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Financial Projection Basics #3: What Should Financial Projections Include?

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cropped-ProjectionHub-Icon-Avatar.pngThis is the 3rd blog post in my series of posts on financial forecasting modeling basics.  You can check out the first couple of posts below:

  1. What are financial projections?
  2. Why create financial projections?

In this post I want to discuss what should be included in financial projections.

What to Include in Financial Projections?

Financial projections should include the following:

  1. 3 years of Projections –  Generally, an investor or lender will ask for 3 years of financial projections as a standard.
  2. Projected Income Statement – Your projections should include an Income Statement, also known as, a profit and loss forecast.  You can see examples of the 3 standard projected financial statements here. 
  3. Projected Cash Flow Statement – A cash flow statement will help you determine whether you will run out of cash.  It is possible, even common, to be profitable but to run out of cash.  For example, your customers might pay you well, but they might wait to pay for 90 days, that is a recipe for trouble if you haven’t planned well.  Forecasting your cash flow will help with this process.
  4. Projected Balance Sheet – A banker is going to be interested in your projected balance sheet.  They will look to make sure that your balance sheet ratios show that you can afford to repay the loan and that you have sufficient collateral to cover the loan.
  5. Key Assumptions – It is important that your financial projections are built on a set of assumptions that can be easily understood and changed if needed.  I always recommend that you add a narrative document with your projections that just outlines a list of all of your assumptions and what those assumptions are based on.  I wrote a blog post that outlines how to build realistic projections with bottom up based assumptions.

Here is an excerpt from that blog post that gives an example of what your assumptions might look like:

“A bottom up approach for a coffee shop might look like this:

  • Our coffee shop is at the intersection of the 2 busiest streets in town with daily traffic of approximately 15,000 vehicles.
  • We know that only 15% of people purchase coffee at coffee shops
  • All of them already purchase from a different coffee shop, so we will have to convert them as customers
  • Because most customers are loyal to their coffee shop we estimate we might be able to convert 10% of the total number of coffee drinkers
  • We will start by running local tv and radio commercials as well as placing c0upons in the local newspaper.
  • We think these advertising efforts will convince (15,000 vehicles x 15% coffee drinkers x 10% potential customers) 225 customers to try our coffee during the first week.
  • Because we are a local store with high quality coffee at a convenient location we believe we can convert 50% of those customers into returning customers.
  • So our first month sales we estimate at (225 customers x 50% x $3 x 30 days) = $10,000 in sales month 1.”

That’s it!  These are the key ingredients in a solid set of financial projections.  Our software tool – ProjectionHub – can help you create these required documents to keep your banker, investor, or partner happy. Give ProjectionHub a try for free.

Banks Don’t Always Require Full Financial Projections – Here Are 3 Examples

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Generally, banks require loan applicants to create a set of financial projections, and although this is probably wise for you to do, it may not always be required.  If you are applying for an SBA loan, the SBA recommends the following financial forecast guidelines:

“Provide a projection of future operations for at least one year or until positive cash flow can be shown. Include earnings, expenses, and reasoning for these estimates. The projections should be in profit and loss format.”

Although some banks may require a full set of 3 year projections including a cash flow, balance sheet, and profit and loss, there are many situations where this may not be necessary.  Here are 3 examples of loan requests that may not require complete forecasts for the entire business.

1.  Efficiency Savings Greater Than Loan Payment – This is a common loan request situation that may not require you to develop a full set of financial projections because the math is obvious.  For example, let’s say you drive your work vehicle 150 miles per day on average, and you get 15 miles per gallon.  So you purchase 10 gallons of fuel per day at $4 per gallon for 20 work days each month.  That means you spend $800 a month in fuel.  Let’s say you can get a used car for $10,000 that will get 30 miles per gallon.  Now you will spend half as much on fuel which is a savings of $400 per month.  If you do a 3 year loan at 7% for the vehicle you will pay about $300 a month for your loan payment.  This situation may not require a full set of financial projections for the business because the finances are clear,  you will save $100 bucks a month.

2.  Signed Contract With Adequate Profit Margin – Another common situation, you get a signed contract for 1,000 units of your product.  Let’s say you make $100 profit on each unit, but you need a $50,000 loan in order to produce the products for the order.  The bank may be willing to look at this particular order and the $100,000 in profit that you should make based on your profit margin, and lend the $50k without requiring a deeper, long term look at your financial projections.

3.  Expanded Capacity With Collateral – Another possible situation might be if you own a trucking company and you need a larger trailer to expand the amount you can transport.  This will allow you to increase revenue per each delivery, and will allow you to bid on larger jobs.  The bank may be willing to make the loan simply based on the increased potential for sales, and the fact that in the worst case scenario if you can’t make the payment they bank will collect on the collateral and be able to re-sell the trailer.  This only works for collateral that will hold its value well like a semi truck trailer.

The point here is not to suggest that you shouldn’t create financial projections for your business because it is a great planning tool, and important to do for the success of your business, BUT sometimes banks won’t actually require you to go through this exercise as part of the loan application.

How to Create an Income Statement Projection with ProjectionHub

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For many startups and small businesses you are required to create an income statement projection, or a profit and loss projection, when applying for a loan or potential investment.  The purpose of this guide is to walk you through the process of creating a 12 Month Profit and Loss Projection/Income Statement for your business using ProjectionHub.

ProjectionHub is a web-based tool that helps business owners create financial projections without the need to be a PhD in spreadsheet modeling.

Here is how it works:

  1. Enter Financial Projection Info
  2. ProjectionHub Automatically Creates Your Spreadsheets
  3. Spreadsheet Projections Are Emailed to You
  4. Download Your Spreadsheets

Now I want to dig into the details

1.  Contact Information – First we are going to ask you for your contact information.  This accomplishes 2 things:

  • Creates a ProjectionHub Account – By providing your email address and a password we are able to create an account for you.  Now you will be able to quit in the middle of your projections and all your data will be saved and ready for you to jump back into at any time simply by logging in.
  • Includes Contact Info on Spreadsheets – One of the most common mistakes made by entrepreneurs is neglecting to include their contact information with their financial projections.  Simply enter your contact info once and we will include it on every page of your projections.

2.  Start Creating a 12 Month Income Statement Projection

Simply click to start creating your 12 month income statement projection.  Depending on the size of your business, your familiarity with creating financial projections and how much you prepared before getting started, you should budget between 10 minutes and an hour to complete your projections for this 12 month Income Statement.

3. How Will You Project Sales?

The next step is to determine how you will project your sales numbers.  ProjectionHub gives you three options:

  • Project sales for each individual product or service (Choose this option if you only have a few products and/or services)
  • Project sales for product lines or groups of services
  • Project sales in total – (If you have hundreds of products and services, you may want to choose this option)

4.  Enter Sales Projections

Creating accurate and logical sales projections can be incredibly difficult.  Anyone can throw some numbers into ProjectionHub and come up with a set of projections, but your projections need to be based on data.  They need to be bottom’s up.  They need to include logical assumptions.

Once you know what you are going to forecast for sales, you can enter each individual product or service into a table.

You will notice that we ask for the product name, the sales price per unit, and how many days it will take you to get paid.  The days to get paid is not important for your income statement, but it can become incredibly important information for your cash flow projections.

Next you will enter in the number of units you intend to sell for each product for the next 12 months.

Finally, you can add additional products or services to your sales projections quickly and easily.

5.  Project Your Cost of Goods Sold

Now you need to start projecting your expenses, starting with, Cost of Goods Sold.

Now you simply need to enter the direct labor, material costs, and variable expenses for each product or service.

6.  Add your Equipment, Useful Life and Salvage Value

Next you will need to enter any equipment that you have.

There are 3 pieces of information that we need for each piece of equipment in order to properly calculate depreciation expense.  Before I get into that, let me explain depreciation expense.

Depreciation is a non-cash expense.  It works like this.  Certain assets (buildings, equipment, machinery etc) lose value each year.  The value that is lost is called depreciation.  Depreciation is calculated as follows:

Depreciation = (Value or Purchase Price – Salvage Value or Dollar Value at End of Useful Life) / Number of Years Equipment will Last

Value – The value of your equipment is typically what you paid for it.  If you paid $100 for a desk, then you should enter $100 for the value of the desk.

Useful Life – The useful life of a piece of a equipment is the number of years you expect the equipment to last.  For example, we might expect a computer to last 4 years, so the useful life is simply 4 years.

Salvage Value – This is the dollar amount that you expect to be able to sell the equipment for after you are done using the equipment.  For example, you might just throw your old computer away, so the salvage value is zero, but an old desk might be worth something to someone else even after you are done using it.  If you expect to be able to sell your desk for $50, then the salvage value is $50.

7.  Enter General, Administrative and Selling Expenses

Now we need to project all of your General, Administrative, and Selling expenses.

The first question we ask is “How many days does it take you to pay your bills?”  Again this question will impact your statement of cash flows, not your income statement.

Next you will need to input your corporate income tax rate if you anticipate paying corporate taxes.

Lastly, you will need to enter projected expenses for the first 12 months for various categories like:

  • Accounting
  • Advertising
  • Rent
  • Utilities, etc.

8.  Download Financial Projections

You are done!  Now you can download your financial projections as an Excel document.

Simply click the “Download Income Statement”
9. View and Edit Your Financial Statement

Below is a screenshot of our completed financial statement projection.

There are 2 ways you can edit your financial projections.

  1. Edit the Excel Spreadsheet – The first tab of your Excel Spreadsheet file will be a data entry sheet.  You can change the data directly in the Excel file to change your projections.  If you are not comfortable with Excel, then I suggest logging back into ProjectionHub and editing your financials.
  2. Login and Edit in ProjectionHub – Simply go to https://www.projectionhub.com and login at the top right corner.  Use your email address and password to login, and edit the data in your projections.

There you have it, a detailed guide on how to create an income statement projection using ProjectionHub.