important tool for recruiting investors as well as for budgeting for your first months of operating. A financial forecast is used to predict the cash flow necessary to operate the company day-to-day and cover financial liabilities.

Many lenders and investors ask for a financial forecast as part of a business plan; however, with no sales under your belt, it can be tricky to estimate how much money you will need to cover your expenses. Here’s how to begin creating a financial forecast for a new business.

[Read more: Startup 2021: Business Plan Financials ]

Start with a sales forecast

A sales forecast attempts to predict what your monthly sales will be for up to 18 months after launching your business. Creating a sales forecast without any past results is a little difficult. In this case, many entrepreneurs make their predictions using industry trends, market analysis demonstrating the population of potential customers and consumer trends. A sales forecast shows investors and lenders that you have a solid understanding of your target market and a clear vision of who will buy your product or service.

A sales forecast typically breaks down monthly sales by unit and price point. Beyond year two of being in business, the sales forecast can be shown quarterly, instead of monthly. Most financial lenders and investors like to see a three-year sales forecast as part of your startup business plan.

Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign.

Tim Berry, president and founder of Palo Alto Software

Create an expenses budget

An expenses budget forecasts how much you anticipate spending during the first years of operating. This includes both your overhead costs and operating expenses — any financial spending that you anticipate during the course of running your business.

Most experts recommend breaking down your expenses forecast by fixed and variable costs. Fixed costs are things such as rent and payroll, while variable costs change depending on demand and sales — advertising and promotional expenses, for instance. Breaking down costs into these two categories can help you better budget and improve your profitability.

"Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Tim Berry, president and founder of Palo Alto Software, told Inc . "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such."

Project your break-even point

Together, your expenses budget and sales forecast paints a picture of your profitability. Your break-even projection is the date at which you believe your business will become profitable — when more money is earned than spent. Very few businesses are profitable overnight or even in their first year. Most businesses take two to three years to be profitable, but others take far longer: Tesla , for instance, took 18 years to see its first full-year profit.

Lenders and investors will be interested in your break-even point as a projection of when they can begin to recoup their investment. Likewise, your CFO or operations manager can make better decisions after measuring the company’s results against its forecasts.

[Read more: ​​ Startup 2021: Writing a Business Plan? Here’s How to Do It, Step by Step ]

Develop a cash flow projection

A cash flow statement (or projection, for a new business) shows the flow of dollars moving in and out of the business. This is based on the sales forecast, your balance sheet and other assumptions you’ve used to create your expenses projection.

“If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months,” wrote Inc . The cash flow statement will include projected cash flows from operating, investing and financing your business activities.

Keep in mind that most business plans involve developing specific financial documents: income statements, pro formas and a balance sheet, for instance. These documents may be required by investors or lenders; financial projections can help inform the development of those statements and guide your business as it grows.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Follow us on Instagram for more expert tips & business owners’ stories.

Applications are open for the CO—100! Now is your chance to join an exclusive group of outstanding small businesses. Share your story with us — apply today .

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here .

does business plan include financial forecast

Get recognized. Get rewarded. Get $25K.

Is your small business one of the best in America? Apply for our premier awards program for small businesses, the CO—100, today to get recognized and rewarded. One hundred businesses will be honored and one business will be awarded $25,000.

For more finance tips

Mastering mobile payments: top credit card payment apps for entrepreneurs, what is a secure payment system, what are qr code payments.

By continuing on our website, you agree to our use of cookies for statistical and personalisation purposes. Know More

Welcome to CO—

Designed for business owners, CO— is a site that connects like minds and delivers actionable insights for next-level growth.

U.S. Chamber of Commerce 1615 H Street, NW Washington, DC 20062

Social links

Looking for local chamber, stay in touch.

  • Start free trial

Start selling with Shopify today

Start your free trial with Shopify today—then use these resources to guide you through every step of the process.

does business plan include financial forecast

How To Create Financial Projections for Your Business Plan

Building a financial projection as you write out your business plan can help you forecast how much money your business will bring in.

a white rectangle with yellow line criss-crossing across it: business plan financial projections

Planning for the future, whether it’s with growth in mind or just staying the course, is central to being a business owner. Part of this planning effort is making financial projections of sales, expenses, and—if all goes well—profits.

Even if your business is a startup that has yet to open its doors, you can still make projections. Here’s how to prepare your business plan financial projections, so your company will thrive.

What are business plan financial projections?

Business plan financial projections are a company’s estimates, or forecasts, of its financial performance at some point in the future. For existing businesses, draw on historical data to detail how your company expects metrics like revenue, expenses, profit, and cash flow to change over time.

Companies can create financial projections for any span of time, but typically they’re for between one and five years. Many companies revisit and amend these projections at least annually. 

Creating financial projections is an important part of building a business plan . That’s because realistic estimates help company leaders set business goals, execute financial decisions, manage cash flow , identify areas for operational improvement, seek funding from investors, and more.

What are financial projections used for? 

Financial forecasting serves as a useful tool for key stakeholders, both within and outside of the business. They often are used for:

Business planning

Accurate financial projections can help a company establish growth targets and other goals . They’re also used to determine whether ideas like a new product line are financially feasible. Future financial estimates are helpful tools for business contingency planning, which involves considering the monetary impact of adverse events and worst-case scenarios. They also provide a benchmark: If revenue is falling short of projections, for example, the company may need changes to keep business operations on track.

Projections may reveal potential problems—say, unexpected operating expenses that exceed cash inflows. A negative cash flow projection may suggest the business needs to secure funding through outside investments or bank loans, increase sales, improve margins, or cut costs.

When potential investors consider putting their money into a venture, they want a return on that investment. Business projections are a key tool they will use to make that decision. The projections can figure in establishing the valuation of your business, equity stakes, plans for an exit, and more. Investors may also use your projections to ensure that the business is meeting goals and benchmarks.

Loans or lines of credit 

Lenders rely on financial projections to determine whether to extend a business loan to your company. They’ll want to see historical financial data like cash flow statements, your balance sheet , and other financial statements—but they’ll also look very closely at your multi-year financial projections. Good candidates can receive higher loan amounts with lower interest rates or more flexible payment plans.

Lenders may also use the estimated value of company assets to determine the collateral to secure the loan. Like investors, lenders typically refer to your projections over time to monitor progress and financial health.

What information is included in financial projections for a business?

Before sitting down to create projections, you’ll need to collect some data. Owners of an existing business can leverage three financial statements they likely already have: a balance sheet, an annual income statement , and a cash flow statement .

A new business, however, won’t have this historical data. So market research is crucial: Review competitors’ pricing strategies, scour research reports and market analysis , and scrutinize any other publicly available data that can help inform your projections. Beginning with conservative estimates and simple calculations can help you get started, and you can always add to the projections over time.

One business’s financial projections may be more detailed than another’s, but the forecasts typically rely on and include the following:

True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories:

Income statement

Projected income statements, also known as projected profit and loss statements (P&Ls), forecast the company’s revenue and expenses for a given period.

Generally, this is a table with several line items for each category. Sales projections can include the sales forecast for each individual product or service (many companies break this down by month). Expenses are a similar setup: List your expected costs by category, including recurring expenses such as salaries and rent, as well as variable expenses for raw materials and transportation.

This exercise will also provide you with a net income projection, which is the difference between your revenue and expenses, including any taxes or interest payments. That number is a forecast of your profit or loss, hence why this document is often called a P&L.

Balance sheet

A balance sheet shows a snapshot of your company’s financial position at a specific point in time. Three important elements are included as balance sheet items:

  • Assets. Assets are any tangible item of value that the company currently has on hand or will in the future, like cash, inventory, equipment, and accounts receivable. Intangible assets include copyrights, trademarks, patents and other intellectual property .
  • Liabilities. Liabilities are anything that the company owes, including taxes, wages, accounts payable, dividends, and unearned revenue, such as customer payments for goods you haven’t yet delivered.
  • Shareholder equity. The shareholder equity figure is derived by subtracting total liabilities from total assets. It reflects how much money, or capital, the company would have left over if the business paid all its liabilities at once or liquidated (this figure can be a negative number if liabilities exceed assets). Equity in business is the amount of capital that the owners and any other shareholders have tied up in the company.

They’re called balance sheets because assets always equal liabilities plus shareholder equity. 

5 steps for creating financial projections for your business

  • Identify the purpose and timeframe for your projections
  • Collect relevant historical financial data and market analysis
  • Forecast expenses
  • Forecast sales
  • Build financial projections

The following five steps can help you break down the process of developing financial projections for your company:

1. Identify the purpose and timeframe for your projections

The details of your projections may vary depending on their purpose. Are they for internal planning, pitching investors, or monitoring performance over time? Setting the time frame—monthly, quarterly, annually, or multi-year—will also inform the rest of the steps.

2. Collect relevant historical financial data and market analysis

If available, gather historical financial statements, including balance sheets, cash flow statements, and annual income statements. New companies without this historical data may have to rely on market research, analyst reports, and industry benchmarks—all things that established companies also should use to support their assumptions.

3. Forecast expenses

Identify future spending based on direct costs of producing your goods and services ( cost of goods sold, or COGS) as well as operating expenses, including any recurring and one-time costs. Factor in expected changes in expenses, because this can evolve based on business growth, time in the market, and the launch of new products.

4. Forecast sales

Project sales for each revenue stream, broken down by month. These projections may be based on historical data or market research, and they should account for anticipated or likely changes in market demand and pricing.

5. Build financial projections

Now that you have projected expenses and revenue, you can plug that information into Shopify’s cash flow calculator and cash flow statement template . This information can also be used to forecast your income statement. In turn, these steps inform your calculations on the balance sheet, on which you’ll also account for any assets and liabilities .

Business plan financial projections FAQ

What are the main components of a financial projection in a business plan.

Generally speaking, most financial forecasts include projections for income, balance sheet, and cash flow.

What’s the difference between financial projection and financial forecast?

These two terms are often used interchangeably. Depending on the context, a financial forecast may refer to a more formal and detailed document—one that might include analysis and context for several financial metrics in a more complex financial model.

Do I need accounting or planning software for financial projections?

Not necessarily. Depending on factors like the age and size of your business, you may be able to prepare financial projections using a simple spreadsheet program. Large complicated businesses, however, usually use accounting software and other types of advanced data-management systems.

What are some limitations of financial projections?

Projections are by nature based on human assumptions and, of course, humans can’t truly predict the future—even with the aid of computers and software programs. Financial projections are, at best, estimates based on the information available at the time—not ironclad guarantees of future performance.

Keep up with the latest from Shopify

Get free ecommerce tips, inspiration, and resources delivered directly to your inbox.

By entering your email, you agree to receive marketing emails from Shopify.

popular posts

The most intuitive, powerful

Shopify yet

Shopify Editions Summer ’24

Graphic of a mobile phone with heart shapes bubbles floating around it

Subscribe to our blog and get free ecommerce tips, inspiration, and resources delivered directly to your inbox.

Unsubscribe anytime. By entering your email, you agree to receive marketing emails from Shopify.

Latest from Shopify

Jul 15, 2024

Learn on the go. Try Shopify for free, and explore all the tools you need to start, run, and grow your business.

Try Shopify for free, no credit card required.

Comscore

  • Newsletters
  • Best Industries
  • Business Plans
  • Home-Based Business
  • The UPS Store
  • Customer Service
  • Black in Business
  • Your Next Move
  • Female Founders
  • Best Workplaces
  • Company Culture
  • Public Speaking
  • HR/Benefits
  • Productivity
  • All the Hats
  • Digital Transformation
  • Artificial Intelligence
  • Bringing Innovation to Market
  • Cloud Computing
  • Social Media
  • Data Detectives
  • Exit Interview
  • Bootstrapping
  • Crowdfunding
  • Venture Capital
  • Business Models
  • Personal Finance
  • Founder-Friendly Investors
  • Upcoming Events
  • Inc. 5000 Vision Conference
  • Become a Sponsor
  • Cox Business
  • Verizon Business
  • Branded Content
  • Apply Inc. 5000 US

Inc. Premium

Subscribe to Inc. Magazine

How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

Hands pointing to a engineer's drawing

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

Editor's Note: Looking for Business Loans for your company? If you would like information to help you choose the one that's right for you, use the questionnaire below to have our partner, BuyerZone, provide you with information for free:

How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

  • Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
  • Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
  • Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
  • Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
  • Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
  • Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

Editorial Disclosure: Inc. writes about products and services in this and other articles. These articles are editorially independent - that means editors and reporters research and write on these products free of any influence of any marketing or sales departments. In other words, no one is telling our reporters or editors what to write or to include any particular positive or negative information about these products or services in the article. The article's content is entirely at the discretion of the reporter and editor. You will notice, however, that sometimes we include links to these products and services in the articles. When readers click on these links, and buy these products or services, Inc may be compensated. This e-commerce based advertising model - like every other ad on our article pages - has no impact on our editorial coverage. Reporters and editors don't add those links, nor will they manage them. This advertising model, like others you see on Inc, supports the independent journalism you find on this site.

The Daily Digest for Entrepreneurs and Business Leaders

Privacy Policy

PlanBuildr Logo

  • Business Planning

Business Plan Financial Projections

Written by Dave Lavinsky

Business Plan Financial Projections

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

  • They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
  • Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
  • Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

  • Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
  • Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
  • Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

FY 1FY 2FY 3FY 4FY 5
Revenues
Total Revenues$360,000$793,728$875,006$964,606$1,063,382
Expenses & Costs
Cost of goods sold$64,800$142,871$157,501$173,629$191,409
Lease$50,000$51,250$52,531$53,845$55,191
Marketing$10,000$8,000$8,000$8,000$8,000
Salaries$157,015$214,030$235,968$247,766$260,155
Initial expenditure$10,000$0$0$0$0
Total Expenses & Costs$291,815$416,151$454,000$483,240$514,754
EBITDA$68,185 $377,577 $421,005 $481,366 $548,628
Depreciation$27,160$27,160 $27,160 $27,160 $27,160
EBIT$41,025 $350,417 $393,845$454,206$521,468
Interest$23,462$20,529 $17,596 $14,664 $11,731
PRETAX INCOME$17,563 $329,888 $376,249 $439,543 $509,737
Net Operating Loss$0$0$0$0$0
Use of Net Operating Loss$0$0$0$0$0
Taxable Income$17,563$329,888$376,249$439,543$509,737
Income Tax Expense$6,147$115,461$131,687$153,840$178,408
NET INCOME$11,416 $214,427 $244,562 $285,703 $331,329

2. Cash Flow Statement & Projection

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

  • The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
  • Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
  • It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

FY 1FY 2FY 3FY 4FY 5
CASH FLOW FROM OPERATIONS
Net Income (Loss)$11,416 $214,427 $244,562 $285,703$331,329
Change in working capital($19,200)($1,966)($2,167)($2,389)($2,634)
Depreciation$27,160 $27,160 $27,160 $27,160 $27,160
Net Cash Flow from Operations$19,376 $239,621 $269,554 $310,473 $355,855
CASH FLOW FROM INVESTMENTS
Investment($180,950)$0$0$0$0
Net Cash Flow from Investments($180,950)$0$0$0$0
CASH FLOW FROM FINANCING
Cash from equity$0$0$0$0$0
Cash from debt$315,831 ($45,119)($45,119)($45,119)($45,119)
Net Cash Flow from Financing$315,831 ($45,119)($45,119)($45,119)($45,119)
Net Cash Flow$154,257$194,502 $224,436 $265,355$310,736
Cash at Beginning of Period$0$154,257$348,760$573,195$838,550
Cash at End of Period$154,257$348,760$573,195$838,550$1,149,286

3. Balance Sheet Projection

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

FY 1FY 2FY 3FY 4FY 5
ASSETS
Cash$154,257$348,760$573,195$838,550$1,149,286
Accounts receivable$0$0$0$0$0
Inventory$30,000$33,072$36,459$40,192$44,308
Total Current Assets$184,257$381,832$609,654$878,742$1,193,594
Fixed assets$180,950$180,950$180,950$180,950$180,950
Depreciation$27,160$54,320$81,480$108,640 $135,800
Net fixed assets$153,790 $126,630 $99,470 $72,310 $45,150
TOTAL ASSETS$338,047$508,462$709,124$951,052$1,238,744
LIABILITIES & EQUITY
Debt$315,831$270,713$225,594$180,475 $135,356
Accounts payable$10,800$11,906$13,125$14,469 $15,951
Total Liability$326,631 $282,618 $238,719 $194,944 $151,307
Share Capital$0$0$0$0$0
Retained earnings$11,416 $225,843 $470,405 $756,108$1,087,437
Total Equity$11,416$225,843$470,405$756,108$1,087,437
TOTAL LIABILITIES & EQUITY$338,047$508,462$709,124$951,052$1,238,744

How to Create Financial Projections

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

  • Gross margin ratio
  • Operating margin ratio
  • Return on assets (ROA)
  • Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

Hot Summer Savings ☀️ 60% Off for 4 Months. Buy Now & Save

60% Off for 4 Months Buy Now & Save

Wow clients with professional invoices that take seconds to create

Quick and easy online, recurring, and invoice-free payment options

Automated, to accurately track time and easily log billable hours

Reports and tools to track money in and out, so you know where you stand

Easily log expenses and receipts to ensure your books are always tax-time ready

Tax time and business health reports keep you informed and tax-time ready

Automatically track your mileage and never miss a mileage deduction again

Time-saving all-in-one bookkeeping that your business can count on

Track project status and collaborate with clients and team members

Organized and professional, helping you stand out and win new clients

Set clear expectations with clients and organize your plans for each project

Client management made easy, with client info all in one place

Pay your employees and keep accurate books with Payroll software integrations

  • Team Management

FreshBooks integrates with over 100 partners to help you simplify your workflows

Send invoices, track time, manage payments, and more…from anywhere.

  • Freelancers
  • Self-Employed Professionals
  • Businesses With Employees
  • Businesses With Contractors
  • Marketing & Agencies
  • Construction & Trades
  • IT & Technology
  • Business & Prof. Services
  • Accounting Partner Program
  • Collaborative Accounting™
  • Accountant Hub
  • Reports Library
  • FreshBooks vs QuickBooks
  • FreshBooks vs HoneyBook
  • FreshBooks vs Harvest
  • FreshBooks vs Wave
  • FreshBooks vs Xero
  • Partners Hub
  • Help Center
  • 1-888-674-3175
  • All Articles
  • Productivity
  • Project Management
  • Bookkeeping

Resources for Your Growing Business

How to make financial projections for business.

How to Make Financial Projections for Business

Writing a solid business plan should be the first step for any business owner looking to create a successful business. 

As a small business owner, you will want to get the attention of investors, partners, or potential highly skilled employees. It is, therefore, important to have a realistic financial forecast incorporated into your business plan. 

We’ll break down a financial projection and how to utilize it to give your business the best start possible.

Key Takeaways

Accurate financial projections are essential for businesses to succeed. In this article, we’ll explain everything you need to know about creating financial projections for your business. Here’s what you need to know about financial projections:

  • A financial projection is a group of financial statements that are used to forecast future performance
  • Creating financial projections can break down into 5 simple steps: sales projections, expense projections, balance sheet projections, income statement projections, and cash flow projections
  • Financial projections can offer huge benefits to your business, including helping with forecasting future performance, ensuring steady cash flow, and planning key moves around the growth of the business

Here’s What We’ll Cover:

What Is a Financial Projection?

How to Create a Financial Projection

What goes into a financial projection, what are financial projections used for.

Financial Projections Advantages

Frequently Asked Questions

What Is Financial Projection?

A financial projection is essentially a set of financial statements . These statements will forecast future revenues and expenses. 

Any projection includes your cash inflows and outlays, your general income, and your balance sheet. 

They are perfect for showing bankers and investors how you plan to repay business loans. They also show what you intend to do with your money and how you expect your business to grow. 

Most projections are for the first 3-5 years of business, but some include a 10-year forecast too.

Either way, you will need to develop a short and mid-term projection broken down month by month. 

As you are just starting out with your business, you won’t be expected to provide exact details. Most financial projections are rough guesses. But they should also be educated guesses based on market trends, research, and looking at similar businesses. 

It’s incredibly important for financial statements to be realistic. Most investors will be able to spot a fanciful projection from a mile away. 

In general, most people would prefer to be given realistic projections, even if they’re not as impressive.

Today's Numbers Tomorrow's Growth

Financial projections are created to help business owners gain insight into the future of their company’s financials. 

The question is, how to create financial projections? For business plan purposes, it’s important that you follow the best practices of financial projection closely. This will ensure you get accurate insight, which is vital for existing businesses and new business startups alike.

Here are the steps for creating accurate financial projections for your business.

1. Start With A Sales Projection

For starters, you’ll need to project how much your business will make in sales. If you’re creating a sales forecast for an existing business, you’ll have past performance records to project your next period. Past data can provide useful information for your financial projection, such as if your sales do better in one season than another.

Be sure also to consider external factors, such as the economy at large, the potential for added tariffs and taxes in the future, supply chain issues, or industry downturns. 

The process is almost the same for new businesses, only without past data to refer to. Business startups will need to do more research on their industry to gain insight into potential future sales.

2. Create Your Expense Projection

Next, create an expense projection for your business. In a sense, this is an easier task than a sales projection since it seems simpler to predict your own behaviors than your customers. However, it’s vital that you expect the unexpected.

Optimism is great, but the worst-case scenario must be considered and accounted for in your expense projection. From accidents in the workplace to natural disasters, rising trade prices, to unexpected supply disruptions, you need to consider these large expenses in your projection. 

Something always comes up, so we suggest you add a 10-15% margin on your expense projection.

3. Create Your Balance Sheet Projection

A balance sheet projection is used to get a clear look at your business’s financial position related to assets, liabilities , and equity, giving you a more holistic view of the company’s overall financial health. 

For startup businesses, this can prove to be a lot of work since you won’t have existing records of past performance to pull from. This will need to be factored into your industry research to create an accurate financial projection.

For existing businesses, it will be more straightforward. Use your past and current balance sheets to predict your business’s position in the next 1-3 years. If you use a cloud-based, online accounting software with the feature to generate balance sheets, such as the one offered by FreshBooks, you’ll be able to quickly create balance sheets for your financial projection within the app.

Click here to learn more about the features of FreshBooks accounting software.

FreshBooks accounting software

4. Make Your Income Statement Projection

Next up, create an income statement projection. An income statement is used to declare the net income of a business after all expenses have been made. In other words, it states the profits of a business.

For currently operating businesses, you can use your past income statements and the changes between them to create accurate predictions for the next 1-3 years. You can also use accounting software to generate your income statements automatically. 

You’ll need to work on rough estimates for new businesses or those still in the planning phase. It’s vital that you stay realistic and do your utmost to create an accurate, good-faith projection of future income. 

5. Finally, Create Your Cash Flow Projection

Last but not least is to generate your projected cash flow statement. A cash flow projection forecasts the movement of all money to and from your business. It’s intertwined with a business’s balance sheet and income statement, which is no different when creating projections. 

If your business has been operating for six months or more, you can create a fairly accurate cash flow projection with your past cash flow financial statements. For new businesses, you’ll need to factor in this step of creating a financial forecast when doing your industry research. 

It needs to include five elements to ensure an accurate, useful financial forecast for your business. These financial statements come together to provide greater insight into the projected future of a business’s financial health. These include:

Income Statement

A standard income statement summarizes your company’s revenues and expenses over a period. This is normally done either quarterly or annually.

The income statement is where you will do the bulk of your forecasting. 

On any income statement, you’re likely to find the following:

  • Revenue: Your revenue earned through sales. 
  • Expenses: The amount you’ve spent, including your product costs and your overheads.
  • Pre-Tax Earnings: This is your income before you’ve paid tax.
  • Net Income: The total revenues minus your total expenses. 

Net income is the most important number. If the number is positive, then you’re earning a profit, if it’s negative, it means your expenses outweigh your revenue and you’re making a loss. 

Cash Flow Statement

Your cash flow statement will show any potential investor whether you are a good credit risk. It also shows them if you can successfully repay any loans you are granted.

You can break a cash flow statement into three parts:

  • Cash Revenues: An overview of your calculated cash sales for a given time period. 
  • Cash Disbursements: You list all the cash expenditures you expect to pay.
  • Net Cash Revenue: Take the cash revenues minus your cash disbursements.

cash flow statement

Balance Sheet

Your balance sheet will show your business’s net worth at a given time.

A balance sheet is split up into three different sections:

  • Assets: An asset is a tangible object of value that your company owns. It could be things like stock or property such as warehouses or offices. 
  • Liabilities: These are any debts your business owes.
  • Equity: Your equity is the summary of your assets minus your liabilities.

Balance Sheet

Looking for an easy-to-use yet capable online accounting software? FreshBooks accounting software is a cloud-based solution that makes financial projections simple. With countless financial reporting features and detailed guides on creating accurate financial forecasts, FreshBooks can help you gain the insight you need to let your business thrive. Click here to give FreshBooks a try for free.

FreshBooks accounting software features

Financial projections have many uses for current business owners and startup entrepreneurs. Provided your financial forecasting follows the best practices for an accurate projection, your data will be used for:

  • Internal planning and budgeting – Your finances will be the main factor in whether or not you’ll be able to execute your business plan to completion. Financial projections allow you to make it happen.
  • Attracting investors and securing funding – Whether you’re receiving financing from bank loans, investors, or both, an accurate projection will be essential in receiving the funds you need.
  • Evaluating business performance and identifying areas for improvement – Financial projections help you keep track of your business’s financial health, allowing you to plan ahead and avoid unwelcome surprises.
  • Making strategic business decisions – Timing is important in business, especially when it comes to major expenditures (new product rollouts, large-scale marketing, expansion, etc.). Financial projections allow you to make an informed strategy for these big decisions.

Financial Projections Advantages 

Creating clear financial projections for your business startup or existing company has countless benefits. Focusing on creating (and maintaining) good financial forecasting for your business will:

  • Help you make vital financial decisions for the business in the future
  • Help you plan and strategize for growth and expansion
  • Demonstrate to bankers how you will repay your loans 
  • Demonstrate to investors how you will repay financing
  • Identify your most essential financing needs in the future
  • Assist in fine-tuning your pricing
  • Be helpful when strategizing your production plan
  • Be a useful tool for planning your major expenditures strategically
  • Help you keep an eye on your cash flow for the future

Put Your Books On Autopilot

Your financial forecast is an essential part of your business plan, whether you’re still in the early startup phases or already running an established business. However, it’s vital that you follow the best practices laid out above to ensure you receive the full benefits of comprehensive financial forecasting.  

If you’re looking for a useful tool to save time on the administrative tasks of financial forecasting, FreshBooks can help. With the ability to instantly generate the reports you need and get a birds-eye-view of your business’s past performance and overall financial help, it will be easier to create useful financial projections that provide insight into your financial future. 

FAQs on Financial Projections

More questions about financial forecasting, projections, and how these processes fit into your business plan? Here are some frequently asked questions by business owners.

Why are financial projections important?

Financial projections allow you to gain insight into your business’s economic trajectory. This helps business owners make financial decisions, secure funding, and more. Additionally, financial projections provide early warning of roadblocks and challenges that may lay ahead for the company, making it easier to plan for a clear course of action.

What is an example of a financial projection?

A projection is an overall look at a business’s forecasted performance. It’s made up of several different statements and reports, such as a cash flow statement, income statement, profit and loss statement, and sales statement. You can find free templates and examples of many of these reports via FreshBooks. Click here to view our selection of accounting templates.

Are financial forecasts and financial projections the same?

Technically, there is a difference between forecasting and projections, though many use the terms interchangeably. Financial forecasting often refers to shorter-term (<1 year) predictions of financial performance, while financial projections usually focus on a larger time scale (2-3 years).

What is the most widely used method for financial forecasting?

The most common method of accurate forecasting is the straight-line forecasting method. It’s most often used for projecting the growth of a business’s revenue growth over a set period. If you notice that your records indicate a 4% growth of revenue per year for five years running, it would be reasonable to assume that this will continue year-over-year. 

What is the purpose of a financial projection?

Projection aims to get deeper, more nuanced insight into a business’s financial health and viability. It allows business owners to anticipate expenses and profit growth, giving them the tools to secure funding and loans and strategize major business decisions. It’s an essential accounting process that all business owners should prioritize in their business plans.

does business plan include financial forecast

Michelle Alexander, CPA

About the author

Michelle Alexander is a CPA and implementation consultant for Artificial Intelligence-powered financial risk discovery technology. She has a Master's of Professional Accounting from the University of Saskatchewan, and has worked in external audit compliance and various finance roles for Government and Big 4. In her spare time you’ll find her traveling the world, shopping for antique jewelry, and painting watercolour floral arrangements.

RELATED ARTICLES

5 Best Mileage Tracker App for Small Businesses

Save Time Billing and Get Paid 2x Faster With FreshBooks

Want More Helpful Articles About Running a Business?

Get more great content in your Inbox.

By subscribing, you agree to receive communications from FreshBooks and acknowledge and agree to FreshBook’s Privacy Policy . You can unsubscribe at any time by contacting us at [email protected].

AI ASSISTANTS

Upmetrics AI Your go-to AI-powered business assistant

AI Writing Assist Write, translate, and refine your text with AI

AI Financial Assist Automated forecasts and AI recommendations

TOP FEATURES

AI Business Plan Generator Create business plans faster with AI

Financial Forecasting Make accurate financial forecasts faster

INTEGRATIONS

QuickBooks (Coming soon...) Sync and compare with your QuickBooks data

Strategic Planning Develop actionable strategic plans on-the-go

AI Pitch Deck Generator Use AI to generate your investor deck

Xero Sync and compare with your Xero data

See how easy it is to plan your business with Upmetrics: Take a Tour  →

AI-powered business planning software

Very useful business plan software connected to AI. Saved a lot of time, money and energy. Their team is highly skilled and always here to help.

- Julien López

BY USE CASE

Secure Funding, Loans, Grants Create plans that get you funded

Starting & Launching a Business Plan your business for launch and success

Validate Your Business Idea Discover the potential of your business idea

E2 Visa Business Plan Create a business plan to support your E2 - Visa

Business Consultant & Advisors Plan with your team members and clients

Incubators & Accelerators Empowering startups for growth

Business Schools & Educators Simplify business plan education for students

Students & Learners Your e-tutor for business planning

  • Sample Plans

WHY UPMETRICS?

Reviews See why customers love Upmetrics

Customer Success Stories Read our customer success stories

Blogs Latest business planning tips and strategies

Strategic Planning Templates Ready-to-use strategic plan templates

Business Plan Course A step-by-step business planning course

Help Center Help & guides to plan your business

Ebooks & Guides A free resource hub on business planning

Business Tools Free business tools to help you grow

How to Prepare a Financial Plan for Startup Business (w/ example)

Financial Statements Template

Free Financial Statements Template

Ajay Jagtap

  • December 7, 2023

13 Min Read

financial plan for startup business

If someone were to ask you about your business financials, could you give them a detailed answer?

Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.

Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.

A business plan’s financial plan section is no easy task—we get that.

But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.

Ready to get started? Let’s begin by discussing startup financial planning.

What is Startup Financial Planning?

Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.

Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.

Key Takeaways

  • Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
  • Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
  • Preparing a financial plan is easier and faster when you use a financial planning tool.
  • Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.

Why is Financial Planning Important to Your Startup?

Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.

A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.

It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .

Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.

Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.

Say goodbye to old-school excel sheets & templates

Make accurate financial plan faster with AI

Plans starting from $7/month

does business plan include financial forecast

Key Components of a Startup Financial Plan

Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.

Income Statement

An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.

Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.

Your income or P&L statement must list the following:

  • Cost of goods or cost of sale
  • Gross margin
  • Operating expenses
  • Revenue streams
  • EBITDA (Earnings before interest, tax, depreciation , & amortization )

Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.

Cash flow Statement

A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.

This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.

Your cash flow projection consists of the following three components:

✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.

✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.

✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.

Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.

Balance Sheet

Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.

Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.

This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.

Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:

Here is what’s the core purpose of having a balance-sheet:

  • Indicates the capital need of the business
  • It helps to identify the allocation of resources
  • It calculates the requirement of seed money you put up, and
  • How much finance is required?

Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.

Break-even Analysis

Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.

For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.

Remember, anything you sell beyond the break-even point will result in profit.

You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.

  • Fixed costs: fixed expenses that stay the same no matter what.
  • Variable costs: expenses that fluctuate over time depending on production or sales.

A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.

Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.

How to Create a Financial Section of a Startup Business Plan?

1. determine your financial needs.

You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.

Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.

Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.

Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.

Having learned to determine financial needs, let’s head straight to setting financial goals.

2. Define Your Financial Goals

Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.

Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.

However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.

Feeling overwhelmed? Just define your financial goals—you’ll be fine.

You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.

3. Choose the Right Financial Planning Tool

Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.

Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.

Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.

does business plan include financial forecast

Create a Financial Plan with Upmetrics in no time

Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.

Instagram image tagging

Start Forecasting

4. Make Assumptions Before Projecting Financials

Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.

You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.

You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.

After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.

5. Prepare Realistic Financial Projections

It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.

Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.

Following are the two key aspects of your financial projections:

Revenue Projections

In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.

It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.

The following are the key components of an accurate revenue projection report:

  • Market analysis
  • Sales forecast
  • Pricing strategy
  • Growth assumptions
  • Seasonal variations

This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.

Expense Projections

Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.

Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.

These are the most common costs to consider while projecting expenses:

  • Fixed costs
  • Variable costs
  • Employee costs or payroll expenses
  • Operational expenses
  • Marketing and advertising expenses
  • Emergency fund

Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.

6. Consider “What if” Scenarios

After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.

Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.

Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.

7. Build a Visual Report

If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.

Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.

Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.

Here’s what Upmetrics’ dashboard looks like:

Upmetrics financial projections visual report

8. Monitor and Adjust Your Financial Plan

Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.

There are multiple ways to monitor your financial plan.

For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.

Consider making necessary adjustments if your assumptions are not resonating with actual numbers.

Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.

And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.

Startup Financial Plan Example

Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.

Important Assumptions

  • The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
  • The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
  • The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
  • Sales are cash basis – nonaccrual accounting
  • Moderate ramp- up in staff over the 5 years forecast
  • Barista salary in the forecast is $36,000 in 2023.
  • In general, most cafes have an 85% gross profit margin
  • In general, most cafes have a 3% net profit margin

Projected Balance Sheet

Projected Balance Sheet

Projected Cash-Flow Statement

Cash-Flow Statement

Projected Profit & Loss Statement

Profit & Loss Statement

Break Even Analysis

Break Even Analysis

Start Preparing Your Financial Plan

We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.

Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.

So what are you waiting for? Try Upmetrics and create your financial plan in a snap.

Build your Business Plan Faster

with step-by-step Guidance & AI Assistance.

crossline

Frequently Asked Questions

How often should i update my financial projections.

Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.

How do I estimate startup costs accurately?

You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.

What financial ratios should startups pay attention to?

Here’s a list of financial ratios every startup owner should keep an eye on:

  • Net profit margin
  • Current ratio
  • Quick ratio
  • Working capital
  • Return on equity
  • Debt-to-equity ratio
  • Return on assets
  • Debt-to-asset ratio

What are the 3 different scenarios in scenario analysis?

As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:

  • base-case (expected) scenario
  • Worst-case scenario
  • best case scenario.

About the Author

does business plan include financial forecast

Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more

Reach Your Goals with Accurate Planning

Financial-Reports-template

How to Write a Financial Plan for a Business Plan

Stairs leading up to a dollar sign. Represents creating a financial plan to achieve profitability.

Noah Parsons

4 min. read

Updated July 11, 2024

Download Now: Free Income Statement Template →

Creating a financial plan for a business plan is often the most intimidating part for small business owners.

It’s also one of the most vital. Businesses with well-structured and accurate financial statements are more prepared to pitch to investors, receive funding, and achieve long-term success.

Thankfully, you don’t need an accounting degree to successfully create your budget and forecasts.

Here is everything you need to include in your business plan’s financial plan, along with optional performance metrics, funding specifics, mistakes to avoid , and free templates.

  • Key components of a financial plan in business plans

A sound financial plan for a business plan is made up of six key components that help you easily track and forecast your business financials. They include your:

Sales forecast

What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.

Subscription sales forecast

While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.

Expense budget

Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.

How to forecast personnel costs

How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.

Profit and loss forecast

Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.

Cash flow forecast

Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.

Balance sheet

Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.

What to include if you plan to pursue funding

Do you plan to pursue any form of funding or financing? If the answer is yes, you’ll need to include a few additional pieces of information as part of your business plan’s financial plan example.

Highlight any risks and assumptions

Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.

Plan your exit strategy

Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.

  • Financial ratios and metrics

With your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios.

While including these metrics in your financial plan for a business plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall financial situation.

Key financial terms you should know

It’s not hard. Anybody who can run a business can understand these key financial terms. And every business owner and entrepreneur should know them.

Common business ratios

Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.

Break-even analysis

Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.

How to calculate ROI

How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).

  • How to improve your financial plan

Your financial statements are the core part of your business plan’s financial plan that you’ll revisit most often. Instead of worrying about getting it perfect the first time, check out the following resources to learn how to improve your projections over time.

Common mistakes with business forecasts

I was glad to be asked about common mistakes with startup financial projections. I read about 100 business plans per year, and I have this list of mistakes.

How to improve your financial projections

Learn how to improve your business financial projections by following these five basic guidelines.

Brought to you by

LivePlan Logo

Create a professional business plan

Using ai and step-by-step instructions.

Secure funding

Validate ideas

Build a strategy

  • Financial plan templates and tools

Download and use these free financial templates and calculators to easily create your own financial plan.

does business plan include financial forecast

Sales forecast template

Download a free detailed sales forecast spreadsheet, with built-in formulas, to easily estimate your first full year of monthly sales.

Download Template

does business plan include financial forecast

Accurate and easy financial forecasting

Get a full financial picture of your business with LivePlan's simple financial management tools.

Get Started

Content Author: Noah Parsons

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Check out LivePlan

Table of Contents

  • What to include for funding

Related Articles

does business plan include financial forecast

10 Min. Read

How to Set and Use Milestones in Your Business Plan

does business plan include financial forecast

How to Write a Competitive Analysis for Your Business Plan

does business plan include financial forecast

3 Min. Read

What to Include in Your Business Plan Appendix

does business plan include financial forecast

6 Min. Read

How to Write Your Business Plan Cover Page + Template

The Bplans Newsletter

The Bplans Weekly

Subscribe now for weekly advice and free downloadable resources to help start and grow your business.

We care about your privacy. See our privacy policy .

Garrett's Bike Shop

The quickest way to turn a business idea into a business plan

Fill-in-the-blanks and automatic financials make it easy.

No thanks, I prefer writing 40-page documents.

LivePlan pitch example

Discover the world’s #1 plan building software

does business plan include financial forecast

  • Search Search Please fill out this field.
  • Building Your Business

How To Create Financial Projections for Your Business

Learn how to anticipate your business’s financial performance

does business plan include financial forecast

  • Understanding Financial Projections & Forecasting

Why Forecasting Is Critical for Your Business

Key financial statements for forecasting, how to create your financial projections, frequently asked questions (faqs).

Maskot / Getty Images

Just like a weather forecast lets you know that wearing closed-toe shoes will be important for that afternoon downpour later, a good financial forecast allows you to better anticipate financial highs and lows for your business.

Neglecting to compile financial projections for your business may signal to investors that you’re unprepared for the future, which may cause you to lose out on funding opportunities.

Read on to learn more about financial projections, how to compile and use them in a business plan, and why they can be crucial for every business owner.

Key Takeaways

  • Financial forecasting is a projection of your business's future revenues and expenses based on comparative data analysis, industry research, and more.
  • Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts, which can be attractive to investors.
  • Some of the key components to include in a financial projection include a sales projection, break-even analysis, and pro forma balance sheet and income statement.
  • A financial projection can not only attract investors, but helps business owners anticipate fixed costs, find a break-even point, and prepare for the unexpected.

Understanding Financial Projections and Forecasting

Financial forecasting is an educated estimate of future revenues and expenses that involves comparative analysis to get a snapshot of what could happen in your business’s future.

This process helps in making predictions about future business performance based on current financial information, industry trends, and economic conditions. Financial forecasting also helps businesses make decisions about investments, financing sources, inventory management, cost control strategies, and even whether to move into another market.

Developing both short- and mid-term projections is usually necessary to help you determine immediate production and personnel needs as well as future resource requirements for raw materials, equipment, and machinery.

Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts. They can also be used to make informed decisions about the business’s plans. Creating an accurate, adaptive financial projection for your business offers many benefits, including:

  • Attracting investors and convincing them to fund your business
  • Anticipating problems before they arise
  • Visualizing your small-business objectives and budgets
  • Demonstrating how you will repay small-business loans
  • Planning for more significant business expenses
  • Showing business growth potential
  • Helping with proper pricing and production planning

Financial forecasting is essentially predicting the revenue and expenses for a business venture. Whether your business is new or established, forecasting can play a vital role in helping you plan for the future and budget your funds.

Creating financial projections may be a necessary exercise for many businesses, particularly those that do not have sufficient cash flow or need to rely on customer credit to maintain operations. Compiling financial information, knowing your market, and understanding what your potential investors are looking for can enable you to make intelligent decisions about your assets and resources.

The income statement, balance sheet, and statement of cash flow are three key financial reports needed for forecasting that can also provide analysts with crucial information about a business's financial health. Here is a closer look at each.

Income Statement

An income statement, also known as a profit and loss statement or P&L, is a financial document that provides an overview of an organization's revenues, expenses, and net income.

Balance Sheet

The balance sheet is a snapshot of the business's assets and liabilities at a certain point in time. Sometimes referred to as the “financial portrait” of a business, the balance sheet provides an overview of how much money the business has, what it owes, and its net worth.

The assets side of the balance sheet includes what the business owns as well as future ownership items. The other side of the sheet includes liabilities and equity, which represent what it owes or what others owe to the business.

A balance sheet that shows hypothetical calculations and future financial projections is also referred to as a “pro forma” balance sheet.

Cash Flow Statement

A cash flow statement monitors the business’s inflows and outflows—both cash and non-cash. Cash flow is the business’s projected earnings before interest, taxes, depreciation, and amortization ( EBITDA ) minus capital investments.

Here's how to compile your financial projections and fit the results into the three above statements.

A financial projections spreadsheet for your business should include these metrics and figures:

  • Sales forecast
  • Balance sheet
  • Operating expenses
  • Payroll expenses (if applicable)
  • Amortization and depreciation
  • Cash flow statement
  • Income statement
  • Cost of goods sold (COGS)
  • Break-even analysis

Here are key steps to account for creating your financial projections.

Projecting Sales

The first step for a financial forecast starts with projecting your business’s sales, which are typically derived from past revenue as well as industry research. These projections allow businesses to understand what their risks are and how much they will need in terms of staffing, resources, and funding.

Sales forecasts also enable businesses to decide on important levels such as product variety, price points, and inventory capacity.

Income Statement Calculations

A projected income statement shows how much you expect in revenue and profit—as well as your estimated expenses and losses—over a specific time in the future. Like a standard income statement, elements on a projection include revenue, COGS, and expenses that you’ll calculate to determine figures such as the business’s gross profit margin and net income.

If you’re developing a hypothetical, or pro forma, income statement, you can use historical data from previous years’ income statements. You can also do a comparative analysis of two different income statement periods to come up with your figures.

Anticipate Fixed Costs

Fixed business costs are expenses that do not change based on the number of products sold. The best way to anticipate fixed business costs is to research your industry and prepare a budget using actual numbers from competitors in the industry. Anticipating fixed costs ensures your business doesn’t overpay for its needs and balances out its variable costs. A few examples of fixed business costs include:

  • Rent or mortgage payments
  • Operating expenses (also called selling, general and administrative expenses or SG&A)
  • Utility bills
  • Insurance premiums

Unfortunately, it might not be possible to predict accurately how much your fixed costs will change in a year due to variables such as inflation, property, and interest rates. It’s best to slightly overestimate fixed costs just in case you need to account for these potential fluctuations.

Find Your Break-Even Point

The break-even point (BEP) is the number at which a business has the same expenses as its revenue. In other words, it occurs when your operations generate enough revenue to cover all of your business’s costs and expenses. The BEP will differ depending on the type of business, market conditions, and other factors.

To find this number, you need to determine two things: your fixed costs and variable costs. Once you have these figures, you can find your BEP using this formula:

Break-even point = fixed expenses ➗ 1 – (variable expenses ➗ sales)

The BEP is an essential consideration for any projection because it is the point at which total revenue from a project equals total cost. This makes it the point of either profit or loss.

Plan for the Unexpected

It is necessary to have the proper financial safeguards in place to prepare for any unanticipated costs. A sudden vehicle repair, a leaky roof, or broken equipment can quickly derail your budget if you aren't prepared. Cash management is a financial management plan that ensures a business has enough cash on hand to maintain operations and meet short-term obligations.

To maintain cash reserves, you can apply for overdraft protection or an overdraft line of credit. Overdraft protection can be set up by a bank or credit card business and provides short-term loans if the account balance falls below zero. On the other hand, a line of credit is an agreement with a lending institution in which they provide you with an unsecured loan at any time until your balance reaches zero again.

How do you make financial projections for startups?

Financial projections for startups can be hard to complete. Historical financial data may not be available. Find someone with financial projections experience to give insight on risks and outcomes.

Consider business forecasting, too, which incorporates assumptions about the exponential growth of your business.

Startups can also benefit from using EBITDA to get a better look at potential cash flow.

What are the benefits associated with forecasting business finances?

Forecasting can be beneficial for businesses in many ways, including:

  • Providing better understanding of your business cash flow
  • Easing the process of planning and budgeting for the future based on income
  • Improving decision-making
  • Providing valuable insight into what's in their future
  • Making decisions on how to best allocate resources for success

How many years should your financial forecast be?

Your financial forecast should either be projected over a specific time period or projected into perpetuity. There are various methods for determining how long a financial forecasting projection should go out, but many businesses use one to five years as a standard timeframe.

U.S. Small Business Administration. " Market Research and Competitive Analysis ."

Score. " Financial Projections Template ."

  • Business Essentials
  • Leadership & Management
  • Credential of Leadership, Impact, and Management in Business (CLIMB)
  • Entrepreneurship & Innovation
  • Digital Transformation
  • Finance & Accounting
  • Business in Society
  • For Organizations
  • Support Portal
  • Media Coverage
  • Founding Donors
  • Leadership Team

does business plan include financial forecast

  • Harvard Business School →
  • HBS Online →
  • Business Insights →

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

  • Career Development
  • Communication
  • Decision-Making
  • Earning Your MBA
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Student Profiles
  • Work-Life Balance
  • AI Essentials for Business
  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • Business and Climate Change
  • Design Thinking and Innovation
  • Digital Marketing Strategy
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Launching Tech Ventures
  • Leadership Principles
  • Leadership, Ethics, and Corporate Accountability
  • Leading Change and Organizational Renewal
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
  • Winning with Digital Platforms

7 Financial Forecasting Methods to Predict Business Performance

Professional on laptop using financial forecasting methods to predict business performance

  • 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

Access your free e-book today.

What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

  • Income statements
  • Balance sheets
  • Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Financial Accounting| Understand the numbers that drive business success | Learn More

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

A Manager's Guide to Finance and Accounting | Access Your Free E-Book | Download Now

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

does business plan include financial forecast

About the Author

Financial Forecasting

Preparing a prediction of the future

What is Financial Forecasting?

Financial forecasting is the process of estimating or predicting how a business will perform in the future. The most common type of financial forecast is an income statement; however, in a complete financial model, all three financial statements are forecasted. In this guide on how to build a financial forecast, we will complete the income statement model from revenue to operating profit or EBIT .

Financial Forecasting - Example Using Income Statement

Forecasting Revenue

There are inherent tensions in model building between making your model realistic and keeping it simple and robust. The first-principles approach identifies various methods to model revenues with high degrees of detail and precision. For instance, when forecasting revenue for the retail industry, we can forecast the expansion rate and derive income per square meter.

When forecasting revenue for the telecommunications industry, we can predict the market size and use current market share and competitor analysis. When forecasting revenue for any service industries, we can estimate the headcount and use the income for customer trends.

Financial Forecasting for Telecommunications Industry - Step 1

On the other hand, the quick and dirty approach to robust models outlines how you can model revenues in a much more straightforward way, with the benefit that the model will be more simple and easy to use (although less accurate and detailed). With this approach, users predict future growth based on historical figures and trends.

Example of Financial Forecasting - Quick and Dirty Method

Forecasting Gross Margin and SG&A Expenses

Once we finish forecasting revenues, we next want to forecast gross margin. Gross margin is usually forecast as a percent of revenues. Again, we can use historical figures or trends to forecast future gross margin.

However, it is advised to take a more detailed approach, considering factors such as the cost of input, economies of scale, and learning curve. This second approach will allow your model to be more realistic, but also make it harder to follow.

Example of Forecasting Gross Margin

The next step is to forecast overhead costs: SG&A expenses . Forecasting Selling, General, and Administrative costs are often done as a percentage of revenues. Although these costs are fixed in the short term, they become increasingly variable in the long term.

Therefore, when forecasting over shorter periods (weeks and months), using revenues to predict SG&A may be inappropriate. Some models forecast gross and operating margins to leave SG&A as the balancing figure.

Example of Forecasting SG&A

Financial Forecasting Example

Let’s go through an example of financial forecasting together and build the income statement forecast model in Excel. First off, you can see that all the forecast inputs are grouped in the same section, called “Assumptions and Drivers.”

Financial Forecasting Demonstration - Balance Sheet Check

I created separate output section groups for the income statement, balance sheet, and cash flow statement. I also created a “Supporting Schedules” section, where detailed processing calculations for PP&E and equity are broken down in order to make the model easier to follow and audit. In this article, we will only work on the assumptions and the income statement.

All income statement input assumptions from revenues down to EBIT can be found in rows 8-14. All expenses are being forecasted as a percentage of sales. Only the sales forecast is based on growth over the previous year. My inputs are also ordered in the order they appear on the income statement.

Demonstration 2 - Income Statement

Now, let’s move to the “Income Statement” section, where we are going to work on Column D and move downwards. To forecast sales for the first forecast year (in this case 2017), I take the previous year (C42) and grow it by the sales growth assumption in the “Assumptions & Drivers” section. The “SalesGrowthPercent” assumption is located in cell “D8”. Therefore, the formula for the 2017 forecasted revenue is =C42*(1+D8).

Demonstration 3 - Calculating Forecasted Revenue

I then calculated our Cost of Goods Sold. To calculate the first forecast year’s COGS, we put a minus sign in front of our forecast sales, then multiply by one minus the “GrossMargin” assumption located in cell D9. The formula reads =-D42*(1-D9).

I then sum forecasted sales and COGS to calculate “Gross Profit”, located in cell D44. The formula reads =SUM(D42:D43). A handy shortcut for summing is ALT + =.

Demonstraton 4 - Calculating COGS

Next, I forecast all the expenses in rows 45 to 48 as a percentage of sales. Let’s first start with “Distribution Expenses,” then copy the formula down to “Depreciation.” To calculate, we subtract the forecast sales and multiply by the appropriate assumption, which in this case is Distribution Expense as a Percent of Sales. The formula reads =D$42*D10. Be mindful of the $ sign because we want to make row 42 of cell D42 an absolute reference. I then copy this formula down, using the shortcut CTRL + D or fill down.

Demonstraton 5

Then, over to the right, using the shortcut CTRL + R or fill right.

Demonstraton 6

Finally, I net gross profit off with all the other operating expenses to calculate EBIT, using =SUM(D44:D48).

Demonstraton 7

Additional Resources

Thank you for reading this guide to financial forecasting. CFI is a global provider of financial analyst training and career advancement for finance professionals. To learn more and expand your career, explore the additional relevant CFI resources below:

  • Types of Financial Models
  • 3 Statement Model
  • Scenario Analysis
  • Visibility in the Business Context
  • See all financial modeling resources

Analyst Certification FMVA® Program

Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.

Financial Analyst certification curriculum

A well rounded financial analyst possesses all of the above skills!

Additional Questions & Answers

CFI is the global institution behind the financial modeling and valuation analyst  FMVA® Designation . CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.

In order to become a great financial analyst, here are some more  questions and answers  for you to discover:

  • What is Financial Modeling?
  • How Do You Build a DCF Model?
  • What is Sensitivity Analysis?
  • How Do You Value a Business?
  • Share this article

Excel Fundamentals - Formulas for Finance

Create a free account to unlock this Template

Access and download collection of free Templates to help power your productivity and performance.

Already have an account? Log in

Supercharge your skills with Premium Templates

Take your learning and productivity to the next level with our Premium Templates.

Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.

Already have a Self-Study or Full-Immersion membership? Log in

Access Exclusive Templates

Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.

Already have a Full-Immersion membership? Log in

This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our  privacy policy  to learn more.

  • MANAGEMENT ACCOUNTING

Effective financial projections for a startup

Get a business started with meaningful financial projections..

Effective financial projections for a startup

  • Management Accounting
  • Business Planning

Today's business world is bursting with startups, particularly in the technology industry. One of the biggest contributors to a startup's success is a sound business plan that includes meaningful financial projections.

Accountants have the skills to help entrepreneurs build logical financial assumptions to increase the probability of attracting investments. Refining these projections can also help startups develop a growth strategy by keeping information simple and hitting on the key metrics, such as market size.

This list of practical considerations for startups and the accountants who support them is by no means exhaustive, and for many readers the concepts may be familiar. It's meant to serve as a handy guide to key conversations that can keep a startup on the right track.

An Excel workbook providing a more detailed look at the three-year projections in this example is available here .

Revenue will influence the rest of the profit and loss (P&L) assumptions. So if revenue estimates are materially misstated, the company risks overstaffing or understaffing and/or purchasing assets incorrectly. Revenue is also a key metric for potential investors. Estimates do not need to be precise, but they do need to be realistic and supported by a viable story.

Step 1: Collect critical inputs

Four crucial inputs are used to calculate revenue for a new business: revenue levers, revenue drivers, activity assumptions, and pricing.

Revenue levers: Revenue levers are the various opportunities to earn revenue. Levers can include products and/or services, software maintenance agreements, channel partner sales, etc. Start with a list of all the revenue levers that will produce income over the period of the financial projections.

Revenue drivers: Revenue drivers are the activities that influence how revenue levers produce income. Each revenue lever could potentially have a different driver. Think about what activity will increase or decrease revenue for each lever.

Revenue driver activity assumptions: Activity assumptions are the inputs that will indicate how the revenue driver will act. To determine assumptions, work with marketing, sales, or the CEO, depending on the company organization.

Pricing: Pricing is a necessary input to calculate total revenue. This article does not go into detail on pricing methodology. If prices have not yet been determined, read pricing guides and/or articles to ensure effective pricing methods are being implemented.

Step 2: Convert inputs into the revenue estimate

Now that the revenue inputs have been determined, it's as straightforward as inputting the data into a model that calculates total revenue. In its simplest form, the calculation is revenue driver assumption multiplied by price for each revenue lever . If the driver is marketing spend, there will be an additional step to convert dollars spent to revenue earned.

Create revenue calculations for three to five years by year, quarter, or month. A monthly calculation is helpful if your revenue driver is new clients, as clients will be attained throughout the year and will not provide a full year's revenue in year 1. The monthly or quarterly detail should be summarized by year to report the total annual impact.

Be sure to include an estimate for churn. Revenue can be easily overstated or understated without a reasonable estimate on the business that will be lost over the period of the pro forma.

Step 3: Review the final revenue outcome

Take a step back from the detail and reflect on the total revenue result.

On the SEC's website, check the public Forms 10K of competitors or companies in the same industry and compare net revenue. If there are no publicly listed companies to provide financial comparisons, perhaps check with the potential investment banker or capital provider. It may be able to provide a range of financials that are typical in a similar industry. If forecasted revenue in year 2 is higher than the industry leader, then review the calculations for accuracy and activity assumptions for reasonableness.

Consider the growth year over year. The business should show steady growth over the years at a realistic rate. Then calculate the compound annual growth rate (CAGR) to easily identify growth over a period of time. CAGR is an easy comparison tool for investors to use.

Revenue do's

  • Use a range of activity assumptions to determine a worst - case scenario and an optimistic scenario. Determine what makes the most sense within this range.
  • Build the revenue estimates using calculations of inputs so you can easily pivot and create new scenarios.
  • Show revenue increasing over time at an attractive yet realistic rate.

Revenue don'ts

  • Don't create revenue assumptions without having a calculation or story to support the total.
  • Don't overcomplicate the calculations with additional details that do not materially change the result.
  • Don't forget to reflect on the result.

COSTS OF SALES

Costs of sales (COS) are the costs directly related to a product or service, and they represent the cost of producing revenue. Product costs will include raw materials, labor, production equipment depreciation, etc. Service industry companies' COS include salaries of professional service providers; software - as - a - service companies' COS include hosting fees. Measuring the gross profit (revenue minus COS) and gross margin (gross profit as a percentage of revenue) assists in determining profitability and long - term viability.

Compare margins to industry benchmarks or similar companies. COS may be higher at the start, but it is important to show higher margins over time as efficiencies are gained.

SG&A EXPENSES

Selling, general, and administrative (SG&A) expenses include all other expenses outside of product costs and capital purchases. Consider the following major categories:

Salaries and benefits

Build a headcount plan by role for the pro forma period by month. This approach creates a hiring plan based on revenue timing to properly support the business. It also allows for quick adjustments when modeling revenue changes.

Sales staff hire dates should correspond with the sales cycle. If a full sales cycle is three months, then the headcount plan should include sales salaries at least three months before the first month of planned revenue. Ensure other variable sales expenses relate directly to the revenue estimates, including sales commissions, bonuses, and other selling expenses.

Include benefits and payroll taxes in addition to the base salary.

Marketing expenses

Business - to - business relationship building and business - to - consumer advertisement and promotions drive revenue. Marketing expenses as a percentage of revenue vary depending on the industry and the company's size, but they will typically fall somewhere between 5% and 20% of revenue. Years 1 and 2 require higher marketing spend as the company is promoting awareness; however, projections should show increased efficiencies over time.

Several one - time and recurring legal - related costs are associated with incorporating a new business. Consider the following to avoid expensive surprises:

  • Negotiation of customer contracts.
  • Business license fees.
  • Industry - specific state licensing.
  • Incorporation fees.
  • Other legal fees relating to copyrights and/or trademarks.

IT-related costs

Most new businesses require a website and have some technology needs, even if the industry is not technology specific. Technology ignorance is dangerous for any new business owner and can create unplanned expenses. Consider the following:

  • Data storage.
  • Website hosting fees.
  • Software and software maintenance.
  • Data security efforts.

Consider all other potential business expenses such as credit card fees, office rent, office supplies, etc. It is safe to create high - level estimates in this area based on revenue, location, industry, etc.

SG&A do's

  • Stay familiar and current with technical terminology and cost structures to avoid expensive surprises.
  • Ensure the staffing plan and marketing plan align with revenue assertions.
  • Compare expenses as a percentage of revenue to industry averages and benchmarks.

SG&A don'ts

  • Don't underestimate accounting and legal needs during inception.
  • Don't forget business necessities like call centers and credit card fees.

CAPITAL INVESTMENTS

Estimate capital investment dollars needed by year and by category between hardware, software, equipment, inventory, etc. The capital plan should:

  • Correspond with the revenue growth and demonstrate a return on assets.
  • Show that the business can scale and that the capital investments can set the business up for continual growth.
  • Create a purchasing plan for the business and describe to investors how funds will be allocated.

In the simplest form, cash flow equates to projected EBITDA (earnings before interest, taxes, depreciation, and amortization) less capital investments. There are many other balance sheet implications for cash flow (accounts receivable, payables, inventory, etc.). Depending on the industry and round of investing, that level of detail may be unnecessary. If the industry has an exceptionally long cash cycle or includes a large upfront inventory investment, then an annual cash implication estimate should be made on those pieces. Otherwise, EBITDA and capital investments will be sufficient for the seed round. After the seed round, working capital impact will be beneficial to get a full cash flow look.

THE PRESENTATION

Now that the estimates are complete, it is time to transform the work into a collection of facts that potential investors and business owners can use to drive decisions. The initial information and discussions should focus on high - level assumptions and give confidence that the business can scale and grow as the example outlines. (See the sidebar, "Example for High - Level Projections," below.)

Item 1: Condensed profit and loss statement

Present the following sections in a P&L format for each year over the three - to five - year period:

Revenue: Include a row for different revenue levers with a total net revenue.

COS: Show total dollar amount, cost as a percentage of revenue, gross profit (revenue less COS), and gross margin (gross profit as percentage of revenue). If possible, show COS at the individual revenue lever.

SG&A: (1) Categorize the expenses into salaries, marketing, and all other. Present the category subtotals in dollars and as a percentage of revenue as well as the SG&A expense grand total; (2) consider categorizing any other major expense that may be specific to the business; and (3) do not show any expense assumption detail here.

EBITDA: Include EBITDA in total and as a percentage of net revenue.

Item 2: Cash flow

Add two rows underneath EBITDA for each year: one for total cash flow for that particular year and one for cumulative cash flow.

Item 3: Capital investments

Include the capital plan by project and year.

Item 4: Bullet points on key revenue and cost assumptions

Add key assumption points to give the reader an idea of how the revenue and costs were estimated without going into too much detail. These can be points on the same page as the P&L or on a separate page.

Revenue: Revenue drivers, churn, revenue assumptions, and how the assumptions change year over year.

COS: Significant expense drivers. This could be product - specific labor expenses or materials.

SG&A: Total marketing, selling, and administrative headcount year over year with key roles, total one - time startup expenses, and any other material expense that may be specific to the business.

Item 5: Metrics and graphs

Break - even point: The break - even point can be calculated in dollars or units and will indicate at what level of sales the company will cover all fixed costs. This metric is beneficial internally for pricing and production purposes. For external readers, it indicates roughly how long it will take before the company starts generating a profit.

Payback period: The payback period is the length of time it will take to pay back the original investment. Investments with a long payback period are undesirable; however, the required period will range by investor and business industry. Technology projects typically have a desired payback period of one to two years.

Graphs: Graphs are a great way to visually communicate financial results and tell the story of the business. Consider including the following information in a colorful graph format:

  • Revenue over time with a trend line.
  • EBITDA over time with a trend line.
  • Cash flow over time with a break - even point and a payback period point.
  • Revenue drivers and assumptions over time.

Size of the market: Give the reader an idea of the full market potential and what piece of the market the business is trying to attain.

Item 6: Presentation of do's and don'ts

  • Keep it simple.
  • Round numbers to thousands or millions.
  • Highlight the key assumptions.
  • Don't use decimals.
  • Don't confuse the overall story by giving too many details.
  • Don't request less or significantly more cash than required to bridge the business to profitability as outlined on the P&L.

Example for high-level projections

This made-up example outlines high-level projections investors like to see:

Stuff Faux Less is a new thrift store that buys and sells used home goods and clothing items. Stuff Faux Less has an online presence and recently developed software to assist in thrifty shopping. This software allows thrift stores to easily inventory new items using specific keywords and alert a shopper when a desired item becomes available. Lastly, Stuff Faux Less has a personal shopper tool. Using the tool, a customer pays a small fee to have a personal shopper select and retrieve outfits based on the customer’s style.

There are three revenue opportunities associated with Stuff Faux Less’s business model:

REVENUE LEVERS

1. Product sales

Revenue driver: Foot traffic and conversion rates.

Revenue assumptions: 70,000 visitors in year 1 at a 30% conversion rate and a $30 average order; 140,000 visitors in year 2 at a 32% conversion rate and a $30 average order; and 150,000 visitors in year 3 at a 34% conversion rate and a $30 average order.

2. Personal shopper fees

Revenue driver: Advertising spend and advertising return.

Revenue assumptions: One personal shopping order will occur for every $1.50 in advertising dollars spent in year 1, $1 in year 2, and $0.95 in year 3.

3. Software license revenue

Revenue driver: Sales staff and number of licenses each sales team member is able to sell per year.

Revenue assumptions: 10 new licenses in year 1; 11 additional licenses in year 2 net of churn; and 13 additional licenses in year 3 net of churn.

ASSESSING PROJECTIONS

On the P&L, the sales staff’s projection supports the estimated software licenses sold, and the advertising projected spend supports the shopper fee income.

About the author

Tiffany Hovland, CPA , is the owner of Hovland Consulting LLC.

To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, a  JofA  senior editor, at  [email protected]   or 919-402-2304.

AICPA resources

  • " Don't Fall for These Presentation Myths ," CPA Insider , Oct. 1, 2018
  • " What Investors Want to See ," JofA , Oct. 25, 2017
  • " Crowdfunding Brings New Opportunities for CPAs ," JofA , Oct. 2015

CPE self-study

  • Financial Forecasting and Decision Making (#733970, text; #163153, online access)
  • Financial Performance Management Program (#165364, online access)
  • Planning and Budgeting (#165383, online access)
  • Pricing Strategy (#165379, online access)

For more information or to make a purchase, go to  aicpastore.com or call the Institute at 888-777-7077.

Where to find July’s flipbook issue

does business plan include financial forecast

The Journal of Accountancy is now completely digital. 

SPONSORED REPORT

Manage the talent, hand off the HR headaches

Recruiting. Onboarding. Payroll administration. Compliance. Benefits management. These are just a few of the HR functions accounting firms must provide to stay competitive in the talent game.

FEATURED ARTICLE

2023 tax software survey

CPAs assess how their return preparation products performed.

How to Write a Business Plan Outline in 9 Steps (Example Included!)

Getty Images

Starting a business often begins with writing a business plan , especially if you need funding . It acts as a roadmap, guiding you through each stage of launching and managing your company, and it presents a clear, compelling case to potential investors and partners. But here's the thing: not everyone finds this step intuitive. That's where a business plan outline can be incredibly helpful.

Creating a detailed business plan outline helps you organize your thoughts and ensure you cover all the key aspects of your business strategy. Plus, it might be just what you need to overcome that blank page and start typing.

Below, you'll find an easy-to-follow guide on how to craft your business plan outline, and an example to show you what it should look like.

​​ Build your dream business with the help of a high-paying job—browse open jobs on The Muse »

What is an outline of a business plan?

Think of a business plan outline as the skeleton of your entire business plan. It gives a high-level overview of the main sections you'll need to flesh out later. It's not the final document but a crucial step in getting you there.

Simply put, it's like creating a detailed table of contents for your business plan, showing you exactly what information to include and how everything fits together. A well-structured business plan outline also helps you plan things ahead, saving time and effort.

Writing a business plan outline in 9 steps

Follow these steps to build your business plan outline and learn exactly what each section should include.

(Bear in mind that every business plan is unique, tailored to the specific needs and goals of the business. While the structure below is common, the order of sections may vary—only the executive summary will always come first.)

1. Executive summary

Imagine you have just 60 seconds to convince someone to invest in your business. That's the essence of a strong executive summary. Although it appears first on your business plan, this section is often written last because it sums up the entire plan. Think of it as your elevator pitch . This section gives a quick overview of your entire business plan, highlighting key points that grab the reader's attention.

Keep it clear and concise. Start with a brief overview of your business, including its name and what it offers. Summarize your mission statement and objectives, and don’t forget to mention crucial aspects like financial projections and competitive advantages.

2. Company description

Here's where you provide detailed information about your company. Begin with the business name and location. Describe the legal structure (e.g., sole proprietorship, partnership, corporation) and ownership. If your business already exists, share a brief history.

For new ventures, explain the business's nature and the problems you aim to solve. Go into more detail about your vision and mission statements, outlining your goals and the principles guiding your business. This section helps potential investors and stakeholders grasp your company’s identity and purpose.

3. Market research and analysis

This section shares insights into your company’s industry. Start with a landscape analysis to give an overview of the market, including its size, growth rate, and key players.

Next, define your target market and customer demographics—age, location, income, and interests—detailing who your ideal customers are. Identify market needs and trends your business will address, and highlight customer pain points your product or service aims to solve.

Consider conducting a SWOT analysis to evaluate your business's strengths, weaknesses, opportunities, and threats, and gain a strategic view of where your business stands in the competitive landscape.

4. Organization and management

Describe how your business is structured and who runs it. Outline the organizational structure, and if helps, include a chart. Introduce the leadership team and key personnel, highlighting their qualifications and roles. If you have a board of directors, mention them and briefly explain their involvement.

Then, outline your production processes, detailing how your product or service is (or will be) created—from sourcing materials to delivery—to give a comprehensive view of your operational capabilities.

5. Products and services

This section of your business plan outline is crucial for showing potential investors what makes your products and services unique and valuable.

Clearly describe what your business offers, emphasizing your unique selling propositions (USPs) and the benefits and features that set you apart from the competition. Talk about the product life cycle, including any plans for future updates.

If your business holds any intellectual property or proprietary technologies, detail them here to underscore your competitive advantages.

6. Marketing strategy

Having a fantastic product or service is just half the battle. The marketing plan section should outline how you'll reach your target market and convert them into customers.

Begin with market positioning and branding, explaining how you want your brand perceived. Detail your marketing and promotional strategies, including specific tactics to reach your target audience.

Discuss your sales strategy, focusing on how you'll convert leads into customers. Lastly, include your pricing strategy and provide a sales forecast, projecting your expected revenue over a certain period.

7. Operations plan

Here, the goal is to give a detailed overview of the physical and logistical aspects of your company. Start with the business location and facilities, describing where it operates and any significant physical assets. Detail the technology and equipment needed for daily operations.

Briefly describe your supply chain and logistics processes to illustrate how you manage inventory, procurement, and distribution. Finish it by outlining your production process and quality control measures to ensure your products or services consistently meet high standards.

8. Financial plan

Use this section of the business plan to show how your company will succeed financially. Include financial projections like income statements and cash flow statements. Specify how much capital you need and how you plan to use it, discussing funding sources.

Conduct a break-even analysis to estimate when your business will become profitable. Be transparent and address any financial risks and assumptions, outlining how you plan to mitigate them.

9. Appendices and exhibits

In this section, include any additional information that supports your business plan. This might be resumes of key personnel to highlight your team's expertise and experience, or even legal documents and agreements.

Include market research data and surveys to back up your market analysis. Add financial statements for a detailed look at your financial plan. Also, provide detailed product specifications to give a clear understanding of your products and services.

Here's a business plan outline example

Not quite there yet? Take a look at this business plan outline example—it will make everything clear for you.

3.1 Executive Summary

  • Overview of the business
  • Key points of the business plan

3.2 Company Description

  • Business name and location
  • History and nature of the business
  • Legal structure and ownership
  • Vision and mission statement

3.3 Market Research and Analysis

  • Industry analysis
  • Target market and customer demographics
  • Market needs, trends
  • Customer pain points
  • SWOT analysis

3.4 Organization and Management

  • Organizational structure
  • Leadership team and key personnel
  • Roles and responsibilities
  • Board of directors (if applicable)
  • Production processes

3.5 Products and Services

  • Description of products or services offered
  • Unique selling propositions, benefits, features
  • Product lifecycle and development plans
  • Intellectual property and proprietary technologies

3.6 Marketing Strategy

  • Market positioning and branding
  • Marketing and promotional strategies
  • Sales strategy and tactics
  • Pricing strategy and sales forecast

3.7 Operations Plan

  • Business location and facilities
  • Technology and equipment
  • Supply chain and logistics
  • Production process and quality control

3.8 Financial Plan

  • Financial projections (income statements, balance sheets, cash flow statements)
  • Funding requirements and sources
  • Break-even analysis
  • Financial risks and assumptions

3.9 Appendices and Exhibits (if applicable)

  • Supporting documents and additional information
  • Resumes of key personnel
  • Legal documents and agreements
  • Market research data and surveys
  • Financial Statements
  • Detailed Product Specifications

Bonus tips on how to write a winning business plan

Once you've done your business plan outline, it's time to fill in the gaps and craft a winning business plan. Here are some bonus tips to keep in mind:

  • Tailor it to fit your business : Customize sections to meet industry-specific needs and highlight what makes your business unique.
  • Keep it clear and concise : Use straightforward language and support your points with data to ensure easy understanding and avoid any confusion.
  • Set actionable and realistic goals : Define measurable objectives with clear timelines and milestones to track your progress.
  • Update regularly : Keep your plan dynamic by making regular updates to reflect changes in goals, market conditions, and strategies.
  • Seek feedback : Gain insights from mentors and advisors to refine your plan.

Read this next: How to Start a Business in 8 Steps: A Comprehensive Guide from Concept to Launch

does business plan include financial forecast

does business plan include financial forecast

How to Create a Financial Forecast

Bryce Warnes

Reviewed by

July 15, 2022

This article is Tax Professional approved

Maybe your goal is world domination. Maybe you just want a sustainable side hustle. Either way, financial forecasting helps you understand the steps you need to take—and the numbers you need to hit—to make growth happen for your business.

I am the text that will be copied.

Plus, if you ever go looking for more funding, you’ll need financial forecasts to prove that your business is on track for growth.

Here’s everything you need on hand, and the steps you can take, to produce a reliable financial forecast.

What is a financial forecast?

A financial forecast tries to predict what your business will look like (financially) in the future. Pro forma financial statements are how you make those predictions somewhat concrete.

Pro forma statements are just like the financial statements you use each month to see how your business is performing. The only difference is that you prepare pro forma statements in advance, for future months and years.

There are three key pro forma statements you should be familiar with:

  • The Income Statement
  • The Cash Flow Statement
  • The Balance Sheet

Helpful resource: How to Read and Analyze Financial Statements

Depending on your goals, these statements will cover different time spans. If you’re creating a financial forecast for your planning purposes, you should create pro forma statements covering six months to one year in the future.

If you’re presenting your forecast to a lender or investor, though, you should create pro forma statements covering the next one to three years.

Financial forecasting vs. budgeting

When you create a budget for your business , you plan to set aside money for certain costs, taking into account your income and expenses. The budget you make may be based on info from your financial forecast, but it’s distinct from the forecast itself.

Think of financial forecasting as a prediction, and budgeting as a plan. When you make a financial forecast, you see what direction your business is headed in, based on past performance and other factors, and use that to anticipate the future.

When you make a budget, you plan how you’re going to spend money based on what you expect your finances to look like in the future (your forecast).

For instance, if your financial forecast for next year says you’ll have an extra $5,000 in revenue, you might create a budget to decide how it will be spent—$2,000 for a new website, $1,000 for Facebook ads, and so on.

Three steps to creating your financial forecast

Ready to peer into the crystal ball and see the future of your business? There are three steps you need to follow:

  • Gather your past financial statements. You’ll need to look at your past finances in order to project your income, cash flow, and balance.
  • Decide how you’ll make projections. Besides past records, there’s other data you can draw on to make your projections more accurate.
  • Prepare your pro forma statements. Pour a coffee and get ready to crunch some numbers.

Step one: Gather your records

If you’re not looking into the past to see how your business has grown, you’re not really forecasting—you’re just guessing.

You’ll need to gather past financial statements so you can see how your business has developed over time, and then project that development into the future.

Your bookkeeper or bookkeeping software should generate financial statements for you. If you don’t have either, and you don’t have financial statements, you’ll need to take care of that before you can start forecasting. You need complete bookkeeping in order to get the transaction history you base your financial statements on.

Put aside the task for financial forecasting for the moment, and learn how to catch up on your bookkeeping .

Once your books and financial statements are up to date, you’ll have everything you need to start planning for the future.

Step two: Decide how you’ll make your forecast

Depending what resources you choose to use, the type of forecast you create will fall between two poles— historical and researched-based.

Almost every financial forecast includes a little bit of historical forecasting, and a little bit that’s research-based. The blend you choose will depend on your needs and the resources at your disposal.

Remember, the goal is to create a realistic, useful forecast—without breaking the bank or eating up all your time.

Historical forecasting

When you use your financial history to plot the future, it’s historical forecasting . You’re looking at your last few annual Income Statements, Cash Flow Statements, and Balance Sheets to see how fast you’ve grown in the past. From there, you can make a guess about how fast you’ll grow this year.

The benefit of this is that it’s relatively easy to do and doesn’t take a lot of time, money, or expertise. The drawback is that you’re only using info about your own business, and not looking at broader market trends—like what your competition has been up to.

Historical forecasting is a good bet if you’re forecasting for modest growth, or else creating a quick-and-dirty forecast for your own use—not putting together a presentation for potential investors.

Research-based forecasting

When you do research about broader market trends, you’re using research-based forecasting . You may look at how your industry has performed over the past ten years, investigate new technologies and consumer trends, or try to measure the progress of your competitors. You might look at how companies similar to yours have planned their own growth.

The benefit of research-based forecasting is that you get a detailed, nuanced view of how your business could grow, taking into account a lot of different factors. And it’s the kind of forecast that investors and lenders want to see.

The drawback is that researched-based forecasting can be expensive. You may find you need to hire outside consultants and researchers to handle the heavy lifting.

Research-based forecasting is a good choice if you’re courting investors, or planning on rapid, aggressive growth. It’s also good if your company is brand new, and doesn’t have a lot of financial history to draw on for making projections

Step three: Create pro forma statements

Once you’ve collected the information you need to build your forecast, you can create pro forma statements.

We’ll cover the three key financial statements here. Whether you use all of them is up to you.

If you’re creating a quick forecast for your own planning, you may only need to create pro forma Income Statements. If you’re presenting to lenders or investors, you’ll want to use all three.

Rule of thumb: Any form you’d use in the month-to-month operation of your business should be created pro forma. For instance, if you move a lot of cash around every month, and you rely on Cash Flow Statements to make sure you’ve got enough money on hand to pay your vendors, then it’s wise to create pro forma Cash Flow Statements as part of your forecast.

Creating the pro forma Income Statement

First, set a goal—a projection—for sales in the period you’re looking at.

Let’s say you made $30,000 in sales this year. Next year, you want to make $60,000. So, your total sales will increase by $30,000.

Set a production schedule that will let you reach that goal, and map it out over the time period you’re covering. In our example, there will be 12 Income Statements in the year to come (one each month). Map out that $30,000 increase in sales over the 12 statements.

You could do this by increasing sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to your instincts and experience as a business owner.

Then, it’s time for the “loss” part of “ profit and loss .” Calculate the cost of goods sold for each month, and deduct it from your sales. Deduct any other operating expenses you have, as well.

It’s important to take every expense into account so you get an accurate projection. If part of your plan is quadrupling your online advertising, be sure to include an expense that reflects that.

Once you’re done, your pro Forma Income Statements show you how much you can expect to earn and how much you can expect to spend in the time ahead.

Example Pro Forma Income Statement:

Karen’s Falafel Warehouse

2022 (current) $ 2023 $ 2024 $
Sales Revenue 15,000 19,000 23,000
Cost of Sales (6,000) (9,000)  (11,000)
Gross Profit 9,000 10,000  12,000
Operating Expenses
Rent 1,000 1,000 1,000
Web hosting  600 600 600
Advertising 3,000 3,000 3,000
Total Operating Expenses (4,600) (4,600) (4,600)
Operating Income 4,400 5,400  7,400
Net Income 4,400 5,400 7,400

Creating the pro forma Cash Flow Statement

You create a pro forma Cash Flow Statement a lot like the way you’d create a regular Cash Flow Statement. That means taking info from the Income Statement, and using the Cash Flow Statement format to plot out where your money is going, and how much you’ll have on hand at any one time.

Your projected cash flow can tell you a few things. If it’s in the negative, it means you’re not going to have enough cash on-hand to run your business, according to your current trajectory. You’ll need to make plans to borrow money and pay it off.

If your net cash flow is positive, you can plan on having enough surplus cash on hand to pay off loans, or save for a big investment.

Example Pro Forma Cash Flow Statement:

Ruth’s Raccoon Rescue and Rehabilitation Center

2022 (current) $ 2023 $ 2024 $
OPENING BALANCE 15,000 16,000 18,000
CASH RECEIVED FROM
Donors 86,000 88,000 93,000
Souvenir Shop 1,000 900 800
Total Cash Received 87,000 88,900 93,800
CASH PAID FOR
Supplies 33,000 35,000 36,000
Rent 24,000 24,000 24,000
Income Tax 8,000 8,600 8,800
Total Cash Paid 64,000 67,600 68,800
Net Cash Flow Operations 23,000 22,300 25,000

Creating the pro forma Balance Sheet

Drawing on info from the Income Statement and the Cash Flow Statement lets you create pro forma Balance Sheets. But you’ll also need previous Balance Sheets to make this useful—so you can follow the story of how your business got from “Balance A” to “Balance B.”

The Balance Sheet will project changes in your business accounts over time. That way, you can plan where to move money, when.

Example Pro Forma Balance Sheet:

Big Bill’s Budget Wedding Videos

2022 (current) $ 2023 $ 2024 $
ASSETS
Current Assets
Checking Acct. 12,000 15,000 18,000
Savings Acct. 34,000 40,000 44,000
Accounts Receivable 3,000 1,000 2,000
Inventory 14,000 17,000  21,000
Total Current Assets 63,000 73,000 86,000
NON-CURRENT ASSETS
Video Equipment 13,000  13,000 13,000
Car 7,000 7,000 7,000
Total Non-Current Assets 20,000 20,000 20,000
Total Assets 83,000 93,000 106,000
LIABILITIES & EQUITY
Current Liabilities
Accounts Payable 10,000 9,000 11,000
Line of Credit 23,000 20,000 19,000
Total Current Liabilities 50,000 45,000 43,000
Non-current Liabilities
Loan 40,000 36,000  32,000
Total Liabilities 90,000 81,000 75,000
EQUITY
Owner’s Capital 30,000 30,000 30,000
Retained Earnings 45,000 56,000 65,000
Total Equity 75,000 86,000  95,000
Total Liabilities & Equity 165,000 167,000 170,000

Forecast vs. actuals

Once you’ve created a financial forecast, your work isn’t done. The vital second stage is to go back and record what your actual financials were in comparison to your forecast once the month or year is over.

Why is this so vital?

It helps you learn to forecast better next year, and when your forecast is way off, you can take notes for yourself on why that was.

For example:

  • March revenue was much higher than I forecasted for. I didn’t realize there would be a seasonal boost over spring break.
  • Sales were lower than I forecasted in the June. There was a miscommunication with the supplier and I didn’t have all the inventory I needed.

These mundane notes to yourself accumulate into invaluable business knowledge that help make every year more successful than the last.

Best, worst, and normal case projections

Whether you’re the kind of person who always sees the glass half full, or the kind who always sees it half empty, it’s a good idea to take into account different possible outcomes for your business.

Humans aren’t very good at predicting the future. Consider creating three different forecasts: One for the best case scenario, one for the worst, and one for the middle or “regular” scenario.

  • Maybe the t-shirts you buy wholesale for your online store go up in price, like they did last year. Factor that into your worst case scenario .
  • Maybe t-shirt prices stay the same, plus your new advertising plan takes off, and you get more business. Consider that the best case.
  • Maybe everything more or less stays the same. Let’s call that the regular case.

The best/worst/regular trifecta is also useful when you’re making a budget for your business. For example, in January you might budget for a regular scenario. In this case, that means monthly sales revenue of $8,000.

However, in February say your revenue hits $10,000, and in March it’s $11,000. At that point, you may want to adjust your budget to the best case to scenario—since you’ll now have more money to reinvest in your business.

At the end of the day, the more robust your forecast, the better you’ll be able to plan the future of your business, and think on your feet. Plus, you’ll impress investors and lenders, by proving you’ve considered (almost) every possible outcome.

The better you understand how financial statements work, the easier you’ll find it to create financial forecasts. Before you start forecasting, take a look at our other helpful resources for understanding your small business financials:

  • Financial Literacy 101 for Small Business Owners
  • 10 Financial Ratios Every Small Business Owner Should Know
  • Accounting Solutions: The Top 7 Ways to Get Your Accounting Done

Related Posts

does business plan include financial forecast

How to Calculate Gross Income for the PPP

On February 22, the PPP changed so the self-employed can apply using gross income. But what does that mean for your PPP loan amount? Here's our guide on how to calculate gross income for the PPP.

does business plan include financial forecast

11 Alternatives to QuickBooks in 2024

QuickBooks isn't for everyone. Here are 11 alternatives to explore, each with a different emphasis.

does business plan include financial forecast

6 Challenges of Ecommerce Accounting (& How to Overcome Them)

With a low barrier to entry, ecommerce is a great way to get into entrepreneurship. But there are unique challenges. Learn about what challenges you'll face and how to master them.

Join over 140,000 fellow entrepreneurs who receive expert advice for their small business finances

Get a regular dose of educational guides and resources curated from the experts at Bench to help you confidently make the right decisions to grow your business. No spam. Unsubscribe at any time.

does business plan include financial forecast

More From Forbes

Basics of a business plan financials section.

YEC

  • Share to Facebook
  • Share to Twitter
  • Share to Linkedin

A good business plan is an entrepreneur’s best friend. It’s an indispensable document, and every section matters, from the executive summary to the market analysis to the appendix; however, no section matters as much as the financials section. You’re in business to make money, after all, and your business plan has to clearly, numerically reflect a lucrative business pursuit, preferably with visuals, especially if you want funding.

The financials section of your business plan tells you and your potential investors, loan providers or partners whether your business idea makes economic sense. Without an impressive financials section, you’re looking at an uphill battle when it comes to scoring capital; underwhelming financials may indicate a need to make some revisions to your approach.

Basic Financials

So, how to build an impressive financials section? As with all things in small business, there’s no one-size-fits-all approach; it varies by business and field. But there are some general guidelines that can give you a clear idea of where to start and what kind of data you’ll need to gather.

You need to include at least three documents in the financials section of your business plan:

1. Income statement: Are you profitable?

2. Cash flow statement: How much cash do you have on hand?

3. Balance sheet: What’s your net worth?

There’s other financial information you can — and often should — add to your business plan, like sales forecasts and personnel plans. But the income statement, cash flow projections and balance sheet are the ones you can’t leave out.

Here's a brief run-down of the three major data sets.

Income Statement

Also called a profit/loss statement, here’s where your reader can see if your business is profitable. If you’re not operating the business yet, this will be a projected income statement, based on a well-informed analysis of your business’s first year.

The income statement is broken down by month and shows revenue (sales), expenses (costs of operating) and the resulting profit or loss for one fiscal year. (Revenue - expenses = profit/loss.)

Cash Flow Statements

Here’s where your reader can see how much money you’re going to need in the first year of operations. If you’re not yet up and running, you’ll only have projections.

For cash flow projections, you’ll predict the cash money that will flow into and out of your business in a particular month. You’ll need a year’s worth of monthly projections. If you’re already operating, also include cash flow statements for past months showing actual numbers.

Cash flow statements have three basic components: cash revenues, cash disbursements and reconciliation of revenues to disbursements. For each month, you start with your previous month’s balance, add revenues and subtract disbursements. The final balance becomes the opening balance for the following month.

Balance Sheet

Here’s where your reader sees your business’s net worth. It breaks down into monthly balance sheets and a final net worth at the end of the fiscal year. There are three parts to a balance sheet:

• Accounts receivable

• Inventory, equipment

• Real estate

2. Liabilities

• Accounts payable

• Loan debts

3. Equity: Total assets minus total liabilities (Assets = liabilities + equity.)

It’s good to offer readers an analysis of the three basic financial statements — how they fit together and what they mean for the future of your business. It doesn’t have to be in depth; focus is good. Just interpret the data from each statement, putting it in context and indicating what the reader should take away from the financials section of your business plan.

Other Financial Documents

These are the basics of your financials, but you’ll need to fill out the section with other data based on the specifics of your business and your capital needs. Other financial information you might provide includes:

• Sales forecast: Estimates of future sales volumes

• Personnel plan: Who you plan to recruit/hire and how much it will cost

• Breakeven analysis: Projected point at which your sales will match your expenses

• Financial history: Summary of your business finances from the start of operations to the present time

Make It Easy

A lot of this can be made easier with business planning software, which can not only guide you through the process and make sure you don’t leave anything else but may also generate graphs, charts and other visuals to accompany the data in your financials section. Those types of visuals are highly recommended because some readers will skim. Anything you can do to convey information in a glance imparts a benefit.

Revisit Monthly

Once in operation, don’t forget to go back into your financials every month to update your projections with actual numbers and then adjust any future projections accordingly. Regular updates will tell you if you’re on track with your predictions and hitting your goals, as well as whether you need to make adjustments. Don’t forget this part — when you’re starting out, planning really is your best friend.

  • Editorial Standards
  • Reprints & Permissions
  • Search Search Please fill out this field.
  • Wealth Management

Financial Plan vs. Financial Forecast: What's the Difference?

J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.

does business plan include financial forecast

Financial Plans vs. Financial Forecasts: An Overview

A financial forecast is an estimation, or projection, of likely future income or revenue and expenses, while a financial plan lays out the necessary steps to generate future income and cover future expenses. Alternatively, a financial plan can be looked at as what an individual or company plans to do with income or revenue received.

While both processes orient financial activity toward the future, a financial plan is a road-map drafted now that can be followed over time and a financial forecast is a projection or estimate of future outcomes predicted today.

Key Takeaways

  • A financial plan is a strategic approach to finances that marks out a road-map to follow into the future.
  • A financial forecast is an estimate of future outcomes arrived at using one of several methods, including statistical models to make projections.
  • Both businesses and individuals can make use of financial plans and financial forecasts.

Financial Plans

A financial plan is a process a company lays out, typically broken down into a step-by-step format, for utilizing its available capital and other assets to meet its goals for growth or profit based on a reasonable financial forecast. A financial plan can be considered synonymous with a business plan in that it lays out what a company plans to do in terms of putting resources to work to generate maximum possible revenues.

Individuals can also take advantage of a financial plan. An annual financial plan is a guidebook of sorts that tells you where you’re at financially right now, what your goals are looking ahead and what areas or issues need to be addressed so that you can meet those goals. The plan covers every aspect of your financial life, from  investing  to  taxes  to your outlook for  retirement . While your starting point in developing your plan may be different based on your age, income, debts, and  assets , the most important components of an annual financial plan are the same.

Financial Forecasts

Financial forecasting is critical for business success. To effectively manage working capital and cash flow , a company must have a reasonable idea of how much revenue it plans to receive over a given time period and what its necessary expenses will be over that same period of time. Financial forecasts are commonly reviewed and revised annually as new information regarding assets and costs becomes available. The new data enables an individual or business to make more accurate financial projections. It is easier for established companies that generate steady revenues to make accurate financial forecasts than it is for new businesses or companies whose revenue is subject to significant seasonal or cyclical fluctuations.

For an individual, a financial forecast is an estimate of his income and expenses over a period of time. Based on that forecast, the individual can then construct a financial plan that includes saving, investing, or planning for obtaining additional income to augment his personal finances—as well as anticipating expenditures that would deplete them.

U.S. Small Business Administration. " Write Your Business Plan ."

PennState Extension. " Developing a Business Plan ."

Harvard Business School. " 7 Financial Forecasting Methods to Predict Business Performance ."

does business plan include financial forecast

  • Terms of Service
  • Editorial Policy
  • Privacy Policy

Explore Solution Hub - our brand new library of pre-built solutions and interactive tours

Financial Forecasting

Financial forecast definition.

The objectives of financial forecasting are to analyze past, current, and future fiscal data and conditions to shape strategic decisions and policy. A financial forecast is a framework that presents estimates of past, current, and projected financial conditions.

This assists the business in several ways. It helps identify future costs and revenue trends that may influence strategic goals, policies, or services in the near- or long-term. It also enhances the connection between finance and the business and improves decision-making during the annual budget process, enabling delivery of more business collaboration and connection.

The underlying methodology and assumptions that define financial forecasting should be clearly presented and available to the business as part of the budget process.

Financial forecasting involves the creation of specific financial statements that reflect risk and outlook based on relevant facts and trends. These statements are sometimes also called pro-forma statements. The most common financial statements that are important to making financial prediction include:

Income statement. Sometimes called a profit and loss account, an income statement reveals the company’s expenses and revenues during a particular period and shows how the business transforms those revenues into net profit or net income.

Cash flow statement. Also known as a statement of cash flow, a financial statement shows how changes in income and balance sheet accounts affect cash and cash equivalents, and breaks down its analysis into investing, operating, and financing activities.

Pro-forma balance sheet . A pro forma balance sheet and a historical balance sheet are similar, but a pro forma balance sheet contains running balances for the liabilities, assets, and equity we estimate the business will have in the future and represents a projection . Accounts receivable and current cash assets are the first two items on a pro-forma balance sheet.

What is Financial Forecasting?

Financial forecasting is the process of analyzing what happened in the past, what is happening now, and using that information to determine what is going to happen in the future. Businesses use financial forecasting as a tool for planning and adapting to uncertainty by more effectively predicting risks, opportunities and challenges that the business could encounter.

By engaging in a thorough process, enterprises can generate financial plans that estimate their projected expenses, income, and other organization-specific macroeconomic factors affecting financial forecasting. A strong forecast includes short- and long-term outlooks on contingencies for costs not currently viewed as necessary and other conditions that might possibly affect revenues. Effective financial forecasts rely on detailed models, skilled experts, strong business partnerships and connections and tools for information gathering such as financial forecasting software.

Financial forecasts fluctuate with business trends and other factors, and this is in part why financial forecasting is more accurate in the short term than in the long term.

A financial forecast should include:

  • Prior results weighted against current realities, considering the historical accuracy of data sources and other assumptions critically
  • A forward-facing timeframe, either set or rolling
  • Full assessment of all macroeconomic risks including major, sudden global events such as pandemic, wars, or natural disasters
  • Best-case and worst-case revenue scenarios and key business assumptions
  • Best-case and worst-case anticipated expenses
  • Worst-case unanticipated costs, such as from disasters, data loss, or cyberattacks
  • Internal risk assessment for threats such as insider attacks
  • Connecting the business to “why” this forecast matters and is relevant

Financial forecast accuracy is frequently a critical factor in an organization’s ability to survive unforeseen events.

Types of Financial Forecasting

Organizations have many, varied reasons to conduct financial forecasting. For that reason, there are several types of financial forecast:

Historical financial forecast . A historical forecast uses data from past financial statements including balance sheets, cash flow statements, and income statements to project future growth. This is an easy approach and the most common set of documents finance teams use to engage the business.

Sales forecasting. Predicts the amounts of products or services a business will sell during a projected fiscal period using one of two sales forecasting methodologies: bottom-up forecasting or top-down forecasting. Sales forecasting is useful for budgeting, allocating and managing resources more efficiently, and streamlining planning production cycles. Additionally, this is one of the most important forecasts that finance uses to connect and collaborate inside the business.

Cash flow forecasting. Based on factors such as expenses and income, cash flow forecasting involves estimating cash flow in and out of the business across a defined fiscal period. Although cash flow financial forecasting is more accurate over the short term, it has several applications, including budgeting and identifying immediate funding needs.

There are four basic financial forecast models that are quantitative: straight line or run rates, moving average, simple linear regression and multiple linear regression. All rely on large quantities of historical data that can be measured and statistically controlled and rendered to identify trends and patterns.

Financial forecasting methods may also be qualitative. These techniques rely on data that is mission critical for businesses but cannot be measured objectively, such as evolving customer preferences, and new technologies such as machine learning and predictive modeling algorithms.

What’s the right method or combo of methods for your business? That’s based on a number of considerations.

Financial forecast examples of quantitative methods are:

  • Pro-forma financial statements that use data from previous years such as expected variable and fixed costs and sales figures to make forecasts.
  • Time series analysis identifies trends and can be highly accurate, especially over the short term.
  • Scenario method identifies cause-effect relationships of relevant variables.

Qualitative forecasts are more likely to be used when little or no historical data is available. Some examples of qualitative forecasting methods are:

  • Business knowledge. As always key personnel and other experts can provide a financial forecast.
  • Consumer research. Market research among consumers might include data collected via emails, interviews, phone calls, questionnaires, sample tests, texts, or more, all used to generate forecasts.
  • Scenario forecasts. The forecaster generates various outcomes for different scenarios and results based on them, and management selects the most likely outcome.
  • Key assumption forecasts. Taking a set of key assumptions in the business to discuss with key business partners to test and validate potential outcomes.

What is the Financial Forecasting Process?

The key steps in how to create a financial forecast for business include the following:

Define assumptions

Define assumptions that will impact the forecast to create common goals for the process:

  • What is the financial forecast timeframe?
  • What is the forecasting policy objective? For example, a conservative forecast might build in expenditures for contingencies and underestimate revenues, reducing the risk of an actual shortfall but making it harder to balance the budget. A more objective forecast might aim for accuracy, estimating expenditures and revenues as accurately as possible, increasing the risk of an actual shortfall but making it easier to balance the budget.
  • What are the legal, business, and political issues related to the forecast? Know any expected legal changes or current regulations that affect forecasts.
  • What are the major figures for expenditure and revenue categories such as cash flow, profitability, and net value?
  • What do you hope to learn from the financial forecast? Do you hope to estimate the impact of the current budget on the brand or how many units of your products or services you will sell? Defining the purpose of the financial forecast is essential to selecting the right factors and metrics to consider.

Financial forecasts afford insight into the future, from several weeks to several years, although most companies forecast for one fiscal year at a time.

Gather information and insights from the business

To support the forecasting process, use business conversations and statistical data as well as the forecaster’s expertise and accumulated judgment to forecast financial results, build quantitative models, and document results throughout the financial forecasting process. Gather any relevant historical data and records that impact financial decisions and the fiscal environment, including those concerning: income, costs, equity, expenses, investments, liabilities, risks, and revenue.

Business trends, analysis and information should be a collaborative process with finance and the business. The finance team conducts analysis and examination of historical data and relevant economic conditions for consistent patterns or trends and evidence in several areas:

  • Business cycles. Are expenditure, revenue, or both independent of business cycles or do they vary with community levels of economic activity?
  • Demographic trends. How do changes in population impact revenue or service demands?
  • Outliers and anomalies. Are there extreme values in the data that need to be explained?
  • Relationships between variables. Could important inter-variable relationships aid in forecasting?

Select methods

Select the right quantitative and/or qualitative forecasting methods. Three basic forecasting models to consider include:

  • Extrapolation predicts future behavior using historical revenue data to project forward trends.
  • Regression analysis, also called regression econometrics, is a statistical procedure that determines the relationship between independent and dependent variables to predict future revenues or expenditures.
  • Hybrid forecasting combines quantitative forecasting methods with knowledge-based forecasting.

Implementation methods

Implement the forecast using the various forecasting methods described above. Develop a range of possible forecast ranges or outcomes based on various scenarios.

Use forecasts appropriately

The purpose of a forecast is to inform decision-making, so any compelling, functional financial forecast must achieve several goals.

Financial accuracy and credibility is central, and any financial forecast should be transparent and open around key drivers, assumptions and potential outcomes connected to business processes and tactics. Describe why and how actual financial data and results might be lower or higher than the forecast due to forces acting on expenditures or revenues. Discuss possible tactics for how to improve financial forecasting accuracy and stay within acceptable accuracy tolerances for forecasts.

Link the financial forecast to organizational decision-making and the planning and budgeting process to lend a long-term perspective to the financial planning policy.

What is Financial Forecasting and Planning?

The difference between financial planning and forecasting is that a financial plan is a concrete, step-by-step process for executing the financial forecast. A financial forecast is a projection or estimate of likely future expenses and revenue or income, while a financial plan sets forth the steps needed to cover future expenses and generate future income.

A financial plan lays out the process for making use of assets such as available capital to meet organizational goals for profit or growth based on the financial forecast. A financial forecast in a business plan lays out how to apply resources to generate optimal revenues.

What is Financial Forecasting and Budgeting?

Organizations use both financial forecasting and budgeting as tools. Budgeting establishes where management hopes the company will go, and financial forecasting confirms progress toward the goals.

Budgeting serves as a baseline for comparison for actual results and expected performance metrics. Typically covering one year, budgets include expected cash flows and debt reduction, estimates of revenues and expenses, and a point of comparison for actual results to calculate variance from financial forecasts.

Financial forecasting examines historical data to estimate a company’s future financial outcomes and looks at how actual performance and changes are guiding future outcomes. It is updated routinely, when there is a change in inventory, operations, and/or business plan.

A management team can use financial forecasting over both the short-term and long-term and take immediate action based on the forecasts or use it to develop its business plan.

Financial Forecasting vs. Financial Modeling

Financial forecasting is a process through which organizations can shape realistic expectations surrounding future results and prepare for what’s ahead. In contrast, financial modeling, uses the assumptions from a financial forecast and financial statements to build a predictive financial model. Businesses use these financial models to budget, attain financing, invest, and otherwise make sound business and financial decisions.

Financial modeling allows organizations to summarize a range of variables and financial information that affect the business. Additionally, financial models can be shared with the business in order to conduct their own forecast based on changing key assumptions, drivers or variables. Financial models are the tools which financial forecasts are communicated and built upon.

Financial models are used for budgeting and projecting financial performance, creating pro forma financial statements, historical analysis of businesses, investment research, such as equity analysis, project finance analysis for funding of long-term assets, mergers and acquisitions, and raising capital.

Why Financial Forecasting is Important?

Financial forecasts are a core piece of business planning, operations, budgeting, and funding. They empower finance and the business together to make smarter, more forward-thinking and impactful decisions.

A financial forecast is an integral part of the annual budget process because it estimates future financial outcomes and informs major financial decisions, such as whether to hire ahead of plan, fund a capital project, or seek investment.

A financial forecast enables finance departments to establish relevant, realistic business goals and estimate how the business might perform in the future based on past performance. Financial forecasts are also critical to investor relations, and to analyzing financial data from the past.

What are the Advantages and Disadvantages of Financial Forecasting?

How can financial forecasting benefit an organization? Beyond the practical advantages of financial forecasting we’ve already covered, the financial forecast process offers several other benefits:

  • Helps establish realistic goals;
  • Forms a foundation for budgeting decisions;
  • Prepare the organization for best- and worst-case scenarios including unforeseen future expenses;
  • Prepare businesses for demand fluctuations as well as forces that influence costs of goods sold;
  • Prepare organizations for predictable changes like new tax brackets;
  • Prevent events from blindsiding leaders and hurting performance;
  • Provide a gauge for management making financial decisions;
  • Raise awareness of and establish controls for a broad range of external and internal variables with short- and long-term impacts;
  • Reduces financial risk more generally to improve the organization.
  • Increase business partnership and collaboration to how forecasts drive business outcomes.
  • Provide a strategic overview of key assumptions and drivers that help navigate uncertainty and change
  • Avenue for finance to work together with accounting and business partners to go further together

There is no real downside to financial forecasting—other than the need to do it and the cost to achieve it.

Who is Responsible for Financial Forecasting?

Preparing, analyzing, and forecasting financial statements falls to the finance team, in close partnership with the business. Together, this partnership should inform the leaders and management teams inside and outside the company. Forecasting absolutely needs to be a united team project.

What are Financial Forecasting Tools?

A variety of financial forecasting tools and techniques exist for forecasting future financial returns and measuring performance. Anything that helps analyze and process current internal business and external economic information might be considered a tool for financial forecasting. Home-based or other small businesses might not use financial forecasting tools as often as enterprise-class organizations, but the advent of financial forecasting software and platforms have made these tools more available.

Does Planful Help With Financial Forecasting?

Creating financial forecasts is more complex than it used to be, thanks in part to the availability of so much real-time data and better tools. For example, fraud detection, buying patterns, machine learning, customer segmentation, real-time stock market information, and other details add complexity as they open up more possibilities.

Dedicated financial management software that automatically collects all operational and financial data and KPIs in one location with one data set makes the financial forecasting process quicker and more accurate.

When it comes to how to forecast a company’s financials, there’s no one right way. However, spending any time conducting financial forecasting reveals that pouring over massive amounts of historical data can be exhausting. And spending all of the budget and time on historical data and linear analysis generates financial forecasts that are frequently doomed to irrelevance thanks to changes in consumer behavior or market volatility.

To best prepare for unforeseen situations, engage in ongoing financial forecasting with a continuous planning platform. This allows for more effective scenario analyses that consider unexpected, worst-case market scenarios and other external factors. It also ensures data integration so your financial and non-financial data doesn’t get locked in data silos. Planful offers a centralized platform that finance and the business can communicate, collaborate to drive clear and concise business outcomes through a unified and easy to use action oriented platform.

A powerful FP&A platform with financial forecasting software, Planful supports continuous financial forecasting and other financial planning without consuming excess time. Respond to uncertainties and market shifts much faster with the data at your fingertips.

Curious to learn what else Planful can do to help your team learn how to do financial forecasting more effectively? Contact us for a demo.

Get Started with Planful

Free! 5-Day Challenge - Find & Validate Your Ecommerce Idea!

  • Skip to primary navigation
  • Skip to main content

A magazine for young entrepreneurs

does business plan include financial forecast

The best advice in entrepreneurship

Subscribe for exclusive access, what does a business financial plan include a painless, step-by-step walkthrough.

' src=

Written by Rebeca Seitz | February 24, 2020

Comments -->

does business plan include financial forecast

Get real-time frameworks, tools, and inspiration to start and build your business. Subscribe here

While your incredible, unique, surefire business idea will be sure to captivate investors, you won’t get very far in finding financial support unless you can also tell its financial story. That’s the purpose of your business financial plan—to show your potential funders what a good bet this is. You aren’t just a dreamer. You’re a doer . You’re business financial plan shows this.

“The goal is to show your lender that you are a reliable and resilient borrower to give them confidence in their decision,” Bill Phelan, CEO of PayNet , an Equifax Company, told Foundr.

Foundr understands that this part of getting your business off the ground can be intimidating. You might even be tempted to put it off or ignore it entirely, hoping a magical unicorn will notice how hard you’re working and how good your idea is and just pop up with a check.

Come on back to reality and let’s do this.

On the major plus side, this endeavor doesn’t only serve the people who are holding the cash you need. Creating the five elements of your business financial plan (income forecast, expense budget, cash flow snapshot, assets and liabilities disclosure, and break even analysis) serves you .

Writing your business financial plan forces you to take an honest look at what you’re about to attempt. You’ll have to think not just about today’s exciting idea, but the intricacies of how that idea will come to fruition in a nearby tomorrow.

Chances are high that you will spot any potential financial pitfalls as you create this plan, instead of crashing into them six months from now and watching all your work go down in flames.

This isn’t rocket science, it’s entrepreneurship. And you’re here for that—for all of that—right?

Then let’s get to it.

Elements of a Business Financial Plan, Explained

Financial plans typically include five elements:

  • Income forecast
  • Expense budget
  • Cash flow snapshot
  • Assets and liabilities disclosure
  • Break even analysis

The exact order and terminology may vary, but the information that should be included boils down to those five areas. Let’s walk through each one and you’ll see how simple this is.

Sales Forecast

Just write, “I’m going to make a million dollars in three weeks!”

Do not write that, or anything remotely resembling it. Yes, even if you just know that it is absolutely 100% true for your amazing idea.

The sales forecast is your opportunity to show a lender or investor that you are not a starry-eyed dilettante who will blow through their cash. This is your moment to be reasonable and mature. Feel free to drink a cup of tea (pinky raised) and speak in a lofty British accent while you write out the list of ways you will make money. Is it product sales? Advertising? Memberships?

Now, the time has come to validate your dreams with a warm, comforting coat of research-based estimates. Find a product or service that is similar to yours. Now find two more. Look at the sales of those products or services. Consider how they are each similar to or different than yours. What do you plan to do differently? How will your product or service cause a different reaction in the market?

Now assign sales figures to each item listed in your income source list, based on similar sales in your industry and  your reflection on your idea’s potential compared to their reality. Keep in mind that your numbers here are not set in stone. They are your  informed best estimate,  and you will explain how you arrived at that estimate when you sit with a lender or investor discussing the plan you’re now writing.

For instance, let’s say you have designed a beautiful, one-of-a-kind fork. It provides all the services of the billions of existing forks on the planet—but it also records how many calories it forks into your mouth and reports those to the health app on your iPhone. (Also, it’s dishwasher safe!)

You could research sales of forks and sales of health gadgets, then use the information from that to form best guesses for how your new Fork Dork could sell.

Later, when you’re sitting with Mrs. Josephine Banker and telling her how you need a $2.3 million loan to create a prototype, you will be able to say, “Look at all the forks that sell every year already, Mrs. Banker. Obviously, forks are in major use. Now take a look at the billions that are spent on calorie counters and food trackers. See what a credible profit potential this holds?”

Insider word of advice: Once you’ve created your estimate, cut it by 20%.

Trust me on this.

That way, when you’re sitting with Mr. Igor Investor, you’ll be able to say, “To be conservative and reasonable, I lowered my projections by 20%.” He’s going to appreciate this display of reason and perhaps attach more credibility, not only to your entire financial business plan, but to your business idea as a whole.

sales forecast

And here are some of the fun graphs that can be made with sales projections.

sales projection

Download templates to create your own sales projection worksheets and charts at vertex42.com. Find the sales projection worksheets here .

Expense Budget

Wouldn’t it be awesome if you had every dollar you needed before you needed it to build your business? What a fun fantasy.

And that’s all it will be, unless you put fantasy to paper. For your next business financial plan element, you’ll create an expense budget.

This is not the place to skimp or ignore . Here’s your opportunity to ask for everything you envision needing. You may not get it all, but you should absolutely include it all in the ask.

Remember that this is your opportunity to show how reasonable and logical you are. So, while you will include every potential expense you can imagine, you will also refrain from granting yourself a million dollar salary in the first six weeks with a half million dollar bonus two weeks later.

Be realistic. Learn to pronounce “boot strap” and “grow to go” (yes, you can do it in that British accent you perfected during the income forecasting).

In your expense budget, you’ll list salaries, contract worker fees, costs for equipment, research, office rent, supplies, software, subscriptions, travel, and more.

If this is your first go-round, a strong word of advice: Don’t forget to budget for legal (attorneys), accounting (bookkeepers and tax professionals), and tax payments (on payroll and sales). Some founders think they can skimp on these areas and squeak through with fingers crossed.

But if you want to build a business financial plan that reflects a mature, responsible approach (and not ruin yourself financially if this doesn’t work out), then you will include money for attorneys, accountants, and the government’s cut.

Also, include a line item for contingencies and miscellaneous. It should be 10-20% of your entire expense budget. So, if you tallied up everything you anticipate needing to spend for the year and it comes to $1 million, add $100,000-$200,000 in the “contingencies/miscellaneous” column.

It will feel excessive.

Mrs. Banker and Mr. Investor know it is not.

It is, instead, the line they know you will pull from when something unexpected inevitably happens, and that means you will most likely not be coming in their door with your hand out again.

For my fellow visual learners, here’s an example of an expense budget:

2020 expense budget

Cash Flow Snapshot

Now that you’ve thought through where the money is coming from and where it’s going, you can create a Cash Flow Snapshot. This document gives you an idea of how much money you’ll have on hand for operations on any given day. It also lets your lender or investor see why you need operational money to get (or keep) going.

At first, the Cash Flow Snapshot can seem redundant. If 1,000 Fork Dorks are projected to sell in August for $40 each, then August income is $40,000, right?

Well, who bought the Fork Dorks? (There’s another business idea: a band called “Who Bought the Fork Dorks?”) If wholesalers bought them to re-sell in stores, then they might not be paying you for your product for 30, 60, or 90 days. So, $40,000 of product can go out in August, but it could be November before that $40,000 comes in as income. This is accrual accounting and something you can talk about with the accountant you intend to hire because you are a serious entrepreneur. By using accrual accounting to create your Cash Flow Snapshot, you’ll see that, if there is no other source of income than that $40,000 sale in August, the busy workers in the factory making Fork Dorks might well walk off the job.

You’d wind up Fork Dork-less!

Also, you’d be back in the banker or investor’s office with your hand out and a sheepish expression, explaining how you really, really are a smart, serious, trustworthy entrepreneur but you didn’t take into account something as simple as the gap between sale and payment.

Aren’t Cash Flow Snapshots awesome?

Visual learners, here’s your example of a blank Cash Flow Snapshot  (download a template from SCORE here ):

12 Month Cash Flow

Assets and Liabilities Sheet (aka Balance Sheet)

Okay, so we have a sheet that shows where the money is coming from, another one that shows where the money is being spent, and another that shows the ebb and flow of all that in monthly time. Lovely!

Now you’ll incorporate in whatever Mrs. Banker, Mr. Investor, and you have put into the business, as well as other elements, to create your Assets and Liabilities Sheet.

Assets include the money you have in the bank (both pennies!), the money that’s coming in (that $40,000 in November), the value of what you could sell but haven’t yet ($100,000 worth of Fork Dorks sitting on your warehouse shelves), Mr. Igor’s investments, any other investments (don’t group short-term and long-term investments into one line), any real estate or vehicles the company owns, any equipment—basically anything the company owns that could be sold for money.

Liabilities include everything the company owes. Imagine the company goes belly up. Now think about who would be owed money. Mrs. Banker’s loan (and interest that would be due). Payroll and taxes for your employees. Contracted worker fees. Other contracted fees (e.g. office rent for the remainder of the lease). List all of these in the liabilities section.

To figure out the net worth of your company, subtract your liabilities from your assets. For instance, if you owe $100,000 (liabilities) and you have $200,000 in assets, then your company’s net worth is $100,000. This is also called the owner’s equity  because it’s the value of what the owners own by being owners of this business.

The Assets and Liabilities Sheet shows how the net worth of your business/owner’s equity changes from month to month or year to year as you pay off the liabilities and accrue assets.

Resist the urge to rub your hands together and giggle as you see the number head into a positive range and grow.

Well, go ahead, nobody’s watching. But only for a second.

Visual learners, here’s your example of an Assets and Liabilities Sheet  (download a template to create yours from Vertex42 here ):

balance sheet

Break Even Analysis

At last, you have reached the Final Frontier. Okay, not really. You’ve just come to the final element of writing a business financial plan: the Break Even Analysis.

This document is exactly what it sounds like, a reflection of when your company is going into the black and not going back. At what point do the numbers reflect that your company is making more than it’s spending? Mr. Investor is particularly interested in this part because it shows him when and how his gamble might pay off.

Remember how you absolutely, 100% are not going to show your sales hitting $1 million in three weeks? (If you’ve already forgotten that part of this article, then you might need to pause here and go Google “ginkgo biloba.”) A big reason for that is to avoid a “hockey stick” in your break even analysis.

They look like this:

hockey stick” break even analysis

Now, before a bunch of pucks get thrown at the Foundr offices, let’s be clear that this is not a bias against hockey. No, this is a bias against unrealistic expectations and projections (aka googly-eyed entrepreneurs). Put your most posh British accent back on and tell yourself, “I must be reasonable.”

Now create a spreadsheet that shows when your income moves beyond your expenses and stays there.

Here’s what one looks like (download yours from SCORE here ):

break even analysis

Ta Da! Business Financial Plan, Done

You did it! You made it to the end of an article that had nothing to do with your creative product or service and everything to do with math, finance, accounting, and reasonable entrepreneurial endeavors. You now know how to create a business financial plan.

You are a boss.

Or, you’re soon going to be.

But not of Fork Dork, Inc.

That one’s mine.

Any questions? Feel free to blast them in the comments below!

' src=

About Rebeca Seitz

Rebeca Seitz is a best-selling writer and producer, and the founding CEO of 1C Productions, Inc. She recently raised over $3M for a single business venture and helped create, distribute, and promote products with sales of over $34M. Her books are published by HarperCollins and B&H Group and her last screenplay was produced with Out of Order Studios and written with Disney veteran Bob Burris. She has appeared on NPR, CNN, Huffington Post Live, and more regarding the responsible use of mass media.

Related Posts

How Much To Unapologetically Charge For Public Speaking

How Much To Unapologetically Charge For Public Speaking

How to Get Sponsored: From 0 to $50,000 in 4 Weeks

How to Get Sponsored: From 0 to $50,000 in 4 Weeks

How To Develop a Million-Dollar Pitch Deck For Potential Investors

How To Develop a Million-Dollar Pitch Deck For Potential Investors

Business Not Making Money? Here’s the Reason(s) Why

Business Not Making Money? Here’s the Reason(s) Why

What Is ROI? And How Can You Calculate It like a Pro?

What Is ROI? And How Can You Calculate It like a Pro?

Profit and Loss Statement: What Is It and Why Your Business Needs One

Profit and Loss Statement: What Is It and Why Your Business Needs One

How Much Do Consultants Make? Get Ready to Consult.

How Much Do Consultants Make? Get Ready to Consult.

Business Startup Funding: A Beginner’s Guide

Business Startup Funding: A Beginner’s Guide

These Founders Bought Back Their Business: Chris Savage and Brendan Schwartz of Wistia

These Founders Bought Back Their Business: Chris Savage and Brendan Schwartz of Wistia

Annual Recurring Revenue: Calculate Your Subscription Revenue

Annual Recurring Revenue: Calculate Your Subscription Revenue

Revenue vs Profit: What’s the Difference and Why it Matters

Revenue vs Profit: What’s the Difference and Why it Matters

How to Build Business Credit Fast: Everything You Need to Know

How to Build Business Credit Fast: Everything You Need to Know

Series Funding for Startups: Terms and Jargon Explained

Series Funding for Startups: Terms and Jargon Explained

16 Financial Concepts Every Entrepreneur Needs to Know

16 Financial Concepts Every Entrepreneur Needs to Know

Is Your Business Not Making Enough Money? Here’s How to Fix It

Is Your Business Not Making Enough Money? Here’s How to Fix It

FREE TRAINING FROM LEGIT FOUNDERS

Actionable Strategies for Starting & Growing Any Business.

does business plan include financial forecast

FREE Finance Masterclass!

Set up your business finances “the smart way” to earn and keep more money..., don't miss out register free for the 5-day challenge..

  • 5 Days. 7-Figure Founders LIVE.
  • Walk Away With A Winning Idea.

does business plan include financial forecast

  • Starting a Business
  • Growing a Business
  • Small Business Guide
  • Business News
  • Science & Technology
  • Money & Finance
  • For Subscribers
  • Write for Entrepreneur
  • Tips White Papers
  • Entrepreneur Store
  • United States
  • Asia Pacific
  • Middle East
  • South Africa

Copyright © 2024 Entrepreneur Media, LLC All rights reserved. Entrepreneur® and its related marks are registered trademarks of Entrepreneur Media LLC

  • Write Your Business Plan | Part 1 Overview Video
  • The Basics of Writing a Business Plan
  • How to Use Your Business Plan Most Effectively
  • 12 Reasons You Need a Business Plan
  • The Main Objectives of a Business Plan
  • What to Include and Not Include in a Successful Business Plan
  • The Top 4 Types of Business Plans
  • A Step-by-Step Guide to Presenting Your Business Plan in 10 Slides
  • 6 Tips for Making a Winning Business Presentation
  • 3 Key Things You Need to Know About Financing Your Business
  • 12 Ways to Set Realistic Business Goals and Objectives
  • How to Perfectly Pitch Your Business Plan in 10 Minutes
  • Write Your Business Plan | Part 2 Overview Video
  • How to Fund Your Business Through Friends and Family Loans and Crowdsourcing
  • How to Fund Your Business Using Banks and Credit Unions
  • How to Fund Your Business With an SBA Loan
  • How to Fund Your Business With Bonds and Indirect Funding Sources
  • How to Fund Your Business With Venture Capital
  • How to Fund Your Business With Angel Investors
  • How to Use Your Business Plan to Track Performance
  • How to Make Your Business Plan Attractive to Prospective Partners
  • Is This Idea Going to Work? How to Assess the Potential of Your Business.
  • When to Update Your Business Plan
  • Write Your Business Plan | Part 3 Overview Video
  • How to Write the Management Team Section to Your Business Plan
  • How to Create a Strategic Hiring Plan
  • How to Write a Business Plan Executive Summary That Sells Your Idea
  • How to Build a Team of Outside Experts for Your Business
  • Use This Worksheet to Write a Product Description That Sells
  • What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
  • How to Raise Money With Your Business Plan
  • Customers and Investors Don't Want Products. They Want Solutions.
  • Write Your Business Plan | Part 4 Overview Video
  • 5 Essential Elements of Your Industry Trends Plan
  • How to Identify and Research Your Competition
  • Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
  • How to Identify Market Trends in Your Business Plan
  • How to Define Your Product and Set Your Prices
  • How to Determine the Barriers to Entry for Your Business
  • How to Get Customers in Your Store and Drive Traffic to Your Website
  • How to Effectively Promote Your Business to Customers and Investors
  • Write Your Business Plan | Part 5 Overview Video
  • What Equipment and Facilities to Include in Your Business Plan
  • How to Write an Income Statement for Your Business Plan
  • How to Make a Balance Sheet
  • How to Make a Cash Flow Statement
  • How to Use Financial Ratios to Understand the Health of Your Business
  • How to Write an Operations Plan for Retail and Sales Businesses
  • How to Make Realistic Financial Forecasts
  • How to Write an Operations Plan for Manufacturers
  • What Technology Needs to Include In Your Business Plan
  • How to List Personnel and Materials in Your Business Plan
  • The Role of Franchising
  • The Best Ways to Follow Up on a Buisiness Plan
  • The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
  • How to Hire the Right Business Plan Consultant
  • Business Plan Lingo and Resources All Entrepreneurs Should Know
  • How to Write a Letter of Introduction
  • What To Put on the Cover Page of a Business Plan
  • How to Format Your Business Plan
  • 6 Steps to Getting Your Business Plan In Front of Investors

How to Make Realistic Financial Forecasts Business plans and financing proposals are based on projections. Here's how to set attainable financial goals.

By Eric Butow Oct 27, 2023

Key Takeaways

  • Why forecasts are necessities for startups
  • Experts advice on how to be conservative in your forecasts.
  • The cash flow pro forma

Opinions expressed by Entrepreneur contributors are their own.

This is part 8 / 12 of Write Your Business Plan: Section 5: Organizing Operations and Finances series.

Business plans and financing proposals are based on projections. Past financial data can only support your projections. However, financial projections in your business plan express in common financial terms and formats how you expect the immediate future to play out the scenarios you created in the body of the plan. You can forecast financial statements such as balance sheets, income statements, and cash flow statements to project where you'll be at some point in the future.

Forecasts are necessities for startups, which have no past history to report on. Existing businesses find them useful for planning purposes. Forecasts help firms foresee trouble, such as a cash flow shortfall, that is likely to occur several months down the road, as well as give them benchmarks to which they can compare actual performance.

Related: The Facts About Financial Projections

It's always advisable to be somewhat conservative in your forecasts.

Forecasts Aren't Forever

Noah Parsons writes in How to Better Manage Your Business by Creating a Live Forecast : "You need to revisit and update your forecasts. If your budget and forecasts from the beginning of the fiscal year are static and unchanging, it's hard to see how the changes you're planning on making will impact your business financially. It's also hard to communicate the changes you're planning to make to the rest of your team.

Related: How to Write an Income Statement for Your Business Plan

Static budgets don't adjust to new situations and in fact, they become more and more outdated as the year goes on. What may have been small variances at the beginning of the year can become larger and larger as actual results naturally differ.

Once a budget is stale and outdated, it's easy to ignore because it doesn't reflect the current situation your business is in. And especially during a crisis, when things can fluctuate rapidly, you don't want budgets and forecasts that you just ignore. Having them up to date can mean the difference between survival and growth, or mismanagement and dwindling performance."

Related: My Company Hears Hundreds of Pitches Every Year — Here's What Investors Are Actually Looking For.

Projected Income Statement

Business planning starts with sales projections. No sales, no business. It's that simple. Even if you're in a long-range development project that won't produce a marketable product for years, you have to be able to look ahead and figure out how much you'll be able to sell before you can do any planning that makes sense.

Now that the pressure's on, making a sales projection and the associated income projection may look a little tricky. So let's do it step-by-step.

Related: 80% of Businesses Fail Due To a Lack of Cash. Here are 4 Reasons Why Cash Flow Forecasting Is So Important

First pick a period for which you want to make a projection. You should start with a projection for the first year. To do so, you want to come up with some baseline figures. If you're an existing business, look at last year's sales and the sales of prior years. What's the trend? You may then be able to simply project out the 10 percent annual sales increase that you've averaged the past three years for the next three years.

If you're a startup and don't have any prior years' figures to look at, look for statistics about other businesses within your industry. The most important question to ask is: What has been the experience of similar companies? If you know that car dealers across the nation have averaged 12 percent annual sales gains, that's a good starting point for figuring your company's projections.

You'll also need to do your due diligence to get an idea of how much volume you can expect and what factors will have a positive or negative impact upon your ability to sell.

For example, how many people can your restaurant expect to serve in a given day? Statistics of other restaurants may be hard to find, so you may have to do some research by simply watching customers enter and leave a similar type of restaurant for a couple of days during the breakfast, lunch, and dinner hours. Once you get a feel for how many people it is drawing on average, you can begin to estimate how many you may draw. Take into consideration your location vs. its location and the fact that it has regular customers who are familiar with the menu.

Statistics you can look at include how many people are within a few miles and what percentage meet your demographics. For example, a family- friendly restaurant wants to know how many families are living nearby, while a fine-dining establishment wants to get statistics on how many people with a higher income are living within a few miles of the establishment.

Related: How to Use Your Business Plan to Track Performance

For retailers, the difficult part is determining how much market share you can expect. You need to factor in the need for your product in a given community, which can range from local neighborhoods to worldwide if you are selling on the web. Volume will be the toughest thing to estimate. Try to remain conservative in your estimates, knowing that you may not be selling a lot of products or services right off the bat.

Forecasting expenses is your next step, and it's much easier. You can often take your prior year's cost of goods sold, adjust it either up or down based on trends in costs, and go with that. The same goes for rent, wages, and other expenses. Even startups can often find good numbers on which to forecast expenses because they can just go to the suppliers they plan to deal with and ask for current price quotes plus anticipated price increases.

Related: How a Failed Forecast Can Inform Future Planning

When making forecasts, it's useful to change dollar amounts into percentages. So if you figure sales will rise 20 percent next year, you'll enter 120 percent on the top line of the projection. Using percentages helps highlight overly optimistic sales projections and suggests areas, especially in costs, for improvement.

Projected Balance Sheet

Balance sheets can also be projected into the future, and the projections can serve as targets to aim for or benchmarks to compare against actual results. Balance sheets are affected by sales, too. If your accounts receivables go up or inventory increases, your balance sheet reflects this. And, of course, increases in cash show up on the balance sheet. So it's important to look ahead to see how your balance sheet will appear given your sales forecast.

Related: How Startups Should Formulate Financial Projections

When you sit down to prepare a projected balance sheet, it will be helpful to take a look at past years' balance sheets and figure out the relationship of certain assets and liabilities that vary according to sales. These include cash, receivables, inventory, payables, and tax liabilities.

If you have any operating history, you can calculate the average percentages of sales for each of these figures for the past few years and use that for your balance sheet projection. You can simply take last year's figures if you don't think they'll change that much. Or you can adjust the percentage to fit some special knowledge you have about the coming year— you're changing your credit terms, for instance, so you expect receivables to shrink, or you're taking out a loan for an expensive new piece of equipment. Firms without operating history can look at one of the books describing industry norms referred to earlier to get guidance about what's typical for their type of company.

Related: Master Business Finance With This Expert-Led Class

Cash Flow Pro Forma

Businesses are very sensitive to cash. Even if your operation is profitable and you have plenty of capital assets, you can go broke if you run out of cash and can't pay your taxes, wages, rent, utilities, and other essentials. Similarly, a strong flow of cash covers up a multitude of other sins, including a short-term lack of profitability. A cash flow pro forma (or cash budget) is your attempt to spot future cash shortfalls in time to take action.

A cash budget differs from a cash flow statement in that it's generally broken down into periods of less than a year. This is especially true during startup, when the company is sensitive to cash shortages and management is still fine-tuning its controls. Startups, highly seasonal businesses, and others whose sales may fluctuate widely should do monthly cash flow projections for a year ahead, or even two. Any business would do well to project quarterly cash flow for three years ahead.

Related: Maximize Profitability with Data-Driven Forecasts

The added detail makes monthly cash flow forecasts somewhat more complicated than figuring annual cash flow because revenues and expenses should be recorded when cash actually changes hands. Sales and cost of goods sold should be allotted to the months in which they can be expected to actually occur. Other variable expenses can be allocated as percentages of sales for the month. Expenses paid other than monthly, such as insurance and estimated taxes, are recorded when they occur.

As with the balance sheet projection, one way to project cash flow is to figure out what percentage of sales historically occurs in each month. Then you can use your overall sales forecast for the year to generate monthly estimates. If you don't have prior history, you'll need to produce estimates of such things as profit margins, expenses, and financing activities using your best guesses of how things will turn out.

Related: 4 Crucial Signs That Your Small Business Needs Funding

The cash flow pro forma also takes into account sources of cash other than sales, such as proceeds from loans and investments by owners.

Cash Flow Pro Forma Is the Most Important Financial Statement

If you have only one financial statement to manage your business by—and to use in your business plan—let it be the cash flow pro forma. Only the cash flow pro forma can tell you how much capital you will need in a startup (add the startup costs, project the cash flow, then make the cash flow positive by providing capital in the indicated amount). Only the cash flow pro forma will tell you when you will need to borrow money— and how much you will need to borrow. Only the cash flow pro forma will tell you when it is time to pull the plug and bail out before you create negative value in your business.

Used as a budget, your cash flow pro forma will keep you from making spontaneous purchases, help evaluate the cost (in cash flow) of growth, hiring new people, adding facilities or equipment, or taking on more debt.

No business can prosper without a cash flow pro forma.

Related: How to Use Financial Ratios to Understand the Health of Your Business

Finding Free Cash Flow Apps

They say there's an app for everything. You can now find cash flow projection templates in popular business applications. They may not be highly sophisticated, but they do provide the templates for several key spreadsheets. Google Docs, Intuit's QuickBooks, Pulse, and PlanGuru are among the places to look for cash flow templates. They can make setting it all up a lot easier.

Positive Cash Flow = Survival

Some key points about cash flow:

Cash flow buys time (if necessary), builds assets and profits, and keeps suppliers, bankers, creditors, and investors smiling. Without positive cash flow, survival becomes questionable. Negative or feebly positive cash flow is painful, and unless corrected will either kill a business or damage it so seriously that it never lives up to its potential. Although short periods of negative cash flow occur in almost every business, cash flows have to be positive at least on an annual basis. Some farmers do very well indeed with cash flows that are strongly negative for eleven months of the year. So do some manufacturers (especially in the garment trade). The key is that they know what their cash flow patterns are—and take steps to finance the negative periods, offsetting that cost against the occasional strong positive cash influx from operations.

Related: How to Tap Your Inner Business Futurist

Unfortunately, the smaller and more thinly capitalized the company, the less able it is to survive extended negative cash flows. This is one reason why so many startups fail. The business idea may be terrific, but sales always come much more slowly than expected while cash goes out twice as fast. And the initial investment is rarely enough to tide the business along until cash flow turns and stays positive.

How can a small business attain positive cash flow? Discipline. A cash flow budget is an unbeatable tool if followed carefully. If there is to be just one financial statement, make sure it's the cash flow pro forma. It acts at once as a cash flow budget and as a benchmark for sales.

Some people have trouble differentiating the cash flow pro forma from the projected P&L. The concept "profit" is so pervasive that it poses a barrier to understanding that positive cash flow does not equal profit (or vice versa). The example of a profitable growing company with negative cash flow succumbing to illiquidity and tumbling into Chapter 11 bankruptcy is commonly cited to disprove the identity. If the sales don't turn to cash soon enough, the company goes broke. Revenues are up, receivables are up, expenses are up, even profits are up. Yet the company runs out of cash, can't pay its bills, and becomes another cash flow victim.

Related: The Main Objectives of a Business Plan

Another conceptual problem is equating P&L losses with negative cash flow. A loss on the P&L can reflect a negative cash flow, but it doesn't have to. For example, publishing companies enjoy some accounting foibles such as deferred income (which suppresses sales by deferring revenues to a later period). The cash comes in December, but because the revenue is not earned until the following year, the company can show a nice loss for tax purposes, while enjoying strongly positive cash flow.

Some ways to understand cash flow (as distinct from P&L categories) include:

  • Students are adept at managing skinny cash flows. They postpone bill paying, share space to lower costs, use secondhand books whenever possible (if they have to pay the bill, that is), minimize food costs, and so forth. Few of them think of this as cash flow management, but it is—and of a very high order. If they want a ticket to a concert or ball game, they find a way to scrape up the cash. Very few companies are as carefully managed.
  • Emphasize timing. Timing is everything for cash flow—the transfers of cash, even the dates that bills fall due or when discounts can or cannot be taken. Although timing is always important in business, it is especially important in managing cash flow. A P&L can stand a bit of looseness—it doesn't matter whether a bill is received January 31 or February 10. That ten days can make a big difference in cash flow if the bill falls due before you have the cash in hand to pay it.
  • Compare cash flow to a checking account. Cash is deposited (cash inflow). Checks are written (cash outflow). The aim is to always have some cash on hand (positive cash flow).

The cash flow pro forma is the most important single financial statement in the business plan. Every business needs an annotated cash flow pro forma (by month for the first year, by quarter thereafter) reflecting its business idea.

Related: 6 Strategies for Optimizing Cash Management When Starting a Business

Buzzword: EVA

EVA is an acronym standing for economic value added, and it's one of the most interesting financial management tools available to business owners. The aim of EVA is to find out whether you're doing better with the money you have than you could by, say, investing in U.S. Treasury bills.

EVA has been pioneered by consulting firm Stern Stewart, which has counseled hundreds of companies on how to apply EVA. And experts say that entrepreneurs in particular already understand EVA on a gut level. In any event, the basic concept is fairly simple—you measure EVA by taking net operating earnings before taxes and subtracting a reasonable cost of capital, say 12 percent.

In practice, however, it's complicated. Stern Stewart has identified more than 160 adjustments a company may potentially need to make to accounting procedures before EVA can be effectively implemented. Check them out at sternstewart.com .

Related: Developing a Business Model That Works

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

Successfully copied link

does business plan include financial forecast

does business plan include financial forecast

7-step guide to financial forecasting & planning for any business

What is financial forecasting, why is it important, and how to properly conduct financial planning and forecasting

  • What is financial forecasting?
  • Why is it important?
  • 4 common types of financial forecasting
  • How to do financial forecasting in 7 steps
  • Financial forecasting FAQs

Join our newsletter for the latest in SaaS

By subscribing you agree to receive the Paddle newsletter. Unsubscribe at any time.

Uncertainty is one of the constant aspects of doing business. Many factors beyond your control can potentially influence the market in ways you didn't expect. For example, new technologies are constantly changing operations across almost all industries at a fundamental level. 

It pays to know what to expect in the near future and plan ahead, hence the need for financial forecasting. Every business (including monopolies) could benefit incredibly from regular  financial forecasting . Here is a comprehensive guide on the importance of financial forecasting for your business model and how to do it.

Failure to conduct regular financial forecasting leaves you flying blind.

What is financial forecasting? 

Financial forecasting refers to financial projections performed to facilitate any decision-making relevant for determining future business performance. The financial forecasting process includes the analysis of past business performance, current  business trends , and other relevant factors.

However, some aspects of financial forecasting may change depending on the type and purpose of the forecast, as will be discussed later. 

Importance of financial forecasting 

Hypothetically speaking, failure to conduct regular financial forecasting leaves you flying blind. Regular forecasting has extensive benefits for some of your business' fundamental operations, including: 

Annual budget planning 

A budget represents your business' cash flow, financial positions, and future goals and expectations for a set fiscal period.  Financial forecasting and planning  work in tandem, as forecasting essentially offers an insight into your business' future—these insights help make budgeting accurate.  

Establishing realistic business goals 

Accurate forecasting will help predict whether (and by how much) your business will grow or decline. As such, you can set realistic and achievable goals—and manage your expectations. 

Identifying problem areas 

Financial forecasting  can help you identify ongoing problems by analyzing the business' past performance. Additionally, you can identify potential problems by getting an insight into what the future holds. 

Reduction of financial risk 

You risk overspending by creating a budget without financial forecasting. In fact, most of your financial decisions would be ill-informed without the input of a financial forecast's results. 

Greater company appeal to attract investors 

Investors use a company's financial forecast to predict its future performance—and the potential ROIs on their investments. Additionally, regular forecasting shows your investors that you are in control and have a solid business plan prepared for the future.

4 common types of financial forecasting 

Businesses conduct financial forecasting for varying purposes. Consequently, forecasting practices are categorized into four types: 

1. Sales forecasting 

Sales forecasting entails predicting the amounts of products/services you expect to sell within a projected fiscal period. There are two sales forecasting methodologies: top-down forecasting and bottom-up forecasting. 

Sales forecasting has many uses and benefits, including budgeting and planning production cycles. It also helps companies manage and allocate resources more efficiently. 

2. Cash flow forecasting 

Cash flow forecasting  entails estimating the flow of cash in and out of the company over a set fiscal period. It's based on factors such as income and expenses. It has many uses and benefits, including identifying immediate funding needs and budgeting. However, it is worth noting that cash flow financial forecasting is more accurate over a short term. 

3. Budget forecasting 

As a financial guide for your business' future, a budget creates certain expectations about your company's performance. Budget forecasting aims to determine the ideal outcome of the budget, assuming that everything proceeds as planned. It relies on the budget's data, which relies on financial forecasting data. 

4. Income forecasting 

Income forecasting entails analyzing the company's past revenue performance and current growth rate to estimate future income. It is integral to doing  cash flow  and balance sheet forecasting. Additionally, the company's investors, suppliers, and other concerned third parties use this data to make crucial decisions. For example, suppliers use it when determining how much to credit the company in supplies. 

How to do financial forecasting in 7 steps 

Many integral aspects of your company's current and future operations hinge on the results of your financial forecasts. For example, forecasting results will influence investors' decisions, determine how much your company can get in credit, and more. 

As such, accuracy cannot be overemphasized. Here is a step-by-step guide to ensure that you do it right: 

1. Define the purpose of a financial forecast 

What do you hope to learn from the financial forecast? Do you hope to estimate how many units of your products or services you will sell? Or perhaps you wish to see how the company's current budget will shape its future? Defining your financial forecast's purpose is essential to determining which metrics and factors to consider when doing it. 

2. Gather past financial statements and historical data 

One of the components of financial forecasting involves analyzing past financial data, as explained. As such, it is important to gather all relevant historical  data and records , including: 

  • Liabilities 
  • Investments 
  • Expenditures 
  • Comprehensive income 
  • Earnings per share 
  • Fixed costs

It's important to ensure that you gather all required information as your financial forecast's results will be inaccurate if you exclude relevant data.

3. Choose a time frame for your forecast 

Financial forecasts are designed to give business owners an insight into the company's future. You get to decide how far into the future to look, and it can range from several weeks to several years. However, most companies do forecasts for one fiscal year. 

Financial forecasts change over time as factors such as business and market trends change. Consequently, it is worth noting that financial forecasting is more accurate in the short term than in the long term.

4. Choose a financial forecast method 

There are two financial forecasting methods: 

  • Quantitative forecasting uses historical information and data to identify trends, reliable patterns, and trends. 
  • Qualitative forecasting analyzes experts' opinions and sentiments about the company and market as a whole. 

Each method is suitable for different uses and has its strengths and shortcomings. However, qualitative forecasting is more suitable for startups without past data to which they can refer. 

5. Document and monitor results 

Financial forecasts are never 100% accurate and tend to change over time. As such, it is important to document and monitor your forecast's results over time, especially after major internal and external developments. It is also important to update your forecasts to reflect the latest developments. Using  forecasting software  to automate related tasks may help too.

6. Analyze financial data 

Regularly analyzing financial data is the best way to tell whether your financial forecasts are accurate. Additionally, continuous financial management and analysis helps you prepare better for the next financial forecast and gives you crucial insights into the company's current financial performance. 

7. Repeat based on the previously defined time frame 

Smart companies conduct regular financial forecasting to stay in the know and in control. As such, it is advisable to repeat the process once the time period set for the current financial forecast elapses. It's also prudent to keep collecting, recording, and analyzing data to improve your financial forecasts' accuracy.

Get accurate metrics for financial forecasting—absolutely free 

An efficient system of collecting, storing, and analyzing data is necessary for accurate financial forecasting. ProfitWell Metrics is a subscription analytics software designed to do all of this on one platform. Some of the metrics that you can get using this program include: 

  • Monthly and annual recurring revenues 
  • Market and customer segments 
  • Customer acquisition and retention 
  • Customer lifetime value 
  • Churn rate 
  • The average revenue per user 

ProfitWell Metrics collects and records all  important metrics , giving you enough data to work with when conducting a financial forecast. Additionally, the data collected in real-time offers crucial insights to help you update your forecasts and other projects accordingly. 

ProfitWell Metrics also integrates seamlessly with other popular data analytics programs, including Google Sheets and Stripe. More importantly, it's 100% free and secure. 

Financial forecasting FAQs 

Some of the most frequently asked questions regarding financial forecasting include: 

What is the role of forecasting in financial planning? 

Financial forecasting estimates important financial metrics such as sales, income, and future revenue. These metrics are crucial for finance-related operations such as budgeting and financial planning as a whole. Consequently, forecasting functions as a guiding tool (or marking scheme) for financial planning. 

What is the difference between financial forecasting and modeling? 

On the one hand, financial forecasting entails predicting the business' future performance. On the other hand, financial modeling entails simulating how financial forecasts and other data may affect the company's future if everything goes according to plan. Financial modeling is done for very specific and often discrete purposes. 

What is the difference between financial forecasting and budgeting? 

Financial forecasting and budgeting work in tandem and are often misinterpreted as meaning the same thing. However, financial forecasting entails estimating and predicting the company's future performance (financially and in other aspects). On the other hand, budgeting is the company's financial expectations for the future (expectations based on financial forecasts and other data). 

What are the three pro forma statements needed for financial forecasting? 

Pro forma statements are financial reports designed to give insights into how different scenarios would play out based on hypothetical circumstances. There are three pro forma statements: 

  • Pro forma statements of income 
  • Pro forma cash flow statements 
  • Pro forma balance sheets 

Pro forma statements may be hypothetical, but they help companies prepare for an uncertain future. Consequently, they're useful when conducting financial forecasts. 

Related reading

does business plan include financial forecast

Home

  • Recently Active
  • Top Discussions
  • Best Content

By Industry

  • Investment Banking
  • Private Equity
  • Hedge Funds
  • Real Estate
  • Venture Capital
  • Asset Management
  • Equity Research
  • Investing, Markets Forum
  • Business School
  • Fashion Advice
  • Financial Modeling Resources

Financial Forecasting

An estimation process regarding a company’s future operational and financial performance derived from various analyses.

David Bickerton

Previously a Portfolio Manager for MDH Investment Management, David has been with the firm for nearly a decade, serving as President since 2015. He has extensive experience in wealth management,  investments and portfolio management .

David holds a  BS  from Miami University in Finance.

Josh Pupkin

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking  analyst for Barclays  before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a  management consulting  firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an  MBA  candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

  • What Is Financial Forecasting?
  • How To Create A Financial Forecast?
  • Importance Of Financial Forecasting
  • Types Of Financial Forecasting
  • Types Of Forecasting Models
  • Financial Forecasting Vs. Modeling
  • Financial Planning And Analysis (FP&A)
  • Problems With Financial Forecasting

What is Financial Forecasting?

Financial forecasting is a process in which estimations regarding a company’s future operational and financial performance are derived from various analyses. 

Creating a financial forecast allows businesses to understand where they are currently positioned and headed. A company can ascertain answers to various questions about the future through projections.

Executives use forecasting to project a variety of important financial measures such as  revenue ,  net income ,  SG&A (Selling, General, and Administrative expenses) , gross profit margin , and net profit margin . In addition, analysis of projections offers management the opportunity to make fundamental operational changes to achieve a business’s goals.

Creating a financial forecast grants companies the ability to derive projections from data instead of desire.

For example, creating a financial forecast allows companies to derive projections from data rather than desire, based on quantitative information for increased accuracy, conservatism, and rationality.

Data Based

A company’s forecast can also be a productive medium for communicating expected financials to investors. Analysts can weigh their financial models against a business’s forecast to extrapolate a more accurate future share price.

This dynamic creates the opportunity for companies to build investor trust.

For example, if a company has historically provided accurate forecasts, analysts attribute greater credibility to present-day forecasts. Likewise, if past financial results have missed their mark relative to projections, analysts will deem a company’s present-day forecasts to be unreliable.

Key Takeaways

  • Financial forecasting involves estimating a company's future operational and financial performance through data analysis.
  • The process provides insights into the company's current position and future trajectory, helping executives make informed decisions.
  • Executives use forecasting to project various financial measures such as revenue, net income, expenses, gross profit margin, and net profit margin. Accurate forecasting allows for fundamental operational changes to align with business goals.
  • Effective financial forecasts are data-based, relying on quantitative information for increased accuracy, conservatism, and rationality.

How to create a financial forecast?

The process for creating a financial forecast consists of 6 steps:

does business plan include financial forecast

  • What is the question?: Before analyzing any financial data, one must know what they are looking for. A question relevant in forecasting maybe, “If we increase  R&D  by 15% next year, how would that affect net income?” or “If the federal funds rate were to rise to 6%, how would that affect our ability to service our debt payments?”
  • What are the variables?: Specific data sets and relevant financial information are selected to answer the question posed in step #1. 
  • Select a time period: After choosing what data and financial information are essential for this specific forecast, one must decide what time period to select from this information. Data from 15 years prior may not be relevant anymore, and the same may go for financial results. 
  • Select and create a model: The proper model for analyzing the relevant data is chosen. Forecasts are created using various methods, including statistical analysis, to answer the proposed question in step #1. 
  • Analysis: Once the model has been completed, it is time to analyze it. In this phase of the process, conclusions are drawn from the model’s output, providing insights into the company's strategic direction. 
  • Execution : The forecast is presented to upper management. Management considers the projection and implements new policies and procedures to assist the company’s trajectory.

Importance of Financial Forecasting

Let’s look at some of the importance of the financial forecasting below:

  • Annual Budget Planning: Financial forecasting and annual budget planning go hand in hand, ensuring that budgets reflect realistic future scenarios. Forecasting transforms budgets into strategic roadmaps by offering insights into a business’s financial future.
  • Realistic Business Goals: Accurate forecasting enables businesses to predict growth or decline, setting the stage for establishing achievable goals. This foresight aligns targets with financial outlooks, fostering a proactive approach to goal-setting.
  • Identifying Problem Areas: As a diagnostic tool, financial forecasting analyzes past performance and anticipates future challenges, allowing proactive problem-solving and enhancing overall resilience.
  • Risk Reduction: Financial forecasting mitigates risks associated with overspending and ill-informed decisions, aligning budgets with prudent, informed financial strategies.
  • Investor Appeal: Investors rely on financial forecasts to predict performance and potential returns, making regular forecasting a key factor in showcasing control, preparedness, and a solid business plan .

Types of Financial Forecasting

There are a variety of forecasts that companies can use to project their financial future. Selecting the specific type of forecast is crucial for efficiently and accurately answering any proposed question when it comes to forecasting. The various types of forecasts include traditional, rolling, predictive, and exception-based. 

Traditional Forecast

This forecast involves using historical financial results and data to create a fixed projection. It produces projections for various financial items such as revenue, cost of goods sold , net income, etc.

The problem with this type of method is that the projections are fixed. If an unforeseen event occurs, it will be challenging to adjust the model and often result in the company having to make an entirely new model. 

Rolling Forecast

It offers a solution to the issue that arises with traditional forecasting. A rolling forecast takes into account new data and financial returns. The model is regularly updated on a time basis set by the company. It may be updated daily, weekly, monthly, or quarterly, depending on company preferences. 

It allows a company to adjust for unforeseen events without having to make a new model. 

This method can improve management decisions by providing a dynamic and regularly updated screenshot of the company’s current financial state. Based on the interpretation of the forecast, management can adapt quickly and implement operational changes. 

Predictive Forecast

This method uses machine learning to create a forecast. Using artificial intelligence to gather and analyze data, a predictive forecast can provide insights that would have gone unnoticed using the previous forecasting methods. 

It can be less work for employees, and the forecast can be produced on a faster timeline relative to traditional forecasting. 

Predictive models often employ algorithms for data analysis, such as the random forest algorithm , which uses decision trees to observe an item or branch and then output a conclusion, which is displayed in the leaves. 

Other algorithms regularly used are the generalized linear model, the gradient-boosted model, the prophet model, and the k-means clustering method. 

To learn how to implement machine learning within a forecast, look into the following course. 

Python + Machine Learning Course

Everything You Need To Master Algo Trading using Python

To Help You Thrive in One of the Most Future Proof Careers on Wall Street.

Exception Based Forecast

This method uses scenario analysis to create a forecast that can be adaptable to various potential events. It allows management to identify what the company’s financial results may look like under different circumstances. 

The selection of a forecasting method is decided at the discretion of a company’s management. As a result, some companies may choose to implement multiple forecasting methods, and some may only choose to use one. 

As the company grows, it requires more inputs and must address an increasing number of potential hurdles, all recognized within the forecast.

A strong forecast must include a thorough set of data and financial results to draw upon, a time horizon that points toward the future, and a variety of scenarios and their potential effect on company operations. In addition, a strong forecast should account for external and internal risks that have the potential to threaten profitability. 

Types of Forecasting models

Various models can be used to project and analyze data or financials within a forecast. 

These models are commonly built using Microsoft’s Excel software. Using models can increase accuracy by basing projections upon mathematical formulas instead of management desire. 

Models that are frequently used for forecasting include:

  • Straight-Line method
  • Moving Average method
  • Linear Regression method
  • Delphi method

Straight Line Method

This model takes historical financial results or data and measures the historical growth rate. The growth rate is then used to project the financial results or data into the future to create a forecast. It assumes that past results will continue to be similar in the future. 

does business plan include financial forecast

The trouble with this model is selecting the proper time period to analyze. It is prudent to determine which historical data is relevant to the company and which historical data should be disregarded. 

To calculate the growth rate, divide the current year’s result by the prior-year result and subtract 1. To project into the future, multiply the prior-year result by 1 plus the growth rate.

To use the growth rate to project into the future, multiply the prior-year result by 1 plus the growth rate. 

Moving Average Method

This type of model measures recent patterns in data through averaging results. The model smooths out the volatility of data points, allowing a better assessment of current trends.

does business plan include financial forecast

Often, companies will use 5-month moving averages or 3-month moving averages, although the method can be used on shorter time frames if desired.

Using the moving average method to help a company identify trends in key financial measures such as revenue,  cost of goods sold , or new subscriptions. To derive a 5-month moving average, take the average of a data point over the last 5 months. 

Linear Regression Method

This type of model creates a visual relationship between two variables. One variable is the dependent variable mapped out on the Y-axis.

does business plan include financial forecast

The other variable is an explanatory variable mapped out on the X-axis. After the data points have been placed onto a graph, a line can be drawn between the points, illustrating a pattern or trend. 

This type of analysis allows a company to understand the relationship between multiple financial items.

The Delphi Method

The Delphi method more closely resembles a framework for modeling within the forecasting process as opposed to a model created within a spreadsheet. This method does not create a model based on any mathematical formulas. It creates a model based on the consensus of opinions . 

does business plan include financial forecast

The Delphi Method uses a large group of experts to answer a question proposed by a company. The experts take a test and collectively review the answers alongside a moderator. If the experts can agree, then the company has its response. If not, the experts retake the test.

This process is repeated until a conclusion is reached. 

The Delphi method is based on the concept of ‘wisdom of the crowds,’ suggesting that people collectively make smarter decisions in larger groups than in smaller groups or individually.

VBA Macros

Everything You Need To Master Financial Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Financial Forecasting vs. Modeling

An important distinction is the differentiation between forecasting and modeling. While they share many similarities, leading many to perceive the two as indistinguishable, in reality, they are quite different. 

Below, we look at brief descriptions of the two and the differences between them.

Financial Forecasting Vs. Modeling
Aspect Financial Forecasting Modeling
Definition Process projecting future business operations Part of forecasting involving data and financial analysis
Goal Prepare a company for the future Assist in determining the trajectory of business
Involvement of Data Utilizes data analysis Involves data analysis and financial analysis
Conceptual Process Utilizes data analysis and financial analysis Part of the forecasting process
Relationship to Models Involves modeling as a step Integral part where mathematical formulas are applied
Types of Models Straight line method, Moving average method, Linear regression method, Delphi method (resembles a model) Unlimited types, common ones include: Straight line, Moving average, Linear regression, Delphi method
Delphi Method Resembles a model, even though it does not employ data analysis Represents useful information in an organized manner, similar to a model
Output Determines expectations for a company’s future outlook Assists management in more accurately forecasting future financial results
Implementation Tangible changes in business operations based on model results Utilized to assist management in forecasting future results

Financial planning and analysis (FP&A) 

The Financial Planning and Analysis team (FP&A) is the group that will run financial forecasts most of the time within an organization. This team will move through the entire forecasting process and be responsible for effectively communicating the results to the company’s executive management. 

The involvement of the FP&A team enables executive management to make better decisions and more accurately inform investors and shareholders about company operations and financial results.

The primary responsibilities of the FP&A team are:

  • Create forecasts and budgets
  • Inform senior management, in particular, the  chief financial officer (CFO)
  • Analyze historical financial returns 
  • Utilize data analysis to make informed decisions 
  • Account for potential risks that pose a threat to the company’s financial health

does business plan include financial forecast

The FP&A team will analyze data and financials to create successful budgets and forecasts. For example, if a company implements rolling forecasts, the FP&A team is responsible for monitoring and updating financial models.

Often, the company’s management will develop a plan for the direction they would like to take the company. This direction includes future financial results based on key items such as revenue, net income, and share price. 

The FP&A team is responsible for thoroughly analyzing this plan and creating forecasts and budgets that accurately align with management’s goals.

The FP&A team will dictate in their analysis how business operations must change for the executive’s objectives to be accomplished.  

An analyst's ability to communicate effectively is the most crucial aspect of working within FP&A. It is not enough to have a fantastic financial model; but the analyst must be able to convey information to the senior management productively.

The goal is to use the data to tell a story. This format allows quantitative findings to be efficiently digested, increasing the chance of implementing operational changes.  

Let's take a look at some of the different roles and the median salary according to the roberthalf website for 2024:

Salary Guide
Role Median Salary ($)
FP&A Analyst, 3-5 Years Experience 89,500
FP&A Analyst, 1-3 Years Experience 77,250
Senior Financial Analyst 95,250
Financial Analyst, 1-3 Years Experience 77,000
Entry-Level Financial Analyst 59,500
Senior Budget Analyst 95,250
Budget Analyst, 1-3 Years Experience 77,000
Entry-Level Budget Analyst 59,500

Problems with Financial forecasting

Many of the issues inherent in forecasting derive from two unfortunate truths.

  • Uncertain Future: Despite accurate inputs, the future remains unknown. While financial models provide insights, there’s a fine line between viewing forecasts as likely scenarios and concrete predictions. Methods like straight-line or moving averages may not ensure future alignment with past results.
  • Subjectivity in Forecasting: Analysts’ formula choices influence outcomes, introducing subjectivity. Whether from past performance or other metrics, growth rate derivation is inherently subjective. Operational changes based on forecast interpretation also hinge on subjective decisions.
  • Additional Issues
  • Black Swan Events: Unforeseen occurrences, like the 2008 financial crisis or COVID-19, challenge forecasts, inherently carrying potential errors.
  • Delphi Method: While valuable for insights, dependence on expert opinions poses challenges. The wisdom of the crowd theory, assuming collective intelligence, isn’t foolproof, which is evident in historical instances like Tulip Mania and the dot-com bubble.

VBA Macros

Everything You Need To Master Financial Statement Modeling

To Help you Thrive in the Most Prestigious Jobs on Wall Street.

More about financial modeling

To continue learning and advancing your career, check out these additional helpful WSO resources:

  • Forecasting Balance Sheet Items in a Financial Model
  • Forecasting Cash Flow
  • Forecasting Finance (Equity, Debt, Interest)
  • Forecasting Methods
  • Top-Down Forecasting

does business plan include financial forecast

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

or Want to Sign up with your social account?

  • Today's news
  • Reviews and deals
  • Climate change
  • 2024 election
  • Fall allergies
  • Health news
  • Mental health
  • Sexual health
  • Family health
  • So mini ways
  • Unapologetically
  • Buying guides

Entertainment

  • How to Watch
  • My Portfolio
  • Latest News
  • Stock Market
  • Biden Economy
  • Stocks: Most Actives
  • Stocks: Gainers
  • Stocks: Losers
  • Trending Tickers
  • World Indices
  • US Treasury Bonds
  • Top Mutual Funds
  • Highest Open Interest
  • Highest Implied Volatility
  • Stock Comparison
  • Advanced Charts
  • Currency Converter
  • Basic Materials
  • Communication Services
  • Consumer Cyclical
  • Consumer Defensive
  • Financial Services
  • Industrials
  • Real Estate
  • Mutual Funds
  • Credit Cards
  • Balance Transfer Cards
  • Cash-back Cards
  • Rewards Cards
  • Travel Cards
  • Credit Card Offers
  • Best Free Checking
  • Student Loans
  • Personal Loans
  • Car Insurance
  • Mortgage Refinancing
  • Mortgage Calculator
  • Morning Brief
  • Market Domination
  • Market Domination Overtime
  • Asking for a Trend
  • Opening Bid
  • Stocks in Translation
  • Lead This Way
  • Good Buy or Goodbye?
  • Financial Freestyle
  • Fantasy football
  • Pro Pick 'Em
  • College Pick 'Em
  • Fantasy baseball
  • Fantasy hockey
  • Fantasy basketball
  • Download the app
  • Daily fantasy
  • Scores and schedules
  • GameChannel
  • World Baseball Classic
  • Premier League
  • CONCACAF League
  • Champions League
  • Motorsports
  • Horse racing
  • Newsletters

New on Yahoo

  • Privacy Dashboard

Yahoo Finance

Business tips from score: understanding differences between business vs strategic plan.

In the world of business, planning is crucial for success. Two key tools for guiding a company's direction and growth are the business plan and the strategic plan . They may seem similar, but they serve different purposes and have distinct components. Understanding the differences is essential for any entrepreneur or business leader looking to build and sustain a successful organization.

Purpose and Focus

Business Plan: Launching and managing your business

A business plan is a detailed document that outlines the objectives, strategies, market conditions, financial forecasts, and operational structures of a business. Its primary purpose is to provide a roadmap for the initial stages of the business and guide its growth annually. It is often used to attract investors, secure funding, and provide a comprehensive overview of how the business will operate. There are two approaches that can be adopted. One, the traditional business plan detailed below. And two, the one-page plan like the Business Model Canvas (Strateqyzer) for enterprises that don’t need outside funding but need a guide to launch or grow their enterprise. Key elements of a traditional business plan include:

Executive Summary : A concise overview of the business, its mission, and its vision. Business Description : Detailed information about the business, including its structure, products or services, and target market. Market Analysis : An examination of the industry, market size, target customer segments, and competitive landscape. Marketing and Sales Strategies : Plans for reaching and selling to the target market, including pricing, promotions, and distribution. Operations Plan : Details about the day-to-day operations, including location, facilities, technology, and logistics. Management and Organization : Information about the business's leadership team and organizational structure. Financial Plan : Projections for revenue, expenses, profitability, and funding requirements, often including cash flow statements, income statements, and balance sheets. Appendix : Additional information such as resumes, legal documents, and detailed research.

The Business Model Canvas has nine building blocks: Value proposition . The need, want or desire that is being fulfilled. Or the problem being solved. Target customers . For whom the problem is being solved? Communication channels . How does one reach the target customers? Customer Relationships . How does the organization interact with their target customers? Key activities . What are all the activities it takes to operate the enterprise? Resources . Who can assist the enterprise? Key Partners. Who can partner with the enterprise to make it stronger and allow ownership to focus on the mission? Cost Structure and Revenue Streams .

Strategic Plan: Setting Long-Term Direction

A strategic plan, on the other hand, focuses on long-term goals and the strategies to achieve them. It is a high-level overview that provides direction and priorities for the organization over several years. A strategic plan helps align the organization’s efforts with its mission and vision, ensuring sustainable growth and success. Key elements of a strategic plan include:

Vision Statement : A forward-looking statement that defines what the organization wants to achieve in the long term. Mission Statement : A statement of the organization's purpose and core values. Core Values : The fundamental beliefs and principles that guide the organization’s behavior and decision-making. SWOT Analysis : An assessment of the organization's strengths, weaknesses, opportunities, and threats. Strategic Objectives : Specific, measurable goals that the organization aims to achieve. Strategies : High-level plans and approaches for achieving the strategic objectives, often encompassing multiple areas such as marketing, operations, finance, and human resources. Action Plans : Detailed steps and initiatives to implement the strategies, including timelines, responsible parties, and resources needed. Performance Metrics : Criteria for measuring progress and success, including key performance indicators (KPIs) and benchmarks.

Key Differences

Time Frame A business plan often covers a shorter time frame, usually one to two years, focusing on immediate goals and steps to establish and grow the business. In contrast, a strategic plan covers a longer period, typically three to five years or more, focusing on long-term objectives and sustainability.

Level of Detail A business plan is detailed and specific, outlining operational and financial aspects in depth. It includes precise plans for marketing, sales, operations, and financial projections. On the other hand, a strategic plan is broader and more high-level, concentrating on overall direction and strategic priorities without delving into granular operational details.

Audience Business plans are often written for external stakeholders, such as investors, lenders, and potential partners. They provide a thorough understanding of the business's potential and how it plans to achieve its goals. In contrast, strategic plans are primarily for internal use by the organization’s leadership and staff. They guide decision-making and resource allocation, ensuring everyone is aligned with the long-term vision.

Focus The focus of a business plan is on launching and managing the business, addressing questions like what the business will do, how it will operate, and how it will achieve profitability. A strategic plan, however, focuses on sustaining and growing the business over the long term, addressing questions like where the organization wants to go, what it wants to achieve, and how it will get there.

Both a business plan and a strategic plan are essential for a company’s success, but they serve different purposes and are used at different stages of the business lifecycle. A business plan is crucial for getting the business off the ground and ensuring its initial growth, while a strategic plan is vital for setting long-term direction and ensuring sustained success. Understanding the differences between these two plans allows business leaders to effectively use each tool to guide their organization towards achieving its goals and realizing its vision.

Contributed by Marc L. Goldberg, Certified Mentor, SCORE Cape Cod & the Islands – www.score/capecod , 508/775-4884. Free mentoring and education workshops and webinars.

This article originally appeared on Cape Cod Times: Strategic plan is for long-term goals and the ways to achieve them

COMMENTS

  1. How to Create a Financial Forecast for a Startup Business Plan

    Develop a cash flow projection. A cash flow statement (or projection, for a new business) shows the flow of dollars moving in and out of the business. This is based on the sales forecast, your balance sheet and other assumptions you've used to create your expenses projection. "If you are starting a new business and do not have these ...

  2. How To Start A Business Plan: A Step-By-Step Guide

    What It Is: Financial projections provide a forecast of your business's financial future. ... The appendix includes any additional information that supports your business plan. What to Include:

  3. How To Create Financial Projections for Your Business Plan

    One business's financial projections may be more detailed than another's, but the forecasts typically rely on and include the following: Cash flow. True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories: 1. Operating ...

  4. How to Write the Financial Section of a Business Plan

    Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest ...

  5. Business Plan Financial Projections

    There are three main financial statements that you will need to include in your business plan financial projections: 1. Income Statement Projection. The income statement projection is a forecast of your company's future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

  6. Writing a Business Plan—Financial Projections

    The financial section of your business plan should include a sales forecast, expenses budget, cash flow statement, balance sheet, and a profit and loss statement. Be sure to follow the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board, a private-sector organization responsible for setting ...

  7. How to Make Financial Projections for Business

    A financial projection is a group of financial statements that are used to forecast future performance. Creating financial projections can break down into 5 simple steps: sales projections, expense projections, balance sheet projections, income statement projections, and cash flow projections. Financial projections can offer huge benefits to ...

  8. How to Prepare a Financial Plan for Startup Business (w/ example)

    7. Build a Visual Report. If you've closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using "what-if" scenarios. Now, we'll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

  9. How to Write a Financial Plan: Budget and Forecasts

    Financial ratios and metrics. With your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios. While including these metrics in your financial plan for a business plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall ...

  10. How To Create Financial Projections for Your Business

    Financial forecasting is a projection of your business's future revenues and expenses based on comparative data analysis, industry research, and more. Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts, which can be attractive to ...

  11. 7 Financial Forecasting Methods to Predict Business Performance

    6. Delphi Method. The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance. A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge.

  12. Financial Forecasting Guide

    Financial forecasting is the process of estimating or predicting how a business will perform in the future. This guide on how to build a financial forecast ... As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.

  13. Effective financial projections for a startup

    One of the biggest contributors to a startup's success is a sound business plan that includes meaningful financial projections. ... Levers can include products and/or services, software maintenance agreements, channel partner sales, etc. Start with a list of all the revenue levers that will produce income over the period of the financial ...

  14. Financial forecasting: 7 methods for small businesses

    For example, a qualitative forecast could include opinions or estimates and more intangible factors rather than numbers. Below are the seven types of financial forecasting methods you can use—the first five methods are quantitative, and the last two are qualitative: 1. Percent of sales. The percent of sales forecasting technique estimates ...

  15. How to Write a Business Plan Outline in 9 Steps

    8. Financial plan. Use this section of the business plan to show how your company will succeed financially. Include financial projections like income statements and cash flow statements. Specify how much capital you need and how you plan to use it, discussing funding sources.

  16. Financial forecast example for new businesses and startups

    The financial forecast is an essential step when creating a business plan. The financial forecast allows you to anticipate the revenues and expenses of your new business over a given period. ... Examples of financial statements to include in your forecast. Your forecast will need to include 3 financial statements: The P&L statement ; The cash ...

  17. How to Create a Financial Forecast

    When you create a budget for your business, you plan to set aside money for certain costs, taking into account your income and expenses. The budget you make may be based on info from your financial forecast, but it's distinct from the forecast itself. Think of financial forecasting as a prediction, and budgeting as a plan.

  18. Business Plan: What It Is, What's Included, and How to Write One

    Business Plan: A business plan is a written document that describes in detail how a business, usually a new one, is going to achieve its goals. A business plan lays out a written plan from a ...

  19. Basics Of A Business Plan Financials Section

    There's other financial information you can — and often should — add to your business plan, like sales forecasts and personnel plans. But the income statement, cash flow projections and ...

  20. Financial Plan vs. Financial Forecast: What's the Difference?

    A financial plan is a strategic approach to finances that marks out a road-map to follow into the future. A financial forecast is an estimate of future outcomes arrived at using one of several ...

  21. What is Financial Forecasting? Definition and Related FAQs

    The key steps in how to create a financial forecast for business include the following: Define assumptions. ... The difference between financial planning and forecasting is that a financial plan is a concrete, step-by-step process for executing the financial forecast. A financial forecast is a projection or estimate of likely future expenses ...

  22. What Does A Business Financial Plan Include?

    Elements of a Business Financial Plan, Explained. Financial plans typically include five elements: Income forecast; Expense budget; Cash flow snapshot; Assets and liabilities disclosure; Break even analysis; The exact order and terminology may vary, but the information that should be included boils down to those five areas.

  23. How to Make Realistic Financial Forecasts

    Experts advice on how to be conservative in your forecasts. The cash flow pro forma. Opinions expressed by Entrepreneur contributors are their own. This is part 8 / 12 of Write Your Business Plan ...

  24. What is financial forecasting + how to do it [7 Steps]

    4. Choose a financial forecast method. There are two financial forecasting methods: Quantitative forecasting uses historical information and data to identify trends, reliable patterns, and trends. Qualitative forecasting analyzes experts' opinions and sentiments about the company and market as a whole.

  25. Financial Forecasting Guide

    Executives use forecasting to project various financial measures such as revenue, net income, expenses, gross profit margin, and net profit margin. Accurate forecasting allows for fundamental operational changes to align with business goals. Effective financial forecasts are data-based, relying on quantitative information for increased accuracy ...

  26. Budget vs. forecast: What's the difference?

    Function - Budgeting is a quantitative process that leadership uses to plan for future periods. Forecasting is a qualitative process that estimates future performance. Purpose - Budgets specify what management hopes to achieve during a specific financial period. Forecasts specify what a company is likely to achieve during the period.

  27. Business Tips from SCORE: Understanding differences between business vs

    A business plan is a detailed document that outlines the objectives, strategies, market conditions, financial forecasts, and operational structures of a business.

  28. Key takeaways from Fed Chair Powell's testimony on Capitol Hill

    The US job market is still a pillar of strength for the broader economy but it's not running at the same red-hot pace of a few years ago. The unemployment rate edged higher, to 4.1%, in June ...