How to Make a Business Plan Financial Projections from A-Z

Financial forecasting in a business plan is a critical component for your company. Whether launching a startup or scaling an existing business plan financial projections help you strategize, attract investors, and manage cash flow effectively. In this article, NextSky provides a step-by-step guide to building financial forecasts and expert insights to ensure your projections are realistic and impactful.

What is financial forecasting in a business plan?

Financial forecasting in a business plan involves estimating your company’s future financial performance based on historical data and current trends. Businesses use these forecasts to analyze revenue, expenses, profits, and cash flow changes over time, helping set financial goals.

Typically, forecasts span one to five years and are updated at least annually. They enable business leaders to make strategic financial decisions, manage cash flow, secure investment, and identify areas for operational improvement.

Read more: Successful Business Plan with the Secret from A to Z

What does a business plan financial projections include?

1. Revenue forecast

The revenue forecast is the cornerstone of financial planning, projecting income from products or services. It estimates customer numbers and potential revenue. For example, selling 500 t-shirts at $20 each monthly yields $10,000 in revenue. Accuracy requires referencing market trends and real data.

2. Expense budget

The expense budget lists costs necessary to run your business, from rent and advertising to fixed and variable expenses. Include a 10–15% buffer for unexpected costs to avoid cash shortages.

3. Cash flow statement

The cash flow statement, your business’s “lifeblood,” tracks money flowing in (e.g., sales, loans) and out (e.g., ads, debt repayment). It ensures you avoid running out of cash. Categorize cash flows into operating (daily sales), investing (asset purchases), and financing (loan interest).

4. Income statement (profit and loss)

The income statement shows whether your business is profitable by subtracting costs (e.g., cost of goods sold, operating expenses) from revenue, revealing net profit and assessing strategy effectiveness.

5. Balance sheet

The balance sheet provides a snapshot of assets, liabilities, and equity, helping you evaluate financial health and make informed decisions about investments or loans.

6. Break-even analysis

Break-even analysis identifies when revenue covers all fixed and variable costs, pinpointing the minimum sales needed for profitability. It guides sales planning and profitability assessment.

7. Financial ratios

Financial ratios, like your company’s “vital signs,” evaluate financial health. Gross profit margin and debt-to-equity ratios are key for assessing stability and growth potential.

8. Scenario analysis

Scenario analysis prepares you for different futures by creating best-case, worst-case, and base-case scenarios, ensuring flexibility to handle market fluctuations.

Learn more: Guide to Starting an E-Commerce Business Blueprint from A-Z

5-step guide to creating business plan financial projections

Step 1: Define goals and time frame

Clarify why you need a forecast and its period. Are you pitching to investors, budgeting, or tracking growth? This shapes the forecast’s detail level. Examples:

• For investors: Focus on 3–5-year forecasts highlighting profit and growth potential.
• For internal planning: Use 12–36-month forecasts for daily operations.
• For lenders: Emphasize cash flow and repayment plans over 1–3 years.

Practical tip: Choose a realistic time frame. Startups often use 36-month forecasts to balance long-term vision and short-term practicality. Specify goals (e.g., “Raise a $100,000 loan”) and time frame (e.g., “3 years”) to stay focused.

Step 2: Gather relevant data

Accurate forecasts rely on reliable data. Steps include:

• For existing businesses: Use historical financials like income statements (past revenue/expenses), cash flow statements (inflows/outflows), and balance sheets (assets/liabilities).
• For startups: Rely on:
  • Market research: Use Statista or Google Trends to estimate market size and demand.
  • Competitor analysis: Study similar businesses via SimilarWeb for pricing and sales volume.
  • Industry benchmarks: Reference IBISWorld or trade associations for average profit margins and growth rates.

Practical tip: Organize data in a spreadsheet. For startups, estimate monthly customers (e.g., 100) and average order value (e.g., $50) based on competitor data.

Step 3: Forecast revenue

Revenue forecasting predicts income and forms the foundation of your plan. Steps:

• List revenue sources: Estimate sales volume and pricing for each product/service. Example: A Shopify candle store projects 500 candles sold monthly at $20 each.
• Use conservative estimates: Avoid over-optimism; assume 5% monthly growth instead of 20%.
• Account for seasonality: Online stores may see 30% sales spikes in December.
• Create three scenarios:
  • Best-case: High sales, strong growth (e.g., 1,000 units/month by year two).
  • Worst-case: Low sales, slow growth (e.g., 300 units/month).
  • Base-case: Average sales (e.g., 500 units/month).

Practical tip: Track revenue monthly in a spreadsheet. For example, with 200 orders at $100 each in month one and 5% monthly growth, use: Revenue = Orders * Price * (1 + Growth Rate)^Month.

Step 4: Estimate expenses

List and categorize all costs to understand financial obligations:

• Fixed costs: Rent, salaries, software (e.g., $2,000/month for Shopify Plus, $5,000/month for staff).
• Variable costs: Costs tied to sales, like shipping or ads (e.g., $10/order or 20% of revenue for marketing).
• One-time costs: Startup expenses like equipment or legal fees (e.g., $10,000 for initial inventory).

Practical tip: Add a 10–20% buffer for unexpected costs, like equipment repairs or sudden marketing needs. Use Google Sheets or Excel to track monthly expenses.

Step 5: Build and test your forecast

Combine revenue and expense projections to create core financial statements:

• Cash flow statement: Calculate monthly inflows (revenue) and outflows (expenses) to ensure operational liquidity.
• Income statement: Subtract costs from revenue to project profit or loss.
• Balance sheet: List assets (cash, inventory), liabilities (loans), and equity.

Practical tip: Automate calculations using financial forecasting templates (Excel/Google Sheets). Test scenarios like “What if sales drop 20%?” or “What if costs rise 10%?” to prepare for surprises.

Read more: Business Plan Examples that Put Success within Your Reach

Where to find free business plan financial forecasting templates

Simplify the process with these template options:

• Excel/Google Sheets: Free templates from SCORE or Smartsheet include built-in revenue, cash flow, and break-even analysis formulas.
• Software tools: Prophix or Fathom sync with accounting software for real-time updates.
• Custom templates: NextSky offers e-commerce-specific Shopify forecasting templates at nextsky.co/resources.

These templates cover startup costs, payroll, revenue forecasts, and 36-month revenue/expense projections, ensuring comprehensive coverage.

Common mistakes to avoid in revenue forecasting

• Overly optimistic projections: Emotion-driven numbers lead to unrealistic goals. Base forecasts on market data, customer behavior, and research, not hopes of capturing 50% market share in year one.
• Ignoring variable costs: Don’t focus solely on fixed costs; account for fluctuating expenses like marketing, shipping, or platform fees that impact profits.
• Single-scenario planning: Markets are unpredictable. Prepare three scenarios (best, worst, base) for flexibility.
• Underestimating costs: Actual costs often exceed estimates. Include a buffer for unexpected expenses like repairs or legal fees.
• Static forecasts: Forecasts are only accurate when created. Update them with new business or market data to reflect reality.

 Financial forecasting is the key to business success, guiding planning, securing funding, and overcoming challenges. With free templates and NextSky’s Shopify expertise, you can create accurate, precise forecasts to impress investors. Start building your financial future today!