Financial projections

In the business plan you should include the financial projections section, which sets out all the financial and accounting aspects of your business.

You should always be sure to make positive projections, even if your business is in the early stages.

Financial projections are a key tool for predicting potential profits and expenses in the future of the venture. They are also of vital importance when applying for loans or investments, since they detail the exact amount needed to achieve your goals and for you as an entrepreneur to know the exact amount of cash you require.

Objectives of financial projections

Financial projections have 3 main objectives or purposes:

• Financial projections also function as a guide or framework to determine the possible growth of your business and create a sensible budget accordingly.

• One of the primary elements investors look for when thinking about investing in a business is financial strength and potential profitability. You will not be able to obtain investments if you do not show in your projections the expenses, income and development guidelines.

• Depending on what type of loan or investment you choose, whether from a bank or a private investor, they will require different types of financial information. If you are going to use a bank, you should know that banks are usually more cautious with their lending compared to angel investors or other financial institutions.

• Banks will require much more security when lending you money, your bank statements to get an idea of your company's profit, the legal documents of your business and detailed financial projections, with a long-term scope of up to 5 years or more. All this to understand your business globally and know the direction it is heading, which allows them to perform a very predictive risk analysis.

Aspects of financial projections

Now that we have learned the main reasons for the inclusion of financial projections in our business plan, let's look at the main aspects or steps for the realization of this.

No matter the longevity of your company, whether it is a recent start-up or has been in operation for more than 10 years, you must make a financial projection of it.

The main difference would be that in the case of an established business you can take the data from the past as a basis for your new projections. And in the case of a new business, you should base these projections on your personal experience in the market segment and previous exploration in the same sector.

Sales projection

To start your financial forecast then, you will start with the sales projection. For this purpose you will take into account the comparison of production with profits.

In the case of an established business we would look at past projections. We would use this data to analyze market movements in different seasons and their impact on the company's financial status. Another element to consider is the current state of our industry and the economy, as well as external agents that may affect us, such as the Covid-19 pandemic.

In the case of a new company in its beginnings, we will use the same aspects, except for the historical financial data of the business, which we do not have. Even so, we must have a forecast of sales, for which we will use as tools the market study, or relying on more experienced entrepreneurs in our market segment who want to help us. It is vital to have sales projections in your business plan.

Expense projection

The next step to include in your financial projection would be an expense projection. Making an expense forecast is, in most occasions, easier than the sales projection, since it is simpler to forecast what you plan to spend than the actions and habits of consumers, trade patterns and the general state of the economy.

Established business: In the case of having an established business, it is much easier to predict the expenses you are going to have, such as rent, utilities, payment to employees, since you have historical information about this. Having this previous information of the company itself, will also allow you to prepare an emergency budget, for exceptional situations that have arisen in the past. These emergencies can be of any type, from losing suppliers to having a collapse in the offices of the business.

New business: For start-up companies the situation is a little different, since we have no idea what can happen, as we do not have historical data. It is for this reason that you should invest more time in market research or rely on veteran entrepreneurs who can share their experience.

From the beginning you should be clear about the cost of things like the place where you are going to settle, the internet and the cost of the meeting places where you will meet with potential clients. All of these things come at a cost, and it is your responsibility to research them.

Many new entrepreneurs are overwhelmed in the beginning by the potential unknown expenses. They constantly wonder what if there is a price increase this year, what if customers start to stop using my products or services, what if my suppliers raise their prices, what if my suppliers raise their prices, and what if my customers stop using my products or services, what if my suppliers raise their prices? You could spend hours or days asking yourself "What if?" without ever getting to the end of it, so I advise you to make a cost projection as detailed as possible and add to it a 15% increase to the expense budget. With this method you will always have a safety net for these unforeseen expenses.

A good expense projection, with good safety margins is one of the aspects that banks or financial institutions take into account when they evaluate your company for a loan. This way you show them that you are ready for any setbacks and that you will be able to overcome potential financial setbacks.

Balance Sheet Projection

In the next section you should prepare a balance sheet projection. The balance sheet helps us to know more deeply the financial context of the business using as values the assets, liabilities, capital sales and the net capital of the company in a specific lapse of time.

You can use accountants to do this part, in case you are not very knowledgeable about accounting and finance.

You will then think that it does not make sense to make a balance sheet projection for a new company since it does not have all these elements yet. In this case I advise you to make one using data about your industry. Search the internet for as much information as you can about your chosen market segment, using sales projections as a guide.

Try to expand your network of contacts to entrepreneurs in your same sector with years of experience and who have already made projections for their own businesses to support you in yours.

It will be good training for you as an entrepreneur to make at least a small projection of the first 6 months of your business where you calculate the assets, liabilities and the amount of money you are going to invest. Especially if you plan to raise funds quickly at the beginning.

Income Statement Projection

Next, we would make the projection of the income statement, which allows us to observe the net profits of the company, subtracting the cost of services or products sold, taxes and dissimilar expenses.

As in the previous projections, it is much simpler to make this projection for an established business. It is more complex to do for a start-up business, but you can plan the different phases of your business as a probable income statement that you would use as a sample for investors and financial institutions. This shows them that you have done the necessary research, making an accurate estimate of your income over different time periods (1, 3 or 5 years).

This all sounds very complex and laborious, and if you have no idea how to get started I don't recommend that you even begin. On the Internet there are companies that are dedicated to make this type of projections in each market segment. Help them to provide you with data on sales of products or services in different market niches and realistic and projected levels of progression for the industry.

Include all such data in your projections or choose those most specific to your industry as there may be many differences within the same market segment.

Examples: An example of what is detailed above can be this excerpt from an article written about life coaching as an industry, which was published by CNBC in 2021.The article mentions that life coaching is part of the professional coaching industry, which has amassed at least $5 billion globally in that year. There are several types of coaching within this large group, such as executive leadership coaching or nutrition coaching. It is estimated that there are currently up to 71,000 professional coaches in the world, with more and more professionals joining every year.

In another article based on the Global Final Report of Coaching Studies refers to the growth that the professional coaching industry has had globally. Between 2015 and 2019 there was a 33% increase in the number of new professional coaches. It also talks about the projected salaries annually for an average life coach. It mentions that a life coach can usually earn an average of $31 per hour.

Cash flow projection

The last step in making your financial projections is to make a cash flow projection. This is also a vital stepping stone to your com