How to Write a Business Plan: Financial Projections

How to Write a Business Plan: Financial Projections

In my most humble opinion, the financial projections section of a business plan is the absolute most important part of your business plan.  This is because if the company is not going to be profitable, investors are going to want to know about it.  Further, investors are going to want to ensure that the numbers provided are accurate projections. Because of this, this section should be very detailed with supporting data.

The financial projection section should include an income statement for 3 to 5 years into the future, a balance sheet for 3 to 5 years into the future, and a cash flow statement for the next 12 months.  In my experience, the starting point for your financial projections is always the cash flow statement.  With this statement done, this will leave you with the first year of your income statement.  Once this is complete, make sure to expand your growth for revenues for the next 3 to 5 years.  Further, make sure to do research in reference to the various cost that will be involved with your business.

The balance sheet is always the hardest aspect of the financial projection section to complete.  In the statement, I always start with funds invested in the equity portion of the sheet.  Then, I move towards the liability section and identify any loans that will be taken.  From this, I then complete the asset portion of the sheet.  In the end, a solid, reliable balance sheet will ensure that the asset side of the balance sheet is equal to the liability and equity portion.

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The financial projection section is probably the most difficult section for business owners to write.  There are numerous reasons for this fact.  First, financial statements are mostly made in Excel.  Most business owners do not even have Excel on their computer, let alone, know how to use the various functions needed to create financial statements.

Another common challenge with creating financial statements in Excel is the need to intertwine different pages.  For example, when I create my financial statements, I often use one page, or tab, as an information page.  The rest of the pages, located on different tabs, are tied into the information page using links and formulas.  By doing this, if I change a financial figure on the information page, all of the financial statements are updated.

Financial Assumptions:

The financial summary should explain the highlights related to financial projections.  These highlights include revenues and profits for the first year, expected profits for years two and five, and, when seeking funds from an investor, possibly the expected return on equity.

Business Plan Writing Tip:

When writing the financial summary section, first start off by explaining that the financial section of your business plan is based on research and observations.  This disclaimer helps to set the stage for the reader’s understanding that the projections are just the business owner’s best guesses.  Next, follow-up the statement with your findings from your financial analysis.  These findings should include revenues for the first year, net profits, and the profit margin expected.

Financial Summary

The financial projections are based on market research and empirical examination of the local retail store industry. For the next year, we project revenues of approximately $456,793.  The estimated expense costs will be $217,330.  After taxes, we estimate a net profit of $239,463.  This leads to a profit margin of approximately 52.4%.  As our brand continues to grow, second-year progression is anticipated to yield a net income of approximately $311,363.  Within five years, net income should exceed $348,722.


In this example, the organization expected first-year revenues to exceed $450,000.  Further, the cost involved in attaining these revenues were also shown.  This helps the reader understand the potential revenue generation opportunities for the company and the needed cost to achieve the dollar amount noted.  Other important aspects of the summary would include the net profits for years two and five.

Startup/Expansion Costs:

The startup cost section of the business plan should include the costs needed to start the business.  If the business is already established, then this segment should outline expansion costs.  If funding is being sought and the money will be used for purposes other than startup or expansion, then make sure to use this section to reflect how the money will be spent.  An example of this would be if a company needs funds to spend on an advertising campaign, then utilize the section to break down the costs for the campaign implementation.


When I set up my startup costs section, the first segment is always related to how much money the business owner has invested, funds needed from an investor, desired loan amount, if a loan is needed, initial buildout, and working capital, which are funds used for operations when the business opens.

It may be considered a little unorthodox to include funding with startup costs.  However, by following this structure, the business owner succinctly showed funding needed and how the funds will be spent.

The rest of the sections focused on specific costs needed to start the business.  The specific categories used were equipment, operations, office equipment, and other.  In these categories, I strongly suggest that the cost estimates be inflated a bit.  Say by 10 to 20 percent.  Further, try to stay “general” with startup costs.  This strategy is recommended simply because there is no way to know what your actual startup costs will be until your startup process has commenced.


Startup Costs
Category Estimate
Equity Investment          1,000,000.00
Loan             500,000.00
Initial Build Out                  900,000
Working Capital             125,000.00
Section: Equipment  
Restaurant Equipment               75,000.00
Retail Store Equipment               35,000.00
Hotel Equipment               40,000.00
Sub Total             150,000.00
Section: Operations  
Inventory               95,000.00
Supplies             150,000.00
Décor               28,000.00
Sub Total             273,000.00
Section: Office Equipment
Office Equipment               25,000.00
Furniture               12,000.00
Sub Total               37,000.00
Section:  Other  
Misc. Licenses               15,000.00
Sub Total               15,000.00
Total          1,500,000.00


Daily Revenues:

For my daily revenues, I always start with estimating revenues and the cost of goods for the first day of business.  Revenues are the sales price multiplied by the actual number of products or services sold.  For the cost of goods, this is considered the dollar amount that the business spent to make the product or service.  For simplicity sake, I always utilize a percent for the cost of goods.  This helps for staying true to using averages in the financial statements.

Business Plan Writing Tip:

When designing the average daily sales segment, always use averages for everything.  By embracing the concept of using averages in the financial statements, the business owner is acknowledging that the estimates provided in the financial statements are a best guess approximate as to what the business owner hopes to sell in the future.


In the first column, this is where I put the general categories for items or services that a business will sell.  In this example, the average daily sales are for a hotel with a restaurant and gift shop.  In the first section, I outline the three different types of rooms offered.  Of course, there are further differentiating factors between a one-bedroom with a balcony and a standard one bedroom.  However, for the sake of estimates, I use an average price for all one bedrooms.  In section 2, I break up the categories into lesser revenue generators, which would be the restaurant sales and give shop sales.  In this segment, I asked the business owner to estimate what their revenues will be for the restaurant and gift shop.  Because these are secondary revenue generators, estimates for the total sales may be used.

The second important item in the chart above would be “% Sales.” The percent sales are used to determine the cost of goods sold.  The cost of goods sold is how much a business spends in order to make a product or service.  From the perspective of a restaurant owner, the cost of goods sold may be the amount spent on lettuce, tomatoes, and cucumbers.  For a hotel, as noted in the chart above, the cost of goods sold may include cleaning supplies, towel replacement, and soaps.


Average Daily Sales
Revenue Generators
Daily Sales % Sales Num. Price Cost Profit Total Rev. Total Cost
Section 1
1 Bed Room 20%                         13                 85.0            17.0               68.0              1,105.0 221
2 Bed Room 20%                         18               105.0            21.0               84.00              1,890.0 378
Suite 20%                           2               155.0            31.0             124.0                 310.0 62
Section 2
Restaurant Sales 30%                         35                 45.0            13.5               31.5              1,575.0 472.5
Gift Shop Sales 50%                         75                 12.0              6.0                 6.0                 900.0 450
Misc. Sales 50%                         45                 14.0              7.0                 7.0                 630.0 315
Total                   6,410           1,899



Every business that has ever been started, that will ever be started, needs some type of labor involved.  Even if the labor is only the owner, make sure to include the labor section and the expected dollar amount to be paid on a monthly basis.


Employee Number Rate Monthly Hours Total Pay
Salary  n/a n/a            4,500
Manager 1                    25.00 172            4,300
Employees 18                    18.00 172          55,728
Total          60,028


When I create my labor template, the first line, salary, is the amount of money the owner wishes to be compensated for their time and energy.  Some business owners may argue that they will not take a salary in the first year.  However, lenders and investors, almost to the person, will want to see the owner take some kind of salary when the business starts.  Because of this, the salary is always the first line in all of my labor financial models.

Following this line item would be managers and employees.  As you can see in the example above, the structure will allow you to enter the number of managers in the average pay rate as well as the number of employees and their average pay rate.  Again, we are embracing and exploiting the concept of averages.

Monthly Fixed Costs:

The monthly fixed cost segment should include any and all costs that the business will spend, continuously, on a monthly basis.  Popular fixed costs may include rent, utilities, insurance, and advertising.


Monthly Fixed Costs
Monthly Costs Monthly Total
Rent                    15,000
Utilities                      1,580
Office Expenses 780
Insurance 400
Accounting/legal 250
Advertising 7500
Other 650
Monthly Total                    26,160



Fixed costs are definitely a misnomer.  Just because we call them “fixed costs” does not mean the costs will not change on a monthly basis.  The fixed costs title is more focused on the actual items being paid as compared to the same dollar amount paid each month.

When constructing the fixed costs segment, there are a couple of different theories that may be applied to the construction of the segment.  First, some business owners prefer to leave fixed cost as the same dollar amount throughout the year and then add a growth estimate for the next year.

Other business owners prefer to utilize a percent of sales approach.  In this approach, costs that change on a monthly basis, such as utilities, office expenses, and “other,” would be based on a percent of sales technique.  In this technique, each variable line item would be divided by sales.   For subsequent months fixed costs, the line items would be calculated by multiplying the percent found in the first month for the line item by sales in the following months.  This technique is known as common sizing.

Growth Rates:

Growth rates are the percentages used to increase a line item due to growth or inflation.  Not surprisingly, different sections of the financial estimates will grow at different paces.  From this, the need for a section related to growth rates is needed.


Growth Rates
Growth Rate Sales 2 & 3 3.50%
Growth Rate Sales 4 & 5 1.50%
Growth Rate Cost of Goods 1.50%
Growth Rate Salary 1.50%
Growth Rate Labor 3.00%
Growth Advertising 1.00%
Growth Office 1.00%
Growth Utility 1.00%
Growth Legal 1.00%
Growth Insurance 1.00%
Growth Other 1.00%


My preference for the growth rates is to show different growth rates for each category.  Labor is bound to grow at a different pace than say business insurance.  This structure allows for the needed adjustments.

Misc. Information:

The miscellaneous information section is pretty much used as a catchall for adjusting various line items in the financial statements.  This segment may include the tax rate, cost of capital for the business, franchise royalty payments, etc.


Misc. Information
Tax Rate 20%
Cost of Capital 10%



In this section, I usually only include the tax rate and cost of capital.  For most instances, the cost of capital is not really needed.  However, the tax rate is essential for determining estimated taxes that the company will pay on a monthly and annual basis.

Loan Payment Calculation:

When obtaining a loan, banks often prefer to calculate the loan information using their proprietary software.  However, the business owner should still use the Excel function for calculating payments and include the information in their financial statements.  An important concept to keep in mind for the income statement is to make sure they subtract interest paid instead of the full monthly payment for the loan.  Not only is this standard procedure for accounting, but it also helps to show increased revenues.


Loan Information
Loan Amount           (500,000.00)
Interest Rate 7%
Term 25
Payment $3,533.90



In this example above, a loan is expected to be taken out for $500,000.  The interest rate is expected to be 7% with a term of 25 years.  As a result, the business owner will be expected to pay $3,533.90 on a monthly basis.  As noted above, for the profit and loss statement as well as the income statement, the monthly interest payment is the portion used.  To find the interest portion, the amortization schedule is needed.

Profit and Loss for 12 Months:

The profit and loss statement for financial projections shows the revenues, costs, taxes, and profits for your business.  My preference is to break up the 12-month profit and loss statement into monthly segments and then total each month quarterly.  By doing this, the business owners are able to see the monthly growth projections, as well as, the costs aligned with the projected revenues.

Business Plan Writing Tip:

When creating your 12-month profit and loss statement, make sure to always use Excel or some other spreadsheet.  This will allow you to do calculations easily and duplicate your work month over month.

When creating your profit and loss statement, make sure to always start with your revenues and then align the cost of goods and other fixed costs with your monthly sales.  By following this process, the business owner is able to see how much money the company can make and what costs are involved with the process.


In this example, first, start with the revenues that are projected for the month.  In order to give first-month revenues, I always go back to my expected daily sales.  Using the daily sales, I will then multiply the daily sales by 30 and the cost of goods by 30.  This will give me my first-month sales and the cost of goods.

Next, identify the fixed costs aligned with the monthly sales and deduct them from the gross profits, which is just revenue subtracted by the cost of goods sold.  Once this is complete, just subtract any interest expenses and taxes.  This leaves the business’s net income.

To determine the second-month profit and loss, first, start by multiplying the revenues by an expected monthly growth rate.  Next, for costs that increase on a monthly basis, based on sales, use the common size financial document.  For example, in the example above, the office expense was .4% of sales.  From this, we would multiply .4% by the new revenues for the next 12-months to determine the expected office supplies costs.  This practice would be used for labor, office expenses, and utilities as well.  Keep in mind, for some costs, such as rent, advertising, insurance, and salary; these costs will remain the same, usually, for the first 12-months.


Pro Forma Income Statement Year 1 Quarter 1
Month 1 Month 2 Month 3 Quarter 1
Revenues             192,941             198,729             204,691       596,361
COGS               57,145               58,859               60,625       176,629
Gross Profit             135,796             139,870             144,066       419,732
Salary                 4,500                 4,500                 4,500         13,500
Labor               60,028               60,028               60,028       180,084
Advertising                 7,500                 7,500                 7,500         22,500
Office Expen.                    780                    803                    828           2,411
Rent               15,000               15,000               15,000         45,000
Utilities                 1,580                 1,627                 1,676           4,884
Legal / Account                    250                    250                    250              750
Insurance                    400                    400                    400           1,200
Depreciation               11,667               11,667               11,667         35,000
Other                    650                    650                    650           1,950
Total Expenses             102,355             102,425             102,498       307,279
EBIT               33,441               37,445               41,568       112,454
Interest Expense                 2,917                 2,913                 2,909           8,739
EBT               30,525               34,532               38,658       103,715
Taxes                 6,105                 6,906                 7,732         20,743
Net Income               24,420               27,625               30,927         82,972


Pro Forma Income Statement - Common Size
Income Statement Month 1 Month 2 Month 3 Quarter 1
Sales Growth 3.00% 3.00% 3.00% 6.09%
Revenues 100.00% 100.00% 100.00% 100.00%
Costs of goods Sold 29.62% 29.62% 29.62% 29.62%
Gross Profit 70.38% 70.38% 70.38% 70.38%
Salary 2.33% 2.26% 2.20% 2.20%
Labor 31.11% 31.11% 31.11% 31.11%
Advertising 3.89% 3.89% 3.89% 3.89%
Office Expenses 0.40% 0.40% 0.40% 0.40%
Rent 7.77% 7.77% 7.77% 7.77%
Utilities 0.82% 0.82% 0.82% 0.82%
Legal / Accounting 0.13% 0.13% 0.13% 0.13%
Insurance 0.21% 0.21% 0.21% 0.21%
Depreciation 6.05% 6.05% 6.05% 6.05%
Other 0.34% 0.34% 0.34% 0.34%
Total Expenses 53.05% 51.54% 50.07% 51.53%
EBIT 17.33% 18.84% 20.31% 18.86%
Interest Expense 1.51% 1.47% 1.42% 1.47%
Earnings before taxes 15.82% 17.38% 18.89% 17.39%
Taxes 3.16% 3.48% 3.78% 3.48%
Net Income 12.66% 13.90% 15.11% 13.91%


Balance Sheet:

The balance sheet is, for the most part, not absolutely needed in the business plan.  This is because the projections for balance sheet will almost always be significantly off as compared to actual results.  However, for the diehard entrepreneurs looking to cover all aspects of their financial expectations, presented below is a sample balance sheet.

Business Plan Writing Tip:

When discussing the balance sheet, make sure to explicitly state that the projections for the financial statement may change based on sales, operations, and other business needs.  I like to put the statement before the balance sheet because of the significant fluctuation between projected returns and the actual results in the balance sheet.


In the example above, the business owner can see that the retained earnings section of the balance sheet grows significantly year-over-year.  This shows that the business owner intends to reinvest a significant portion of their net profits back into the business.  By doing this, the owner increases the likelihood of success in the business

Further, the example above showed the cash position grown significantly over a five-year time span.  This also helps the reader to see that the business owner fully expects enough liquidity to support operations for the short and long term.


Balance Sheet - Pro Forma
Assets Year 1 Year 2 Year 3 Year 4 Year 5
Cash         867,202      1,821,416      2,821,905      3,822,085      4,830,119
Accts Receiv.                  -                  -                  -                  -                  -
Inventories           67,583           80,618           81,827           83,054           84,300
Total Curr. Assets         934,785      1,902,034      2,903,732      3,905,139      4,914,419
PP&E      1,360,000      1,360,000      1,360,000      1,360,000      1,360,000
Less Deprec.         140,000         377,500         545,650         669,670         786,760
Net PP&E      1,220,000         982,500         814,350         690,330         573,240
Total Assets      2,154,785      2,884,534      3,718,082      4,595,469      5,487,659
Balance Sheet - Pro Forma
Liabilities Year 1 Year 2 Year 3 Year 4 Year 5
Accounts Pay           67,583           80,618           81,827           83,054           84,300
Notes Payable             2,896             2,850             2,801             2,748             2,691
Accruals           64,528           66,396           68,320           70,300           72,338
Total Current Liab.         135,008         149,864         152,948         156,102         159,329
Loans         492,351         484,149         475,354         465,923         456,681
Total Liabilities         627,359         634,013         628,302         622,025         616,010
Common Stock      1,000,000      1,000,000      1,000,000      1,000,000      1,000,000
Retained Earnings         527,426      1,250,521      2,089,780      2,973,444      3,871,649
Total Com. Equity      1,527,426      2,250,521      3,089,780      3,973,444      4,871,649
Total Liab & Equity      2,154,785      2,884,534      3,718,082      4,595,469      5,487,659


Income Statement:

The income statement is simply the total of your 12 months profit and loss statements.  In other words, the income statement shows the total revenues and costs for the first 12-months.  Once this is complete, most income statements will then project revenues, costs, and profits for the next four years, giving the business owner a five-year income statement projection to review.

Business Plan Writing Tip:

When creating your income statement, my preference is to first construct a table showing quarterly profit and losses, as shown below.  Next, total the quarterly profits and losses into an annual column.  With this complete, create a table using the annual revenues, costs and include columns for years two through five.  The next step is to utilize our growth projections, as noted earlier, and multiply each line item by the associated growth projection.  This will result in a five-year income statement, as shown below.


I started with the quarterly expected profit and loss projections that we calculated in the 12-month profit and loss section.  Next, I added together the quarterly projections to come up with the first-year income statement projection.  Once this was completed, I used the growth rates discussed in the growth rate section to project the next four years profit and losses in the income statement.


Pro Forma Income Statement Annual Summary
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Annual
Revenues       596,361       651,660       712,087       778,116    2,738,224
COGS       176,629       193,007       210,904       230,461       811,001
Gross Profit       419,732       458,653       501,182       547,655    1,927,223
               -                -                -                -                -
Salary         13,500         13,500         13,500         13,500         54,000
Labor       180,084       180,084       180,084       180,084       720,336
Advertising         22,500         22,500         22,500         22,500         90,000
Office Expen.           2,411           2,610           2,852           3,116         10,988
Rent         45,000         45,000         45,000         45,000       180,000
Utilities           4,884           5,286           5,776           6,312         22,258
Legal / Account              750              750              750              750           3,000
Insurance           1,200           1,200           1,200           1,200           4,800
Deprec.         35,000         35,000         35,000         35,000       140,000
Other           1,950           1,950           1,950           1,950           7,800
Total Expenses       307,279       307,880       308,612       309,412    1,233,182
               -                -                -                -                -
EBIT       112,454       150,773       192,570       238,243       694,041
Interest Expense           8,739           8,706           8,673           8,639         34,758
EBT       103,715       142,067       183,897       229,604       659,283
Taxes         20,743         28,413         36,779         45,921       131,857
Net Income         82,972       113,653       147,118       183,684       527,426


Pro Forma Income Statement - Base
Year 1 Year 2 Year 3 Year 4 Year 5
Revenues    2,738,224    3,266,320    3,380,641    3,431,351    3,482,821
COGS       811,001       967,412       981,923       996,652    1,011,601
Gross Profit    1,927,223    2,298,908    2,398,718    2,434,699    2,471,220
Salary         54,000         54,810         55,632         56,467         57,314
Labor       720,336       741,946       764,204       787,131       810,745
Advertis.         90,000         90,900         91,809         92,727         93,654
Office Expenses         10,988         13,195         13,327         13,460         13,595
Rent       180,000       180,000       180,000       180,000       180,000
Utilities         22,258         26,729         26,996         27,266         27,538
Legal / Accoun           3,000           3,030           3,060           3,091           3,122
Insurance           4,800           4,848           4,896           4,945           4,995
Deprec.       140,000       237,500       168,150       124,020       117,090
Other           7,800           7,878           7,957           8,036           8,117
Total Expenses    1,233,182    1,360,836    1,316,032    1,297,143    1,316,169
EBIT       694,041       938,073    1,082,686    1,137,556    1,155,050
Interest Expense         34,758         34,205         33,612         32,976         32,294
Earnings before taxes       659,283       903,868    1,049,074    1,104,580    1,122,756
Taxes       131,857       180,774       209,815       220,916       224,551
Net Income       527,426       723,094       839,260       883,664       898,205