Financial projections are the backbone of strategic planning and decision-making for any business.
They help you gain valuable insights into your financial health to navigate potential challenges successfully.
Thus, knowing how to make financial projections is paramount. If you are unsure where to start, we’ll lend a helping hand.
Read on to discover 6 tips on how to make financial projections and streamline your planning.
Let’s dive in!
What Are Financial Projections?
Business financial projections refer to forecasts or estimates of your company's future financial performance, including:
- Revenues,
- Expenses,
- Profits,
- Cash flows, and
- Key financial metrics.
Financial projections serve as a roadmap for financial planning, budgeting, and performance monitoring and help you:
- Set financial targets,
- Identify growth opportunities,
- Secure funding, and
- Manage financial risks effectively to achieve long-term financial sustainability and success.
Although most projections refer to the first 3-5 years and aim to attract investors or create a strategic plan, short-term projections are also necessary.
These usually cover a year or monthly breakdown.
What is The Purpose of Financial Projections?
The primary purpose is to forecast and estimate your company's future financial performance based on
- Assumptions,
- Historical data,
- Market trends, and
- Business strategies.
Relying on so much data and information makes financial projections beneficial for your business for multiple reasons:
💎 Strategic Planning — Help you set financial goals, develop strategic plans, and allocate resources effectively to achieve long-term objectives and sustainable growth.
💎 Budgeting — Serves as a basis for creating annual budgets, setting revenue targets, allocating expenses, and monitoring financial performance against budgeted expectations.
💎 Forecasting — Provides insights into expected revenues, expenses, profits, cash flows, and KPIs, helping you anticipate financial outcomes.
💎 Decision-Making — Provides data-driven insights, scenario analysis, and financial metrics to assess their impact on profitability, liquidity, and overall financial health.
💎 Investor Communication — Financial planning shows transparency and financial viability, thus supporting fundraising efforts or investment decisions.
💎 Performance Monitoring — Tracks actual financial performance against forecasted figures, identifies variances, analyzes trends, etc.
Financial Projections: 3 Key Elements
Financial projections consist of multiple elements, but 3 elements are paramount:
1. Income statement,
2. Cash flow statement and
3. Balance sheet.
The income statement summarizes a company's revenues, expenses, and profits over a specific period, typically quarterly or annually.
It shows whether a company is generating a profit or incurring a loss during the reporting period.
The cash flow statement shows the inflows and outflows of cash over a specific period, providing insight into the company's liquidity and ability to meet financial obligations.
The balance sheet presents a snapshot of your company's financial position, including assets, liabilities, and equity, at a specific point in time.
It helps assess solvency, liquidity, and overall financial health.
How to Make A Financial Projection in 6 Steps?
Creating a comprehensive financial projection involves analyzing and forecasting your company's financial performance.
To do so, you need to take the following steps into account.
1. Make Sales Projections
Sales projection involves estimating future revenues based on historical performance, market analysis, industry trends, and sales forecasts.
The more accurate the data, the better the projections.
You’ll have no problem gathering data if you are an established business.
However, if you are just starting out, you’ll have no previous data, or at least not a substantial amount.
If this is the case, you should provide your best estimates based on thorough research and analysis of your industry and market trends.
📌 Note
When making sales projections, also consider external factors such as the global economy, potential taxes, supply chain issues, industry downturns, etc.
2. Make Expense Projection
The expense projection entails estimating operating expenses, including costs related to production, labor, marketing, administrative functions, and other business activities.
In order to make an expense projection, you should take fixed and variable costs into account.
As the name suggests, fixed costs are more or less the same monthly. On the other hand, variable costs either differ every month or don’t occur regularly.
Although this projection is slightly simpler to make since it’s easier to predict your business’s behavior than the clients’, you should add a 10-15% margin in case of unforeseen events.
With Puls Project, you can simplify ongoing financial managementand automatically track expenses.
You need to input your regular monthly expenses only once, and the software will automatically display them the following month.
3. Create Balance Sheet Projection
It involves forecasting the company's assets, liabilities, and equity over a specific period. Since it shows insights into the company's financial position, liquidity, and solvency, it is a crucial projection for potential investors.
Similar to sales projections, if you are a startup, you won’t have much data, if any. Nonetheless, the principle remains the same — Do lots of industry research and analysis to make a projection.
Conversely, if you already run a business, you should use the current and previous balance sheets to make a projection for the next 1-3 years.
4. Make Income Statement Projection
This statement outlines expected revenues, expenses, and profitability for a set period, and it summarizes financial performance, including:
- Gross profit — The profit your company makes after deducting the cost of goods sold (COGS) from its total revenue.
- Operating income — Profit from operations before deducting interest expenses and corporate taxes.
- Net income — The bottom-line profit after accounting for all expenses, taxes, and interest.
- Other key financial metrics.
You should consider previous income statements and see the changes between them to indicate future income projections accurately.
Again, the period you’ll cover will span the next 3 years. You should include figures for each year and a total for the three-year period.
🔥 Puls Project's Profitability Tracking feature helps you analyze profitability over any time by label, category, counterparty, company, or account.
🔥 Thus, you can group financial activities across multiple banks and companies to better monitor expense tracking, spending optimization, compliance, and insights.
🔥 Furthermore, you can track balances and spending across different accounts and companies from a single dashboard.
5. Create Cash Flow Projection
Cash flow projection estimates your company's expected cash inflows and outflows over a defined period.
It gives you insights into your company's liquidity, working capital needs, and ability to manage financial obligations.
Cash flow projection is invaluable because it shows your company's ability to generate cash and support ongoing operations.
When creating cash flow projections, pay attention to previous net income statements and balance sheets.
Also, factor in that you won’t always get payments immediately.
If you are just starting, look into the sales forecast and expenses budget in more detail.
With Puls Project’s solution, you can view balances of all accounts in one glance, manage invoice payments efficiently, and maintain a clear history of payments.
6. Estimate Break-Even Projection
Break-even projection calculates the point at which total revenues equal total expenses, resulting in neither profit nor loss.
Your financial projections can help you determine when you expect to break even. This projection is appealing to investors because it demonstrates potential business growth.
🎁 Bonus: 3 Hot Tips for SMBs
As we’ve already mentioned, the most impending factor for SMBs when creating financial projections is the lack of historical data and analysis.
Here are a few tips to help you create financial projections despite this limiting factor:
💎 Identify and study similar businesses within your industry and analyze their financials for better insights.
💎 Do thorough research on market trends, customer behavior, your industry, etc., to get a clear understanding of what is relevant.
💎 Opt for cash flow management solutions that can help you tackle all the essential financial aspects and gradually build your historical database.
How Can You Create Accurate Financial Projections With Puls Project?
Puls Project is a cash flow management system that provides a holistic approach to finances by delivering solutions for the 3 most important financial aspects:
- Multi-banking connectivity
- Loan possibilities, and
- Cash flow planning.
With our solution, you can:
✅ Manage all bank accounts and companies in one place.
✅ Label transactions for grouping financial activities based on project, department, or purpose.
✅ Connect bank accounts from over 4,000 German-based banks.
✅ Track balances and spending across different accounts and companies on a central dashboard.
✅ Rely on accurate, real-time data for business decisions without error-prone spreadsheets and manual calculations.
✅ Monitor your cash flow actively, and our software will highlight any gaps it spots.
In addition, if you need to bridge financial gaps, you can opt for our loan possibilities. Within 48 hours, you can get up to €100,000 for a period of 12 months.
A great perk is that you can enhance your credit limit once you connect all your company’s bank accounts to our system.
The more we know about your business, the more we can help you:
- Develop a stable financial plan,
- Improve your company’s financial health and
- Enhance investment and funding possibilities.
Ready to see what Puls Project can do for your business?
Sign up today to master financial planning.
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