Financial Projections In Business Planning

Financial projections make up a crucial piece of the business planning puzzle, whether you’re just starting or looking to steer your company into new territory. Creating these forecasts might sound intimidating, but having a clear picture of your business’s potential future revenue, expenses, and profits can help you make smarter moves, attract investors, or just sleep a lot easier at night. Here’s my guide for building financial projections in your business plan, using some real-world experience—as well as some tips I wish I’d known when I got started.

What Are Financial Projections and Why Do They Matter?

Financial projections are educated guesses about how your business will perform financially over a certain fixed time period. These forecasts show how much money might come in, how much might go out, and what you can expect to have left over.

Investors, banks, and even your own leadership team check out these forecasts to judge how realistic your business goals seem. Instead of just stating “I think we’ll grow,” financial projections lay out the numbers behind that belief. They show things like projected sales, predicted costs, profits, and, most importantly, when you’ll break even or start to turn a profit. Having financial projections can also make budgeting easier, help you spot cash shortages before they happen, and build trust with anyone who has a stake in your business.

Types of Financial Projections to Put in Your Business Plan

There are a few main types of projections that come up in just about every business plan:

• Sales Forecast: This is an estimate of how much you’ll sell over a specific period. You’ll usually see it broken down by month for the first year, and then yearly after that.
• Expense Forecast (Operating Expenses): These projections show the money you expect to spend on rent, salaries, marketing, utilities, and anything else you need to keep things running.
• Cash Flow Projection: This forecast tracks how much actual cash enters and leaves your business bank account. It helps you predict whether you’ll have enough on hand to pay your bills as your business grows.
• Profit and Loss Projection (Income Statement): This pulls together predicted revenue and expenses to show what the business is likely to earn (or lose) in profit for each forecasted period.
• Balance Sheet Projection: This is a snapshot of what your business owns (assets), what it owes (liabilities), and the leftover balance (equity) at a point in time.

Each of these projections provides a unique angle on your finances and, together, they give you an all-in-one look at your business’s health and the possible challenges ahead.

Getting Started: Building Your Financial Projections Step by Step

The best way to start is with a bit of basic research and some straight math. Here’s my personal step-by-step routine for getting your projections in order:

1.     Research Your Market: Look up average industry sales numbers, seasonal
trends, and what your direct competitors are doing. If you already have sales
data—even if it’s just from a few months—that’s a reliable resource.

2.     Estimate Your Sales: Figure out how many units you’ll likely sell each month, and at what price, for at least the first year. If you’re a service provider, you’d estimate the number of clients and average
fee per client.

3.  List Fixed and Variable Expenses: Write out everything you’ll need to pay for, from rent to supplies, payroll, insurance, marketing, and more. Fixed costs won’t change much from month to
month, while variable costs scale with your sales volume.

4.     Build Your P&L Statement: Subtract all predicted expenses from your total
projected sales. This helps you see how your business might gain or lose money
over time.

5.     Draft a Balance Sheet: Tally up what you expect to own (equipment, cash
in the bank, inventory) and what you owe (loans, credit card debt), and you’ll
get a picture of the business’s health as time goes on.

6.       Calculate Projected Cash Flow: The cash flow statement is calculated using the projected P&L Statement Income or Loss and  the projected Balance Sheet.  The cash flow statement shows all of the activity from the P&L Statement and the Balance Sheet.  It is best to set it up using calculations derived from those statements.

If you’re just starting out, much of this will be based on research and reasonable assumptions. But even ballpark numbers are far better than running blind.

Key Things You’ll Want to Watch Out For

The real world is messy, and that definitely shows up in business projections. Here are some challenges I had to deal with personally, and some ways to keep things realistic:

• Overestimating Sales: Being positive is great, but banking on unlikely sales numbers can mess up your whole plan. I’ve found it’s safer to be a bit conservative and build in some room for slower months or unexpected competition.
• Forgetting Hidden Costs: It’s really easy to miss little expenses, like processing fees, software subscriptions, or business insurance. Make a habit of checking every line of your bank statements to catch repeat costs.
• Ignoring Industry Trends: Changes in your market can push prices up, slow sales, or add new costs. Staying alert to industry news helps you keep your projections up-to-date.
• Poor Cash Flow Timing: Even profitable businesses can run into trouble if customer payments always arrive late or if up front expenses are high. Planning a cash cushion for slow seasons can be really helpful. If you put a revolving line of credit in place you get the cushion without using cash resources. A revolver only requires interest payments when it is used.

Overestimating Sales

Sales projections can be one of the trickiest things to get right. When I started my first business, I figured a best-case scenario for monthly sales right out of the gate. But after a few months, I saw how much startup buzz can fade and how hard it actually was to win repeat customers. This experience made me redo my numbers with more modest growth.

Forgetting Hidden Costs

There’s always one more recurring charge lurking around the corner. After missing out on several small but steady subscription fees and last-minute insurance hikes, I started building a small buffer into expense projections for those surprise items. It kept my planning much more realistic.

Staying Up With Industry Trends

A business plan shouldn’t just be something you do once and stash in a drawer. For example, when the pandemic hit, lots of business owners had to update their projections as entire industries changed overnight. Reading up on news, watching trends, and tracking your competitor’s moves keep your projections accurate and relevant.

Poor Cash Flow Timing

Here’s a little story: even with steady monthly sales, there were times I had to cover payroll before a customer’s payment arrived. Spacing out when money actually hits your bank account versus when bills are due can help you avoid late-night stress sessions.

Financial projections do more than just crunch numbers. They help you get a feel for your business’s rhythm, getting you ready for bumps in the road as well as bursts of opportunity.

Common Questions About Financial Projections

People often have similar questions when working up financials for their business plan. Here are a few I hear a lot:

Question: How precise do my projections need to be?
Answer: It’s normal for first-time entrepreneurs to worry about being off with the numbers. Investors and lenders know these are estimates, not promises. What they want most is to understand your thinking—what assumptions you’re making and how you’ll adapt if things change.

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Question: How far into the future should I project?
Answer: Standard business plans include projections for three years, but five makes sense if you’re planning big investments or your industry has long cycles. I worked for a large public company early in my career. They required the prior year, current year and forecasted next year by month. The next two years were projected in total. So the total package was a five year plan. This process was repeated each year and revised quarterly.

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Question: What if I have no actual sales history?
Answer: If you haven’t opened yet, base your numbers on industry benchmarks, competitor research, and trial runs like surveys or presales offers. Document where your numbers come from so investors know you’re not just guessing.

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Question: What tools can I use for these projections?
Answer: It’s totally fine to start with simple spreadsheets like Excel or Google Sheets. There are also easy-to-use online tools like LivePlan or ProjectionHub, which include templates and calculators to make things go faster. I favor and recommend LivePlan. I favor LivePlan for its content and the way it approaches writing a business plan. It uses a question and answer format that makes the process easy to understand even for a novice. LivePlan takes your business plan beyond the document stage. It turns it into a living, dynamic dashboard that updates your forecasts, tracks your performance, and helps you adjust before problems grow. You can model “what-if” scenarios, compare actual results against projections, and stay focused on the metrics that matter most. If you’re ready to manage your small business like a pro — and keep your plan working as hard as you do — give LivePlan a try today.  To get additional information and start your free trial of LivePlan please click on the link.

Putting Financial Projections Into Action

Once you’ve got your projections ready, put them to work. Pull these numbers out when you’re making big decisions, such as hiring, taking on new customers or making a big purchase. Review them regularly and update when you get new data or face changes in your industry.

For instance, if your cash flow projection shows a dip in three months, you might ramp up marketing or cut some less-important expenses. If you’re seeing stronger sales than you thought, update your forecasts and think about boosting staffing or inventory. Keeping your projections handy also helps you check your own progress month over month or year over year, providing a clearer picture of how your business is growing.

Some Real-World Use Cases for Financial Projections

I’ve seen projections be really useful in all kinds of businesses:

• Startups: Before opening doors, entrepreneurs use projections to show backers what kind of returns they might see, and to avoid running out of money.
• Established Businesses: When planning an expansion or launching a new product, projections help map out the impact on the company’s bottom line.
• Loan Applications: Banks and lenders check projections to see if you can comfortably pay back a loan or line of credit.
• Year-End Reviews: Comparing actual results to projected numbers helps you see what’s going well and where you can tweak your next year’s strategy.

No matter where you are in your business, financial projections are helpful for checking if your ideas line up with the reality you’re facing.

Tips for Making Your Projections Stronger

• Base everything on research: Use real-world numbers when ever you can. Industry reports, competitor data, or quotes from suppliers are more solid than wild guesses.
• Stay conservative: It’s usually better to under estimate sales a little and over estimate expenses by a bit. That way, surprises are less stressful.
• Regularly revisit your numbers: Once your business is running, plug in actual sales and expense data to see how close you are to your forecast—and update as needed.
• Get feedback: Sharing your projections with an accountant, business mentor, or even a friend who’s good with numbers can bring up things you missed.

Financial projections can feel tough to tackle at first, but sticking with them brings major rewards later. They’re all about giving yourself (and anyone else involved) a clearer look at what’s coming up, and maybe even making the ride a little smoother.

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