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

This 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.