What Are Financial Projections: A Step-by-Step Guide to Creating Your Business Forecast
Running a business without financial projections is like taking a road trip without a map. You might eventually reach your destination, but you’ll face unexpected detours and might run out of gas along the way.
This guide will help you understand how to create simple financial projections that can guide your business decisions and set you up for success.
What Is A Financial Projection?
A financial projection is like a crystal ball for your business’s money situation. It combines your past results with educated guesses about future changes to predict your upcoming sales, costs, and profits.
This practical tool helps you:
- Set realistic goals you can actually achieve
- Spot money problems before they happen
- Make smarter decisions about spending
- Show banks why they should lend you money
For example, a lemonade stand owner might project selling 200 cups next month based on last month’s sales of 180 cups, considering that warmer weather is coming.
How Financial Forecasting Works
Financial forecasting uses five main steps:
- Review past numbers – Look at your previous sales and expenses to find patterns
- Research your market – Check what’s happening with competitors and the economy
- Make reasonable predictions – Estimate future sales and costs based on what you know
- Consider different possibilities – Create best-case and worst-case scenarios
- Update regularly – Adjust your forecast as new information comes in
Think of forecasting like predicting tomorrow’s weather. You look at past weather patterns, current conditions, and forecasting models to make your best guess—but you still pack an umbrella just in case!
What Are the Financial Forecasting Methods?
You don’t need to be a math genius to create useful financial projections. Here are some simple approaches:
- Historical Growth Method – If your sales grew 10% last year, you might predict similar growth this year (works best for established businesses)
- Market Research Method – Looking at industry averages and competitor performance to make predictions (helpful for new businesses)
- Bottom-Up Method – Building projections by estimating specific details like “25 customers per day × $20 average purchase”
- Top-Down Method – Starting with the total market size and estimating your share of it
- Multiple Scenario Planning – Creating “optimistic,” “pessimistic,” and “most likely” versions of your projection
Most businesses use a combination of these methods for better accuracy.
What Goes Into a Financial Projection?
A complete financial projection includes three key parts:
Income Statement Projection
This shows whether your business will be profitable by comparing money coming in versus going out:
- Expected sales
- Cost of products or services
- Business expenses like rent and salaries
- Projected profit after all expenses
A coffee shop might project $15,000 in monthly sales, $6,000 in coffee and food costs, $7,000 in expenses, and $2,000 in monthly profit.
Cash Flow Statement Projection
This tracks when money actually moves in and out of your business:
- When customers will pay you (not just when sales happen)
- When you’ll pay bills, employees, and loans
- How much cash you’ll have available each month
This projection is crucial because you might be profitable on paper but still run out of cash if customers pay late or expenses come due before sales revenue arrives.
Balance Sheet Projection
This shows what your business will own and owe at specific future dates:
- Assets (things you own like equipment and inventory)
- Liabilities (things you owe like loans and bills)
- Business equity (the actual value of your business)
How to Create a Financial Projection
New to financial projections? Don’t worry – you can start simple and build your skills over time. Here’s a straightforward approach to creating your first financial forecast:
1. Start With A Sales Projection
Begin by estimating your sales for the next year. Break them down by:
- Product or service type
- Monthly or seasonal patterns
- Realistic growth rates based on your history or industry averages
For example, a lawn care business might project higher sales in spring and summer, with 15% higher revenue than last year based on adding a new service.
Using tools like Invoice Fly’s reporting software can help you track actual sales against projections as your business grows.
2. Create Your Expense Projection
Calculate what it will cost to run your business and deliver your products or services:
- Fixed costs that stay the same (rent, insurance)
- Variable costs that change with sales (materials, commissions)
- One-time expenses (equipment purchases)
A bakery might project $2,000 monthly in fixed costs, ingredients costing 35% of each sale, and $3,000 for a new oven in six months.
Many businesses underestimate costs, so tracking historical expenses with tools like Invoice Fly’s receipt scanner can make your projections more accurate.
3. Create Your Balance Sheet Projection
Estimate what your business will own and owe in the future:
- Track how your cash, inventory, and equipment will change
- Project loan balances and other debts
- Calculate your business’s future value
4. Make Your Income Statement Projection
Combine sales and expense projections to see if you’ll be profitable:
- List projected revenue from your sales forecast
- Subtract direct costs of making products
- Subtract business overhead expenses
- Calculate expected profit or loss
5. Finally, Create Your Cash Flow Projection
Map out when money will actually flow in and out:
- Start with your current cash balance
- Add when customer payments will arrive
- Subtract when bills and expenses must be paid
- Track your ending cash balance each month
This helps you identify months when you might need extra cash reserves or a line of credit to cover temporary shortfalls.
One of the best ways to keep cash flow healthy is to get paid faster. Tools like Invoice Fly’s online payments make it easy for customers to pay quickly, helping you maintain a steady cash flow and avoid delays.
Tips for Better Financial Projections
- Keep it realistic – Overly optimistic numbers hurt credibility with investors and lenders
- Document your assumptions – Note how you calculated growth rates and expenses
- Create multiple scenarios – Prepare for best-case, worst-case, and likely outcomes
- Use technology – Tools like Invoice Fly’s reporting software help track actual results versus projections
- Get input from others – Ask mentors or advisors to review your projections
- Update regularly – Review and adjust your projections as real data comes in
Want to dive deeper? Get more tips from the U.S. Small Business Administration (SBA).
What Are Financial Projections Used For?
Financial projections serve as powerful tools for businesses of all sizes, providing strategic guidance in multiple areas:
Business Planning and Goal Setting
Financial projections help businesses establish achievable targets, identify necessary resources, and create performance benchmarks to measure progress.
By translating business ambitions into concrete numbers, projections create a roadmap that guides daily operations and long-term strategy.
Funding and Investment
Well-crafted projections strengthen loan applications, provide crucial information for potential investors, and demonstrate your business’s financial viability.
Lenders and investors rely on these forecasts to assess risk and potential returns, making them essential for securing capital.
Risk Management
Projections help identify potential cash shortfalls, test different financial scenarios, and develop contingency plans for unexpected events.
This forward-looking approach allows businesses to anticipate challenges and prepare appropriate responses before problems arise.
Strategic Decision Making
Financial forecasts help evaluate new opportunities, inform hiring and expansion decisions, and optimize pricing and cost structures.
By quantifying the potential outcomes of different options, projections transform gut feelings into data-driven decisions.
Budgeting and Resource Allocation
Projections guide departmental budget creation, help allocate resources efficiently, and prioritize investments based on expected returns.
This ensures that limited resources are directed toward activities with the greatest potential impact on business success.
Using tools like Invoice Fly’s estimate generator can help you create more accurate projections by improving your initial sales estimates and tracking conversion rates from estimates to actual sales.
Financial Projections Advantages
When properly developed, financial projections offer significant benefits:
Better Decision Making
Financial projections replace gut instinct with data-driven analysis, helping businesses focus resources on high-impact initiatives and identify optimal timing for investments, hiring, and expansion.
Stronger Planning and Risk Management
Projections ensure necessary resources are available when needed, identify potential problems before they occur, and prepare businesses to capitalize on growth opportunities when they arise.
Clearer Stakeholder Communication
Well-crafted projections demonstrate financial expertise to investors, create shared expectations across your organization, and satisfy documentation requirements for financing applications.
Performance Measurement
Projections establish clear financial targets to measure against, quickly identify when results deviate from expectations, and improve future forecasting accuracy by learning from past projections.
Strategic Focus
Financial projections help balance short-term needs with long-term health, prepare responses for various potential outcomes, and create sustainable growth roadmaps that guide your business forward.
Final Thoughts about Finance Projections
Financial projections serve as your business’s financial roadmap, helping you anticipate challenges and opportunities before they arrive. Even though they won’t perfectly predict the future, the process of creating them forces you to think strategically about your business.
To make good projections, you need good records of your money coming in and going out. Tools like Invoice Fly’s invoice maker makes it easier to track invoices, payments, and expenses, giving you the solid foundation needed for reliable forecasts.
Remember, financial projections aren’t set in stone. They should grow and change as your business evolves. By updating them regularly, you’ll gain better insights and stronger financial control.
