How to Do Financial Projections for Your Business Plan

Writing your business plan takes focused work, research, and thinking. You’ve done competitive analyses, price comparisons, and target audience research. But one section trips up many entrepreneurs, especially those of us who aren’t naturally good at numbers, and that’s the Financial Projections section.

I briefly covered this section in the post on writing a business plan, but this is one section that needs a bit more detail. Financial issues are a leading cause of business failure. A U.S. Bank study found 82% of small businesses failures are due to cash flow mismanagement.

Accurate financial projections are critical to the success and survival of your business. If you miss an expense or don’t consider lead times in your projections, your business might head for an early grave. So spending a bit of time on your financial projections can help you be more prudent and thoughtful about managing your cash flow, so your business can remain fiscally healthy for years to come.

In this article, you will learn:

• The two scenarios in which you will perform financial projections
• Planning for and capturing all expenses
• The importance of being both thorough and realistic in your projections
• Funding the business and planning an exit strategy

Two Scenarios of Financial Projections in Business Planning

The Financial Projections section follows the Product and Service section.

A business plan is never a one-and-done deal. It’s a creation that is constantly reviewed and revised. I recommend reviewing it once a quarter and then creating a new plan at the beginning of each fiscal year.

That said, I assume you’re reading this because you fall under one of two scenarios. In the first scenario, your business is established; you’ve been running your business (as a full-time or as a side hustle) for a year or two and are finally getting around to crafting a plan for your future growth.

In scenario two, you are about to launch a business and are writing a plan for your own clarity and also to request funds from friends, family, banks, and investors.

How you approach the Financial Projections section will be different for each scenario.

Scenario 1: Established Business

If you’ve been running your business now for at least a year, your historical data will make your financial projections go smoother than for those just starting out. That past performance tells a story and projecting that story forward reveals where you will want to make adjustments.

Specifically, as you sit to work through the projecting process, look at what your business has done to date.

Leverage Historical Financial Data

You have amassed financial data in the time your business has operated. This can inform the projections in every category of your business. Examine past fixed expenses, customer invoices, and some previously unexpected events and develop an understanding of what you can expect in the future.

Understand Sales Cycle, Seasonality, and Marketing Strategies

Also at your fingertips is knowledge about the sales cycle and seasonality, what worked and what didn’t in marketing and outreach strategies, as well the tactics that got your business more market traction and the expenses tied to those tactics.

Incorporate Costs of Delivery and Pricing

When you first hung your shingle out in the market, you might have guessed at pricing. Now that you have completed projects, you have a better grasp of what’s involved in the delivery and pricing of your service.

Use Data To Set Revenue, Expense, and Margin Targets

All the above combined, you now have a better understanding of how much marketing is required to produce a certain number of leads, and you also have a feel for how many sales conversations are required to land a client. This information helps you project and set margin targets, ensuring that you can earn a more consistent profit.

Scenario 2: Business Startup

If you are starting a new business, financial projections can feel more like guesswork than research. You’re going to make a lot of assumptions in the beginning. Start with a baseline projection for the next 12 months. You will project revenue, expenses, and margin. You will likely be way off with your initial estimates. That’s okay. The key aim is to eliminate as many unknowns as possible.

You begin by amassing your ideas in one place like a spreadsheet so you have a solid feel for expected expenses and revenue sources. This allows you to think more strategically about the rest of your plan. Below, I list several variables you will want to include in this Financial Projections section of your business plan.

The main idea is to leave no stone unturned in capturing any source of revenue or hidden cost. The more you can expect, the better your cash flow management will be.

Projecting Revenue in Your Plan

As IBM founder Thomas Watson, Sr. said, “Nothing happens until a sale is made.” Revenue is the lifeblood of your business, and you will want to generate revenue as quickly as possible.

For your revenue projections, consider the various revenue sources. Some are obvious, but other sources require a bit of ingenuity.

First, there’s the primary service you’re providing. Behind this you have a pricing strategy with possible tiered pricing, recurring revenue potential, and client retention targets. Project the time involved with these tiered offers and what your maximum workload looks like with your current number of employees — if it’s just you in the beginning, that equals the number of clients you can work with.

As you contemplate how a full book of business looks, also factor in time delays involved in marketing and outreach efforts, the lead time to close a deal, and also the expected time that will elapse between delivery and payment. For instance, don’t project $30,000 in revenue for December when the paperwork is likely to be signed two days before Christmas, payment will arrive in January. Too often I’ve seen entrepreneurs overlook this time factor.

As part of your revenue projections, analyze the number of sales opportunities you will need to have. What will your sales pipeline look like?

For instance, you can assume that for every 4 proposals, you’re going to close one client. In order to get a $25k sale in the second quarter, you will need 4 proposals in March. To land those 4 proposals, you need to talk to, vet, and qualify 20 leads. That narrows this group to, say, 10 qualified leads who you engage in sales conversations in order to have those 4 proposals.

The numbers will be different for each business and individual. If you’re more skillful in sales than I am, your numbers will be lower. If you’re discovering your sales method as you go, assume a lower conversion rate.

Another item to include in your revenue projections is your plan to scale sales growth. Demonstrate this growth and include all expenses associated with it like hiring your first salesperson or accelerating your marketing efforts. And, yes, marketing is an expense from an accounting viewpoint, but from a founder’s point of view, it’s a calculated investment. Capture the expected net revenue from any planned scaling which will be described in detail in the Sales and Marketing section of your business plan.

And finally, look for other sources of revenue you might not have considered. Sources like affiliates, referral partnerships that pay finder’s fees, becoming a reseller of a product or service you already recommend, as well as channel marketing opportunities which I’ve explained elsewhere.

Other sources of revenue could include assets you’re creating such as frameworks, worksheets, and other resources. In serving your clients, you’re also creating a vault of goods you can then offer at a lower price for prospects who can’t afford your primary services.

Only your creativity limits the number of ways to earn revenue. As Albert Einstein said, “Imagination is more important than knowledge.”

Projecting Expenses in Your Plan

Unless you’ve been in business for a while, you will need to make assumptions for various expenses.

Expenses are typically easier to project than revenues. Don’t make the frequent mistake of overlooking some seemingly trivial expenses (they can add up quickly) or failing to quantify expenses associated with revenue-generating activities like attending conferences, sales materials, and paid advertising.

Here’s a checklist you can use to make sure you’re capturing all the expenses involved in operating your business.

Office Expenses

• Office rent or mortgage
• Utilities: electric, heating fuel, internet connection, phone line
• Property maintenance / cleaning service
• Security services such as cameras, alarm systems
• Mailbox services such as the UPS Store or a U.S. Post Office Box
• Expenses for printers like toner, paper, envelopes or printer leasing
• Other office supplies
• Printing services
• Website / email hosting, upkeep, maintenance
• IT services including hardware and cybersecurity with allotments for upgrades

Intangible Expenses

• Insurance: property, liability, vehicle, and even personal health and/or disability insurance
• Professional services such as legal, accounting, or consulting/coaching
• Professional certifications or recertifications
• Expenses connected to professional association fees
• Professional development expenses: courses, webinars, seminars, books, etc.

• Subscriptions like premier social media memberships and software subscriptions like appointment-making portals, CRMs, email services, etc.

Marketing and Sales Expenses

• Fees for networking events or groups
• Lead generation services
• Marketing funnels
• Contractors like marketing consultants, copywriters, brand/graphic designers, or web developers
• Social media management
• Expenses related to internet or print advertising
• Conference booth rentals and related equipment
• Promotional materials like brochures, portfolios, and business cards

HR Expenses

• Salaries, benefits, bonuses, and commissions (which should account for 20 – 30% of your expenses)
• Legally required insurances like disability and unemployment
• Medicaid/Medicare (employer’s share)
• Hiring costs like utilizing employment sites like Indeed or Monster
• HR consultants to perform federal/state regulations compliance audits

Wow… and that’s not covering everything. But this list should provide you with a solid starting point to jog your memory for anything you might miss when preparing to project expenses for your business.

You can get a feel for what your expenses should look like by researching benchmarks for your industry.

One final and hopefully obvious note: make sure your projected revenues exceed your projected expenses.

Being Thorough and Realistic in Your Projections

Be thorough, realistic, transparent, and conservative with ALL of your assumptions. It is better to hit a four-month income target in three months than vice versa.

Being realistic isn’t just erring on the side of caution, it also involves being honest about your resource bandwidth. If you look at your revenue projections for the second or third quarters, you may realize that you don’t have enough time, equipment, or people to handle the additional work, so plan accordingly.

If you’re on track during the first 2 months, you can build in milestones to hire or bring on contracted work BEFORE the expected increase in demand, because nothing’s worse than being stretched and adding the time required to train new people to an already stressful situation.

To account for this in your projection, create anonymous employees with projected milestones to trigger their hiring.

Of course, when projecting hires, balance out that projection with the associated costs.

Funding and Exit Strategy

The Financial Projection section should also cover the areas of funding and exit strategies. You may think this topic doesn’t apply to you if you’re not bringing in any outside funding, but unless you’ve got unlimited resources, you will still want to pay these parts careful consideration.

Funding falls under two categories: The first is how you will fund the business and your own salary needs in the beginning. The second is the more obvious outside investors, who will also be very interested in the exit strategy.

Options for Funding the Business

Running out of funds is a leading cause of business failures. This fear stops many would-be entrepreneurs from taking the big job and leaving a cushy job.

Taking the time to consider the best and worst-case scenarios in advance can help avoid potential financial disasters and ensure that your personal and family finances are protected as you grow the business.

Again, if you’re in this stage, this is a thought exercise. By including the options available to fund your business in the future, you help ease any anxiety you have about taking the leap. Here are five quick thoughts on how to approach your thinking and write a solid funding plan:

1. Save and cut. Figure out the bare minimum you can live on, a super tight budget, and build up a nest egg of savings while still in your job.
2. Find a silent partner. If you’re already in business and money is getting low, think about who you could partner with to fund the business and your salary. A silent partner is a partner who provides funds but isn’t actively involved in decision making or operations (make sure you have a written agreement clarifying those specific details).
3. Find a working partner. Sometimes all you need is another skilled person. Many businesses take on early partners who bring skills, funds, or who’s willing to take a salary cut until the business is profitable.
4. Business loans. Sometimes you just need a little money to cover a gap or to boost your abilities to grow. Loans from small business organizations like the SBA are readily available to businesses.
5. Non-traditional ways. IF YOU’RE FINANCIALLY DISCIPLINED, include borrowing from a retirement account, opening credit cards with zero APR offers, or borrowing against your home’s equity. THESE are a last resort. Make sure your family supports these tactics.

Requesting Funds from

If the plan will seek funding, explicitly state how and when the funds will be used and how you plan to treat that funding — as debt or equity or maybe a mixture of the two.

 

Here are a list of typical fund sources and how you should tailor this portion of the business plan to that audience:

• Banks or other financial institutions: they will be most interested in the data supporting your conclusions for growth, projected revenue, and how you plan to minimize expenses so you can cover the monthly payments-plus-interest and/or a balloon payment of all principal and interest after a certain period. They will have little interest in any exit strategy, knowing that their lending contract will cover most if not every situation.
• Friends and Family. This group will fall into one of two categories, and both require you to set and manage expectations around involvement and decision making. These expectations must be explicit. Maybe an uncle who was happy to let you do whatever you wanted changes his mind when you look to acquire a business. I know of one entrepreneur whose family and business are being torn apart because the power of decision was not clearly addressed in advance. The two categories are…
  • Loan: the person might be just lending you the money with low or no interest. The terms are whatever you decide together, in writing.
  • Equity: the person is taking a share of the business ownership for their investment. They might be silent (no involvement) or actively involved. They may opt for lump sum payments where you buy back your company’s shares, or profit sharing payments as dividends.
• Other investors. This group includes venture capitalists (VCs), angel investors (AI) and others in similar groups. They most likely will have outlined their own clear expectations regarding operations, management, and decision making and their involvement in each, and how they expect to be paid (typically dividends).

Exit Strategy

I met one of my past partners through his father-in-law. Every time I attended a social event, his father-in-law, a successful executive, would ask, “How’s the business?” followed by “What’s the exit plan?”

He had no funds in our business, and his questions were good humored, but it underscored his belief that every business should have an exit plan. I think it’s a good idea.

Any investor will want to see a business plan that includes your long-term plans, so you will need to include a projected exit strategy for those investors. Answer this question for them: how long before the assets you’re creating and revenues you’re generating can be transformed into cash so they can get their original investment back?

Here are a few typical exit plans:

• No exit plan. Struggle through building a business and hopefully retire some day with a lot of money.
• Get acquired. Build the business to a certain point and either sell to another entrepreneur who is branching into other niches or to your competition. Many large companies buy out smaller brands they see that adds to their offers or is a rising threat.
• Go public. Offer shares on a publicly traded stock exchange and let a board run the business.
• Go under. Some just let the business fold or decide to take on another role and transition their full-time venture into a side-hustle or hobby.

If you’re not yet seeking investors — if it’s your first rodeo and you’re unsure of your exit plan — that’s okay. You don’t need to consider which option will be best for you. For now, put a “TBD” in the business plan. While unnecessary to include your own strategy, it never hurts to think long term in the beginning — you can always change it later.

Key Takeaways

The Financial Projections section of your business plan doesn’t need to be the hassle you might expect. If you’ve been in business for a while and have done a halfway decent job tracking finances, you can use historical data.

But if you’re just starting out, you’ll have to do some guesswork. With a few basic tools and a bit of common-sense research, you can make decent projections.

Here is a reminder of things you want to consider:

On the Revenue side:

• Make assumptions about revenue, expenses, and margins

• Incorporate pricing strategies, tiered pricing, recurring revenue potential, and client retention targets
• Be innovative regarding additional revenue streams like reselling or partnering
•  Consider the lead-time to close a deal and how quickly you expect to receive customer payments

On the Expense side:

• Review you hard business expenses like rent, utilities, and any property maintenance if applicable
• Review soft expenses such as insurance, professional services such as legal and accounting, costs involved with certifications or recertification, fees for professional associations
• And then there’s the cost of doing business including subscription costs for things like premier social media membership, appointment software, CRMs, communications, etc.

If you’re seeking funding:

• Set clear expectations for partners or investors, their amount of input and control, and how and when they can expect returns on their investments
• Declare the intended exit strategy — the point when they can expect to have their original investment back

Now, I’m not a finance expert. A CFO would add 27 footnotes to everything I’ve written. Financial projections can be wildly complicated to include things like attrition, interest, depreciation, holding costs, and balance sheets.

This guide is a top-level view for someone getting started — the steps to create a solid financial projection.

By the way, when you sit down to complete your own projection, besides being realistic and as thorough as possible, make sure you’re honest.

Of course, always be honest when requesting money from others because dishonesty wounds your reputation, and at worst, is committing the criminal act of fraud.

But if you’re writing this section only for your own clarity and no one else will see it, at least be honest with yourself. Deluding yourself will only hurt your ability to make excellent financial decisions.

When you are thorough, transparent, realistic, and honest with your financial projections, you have the basis for a solid financial plan that can buoy your business through economic downturns and set you on a trajectory for solid growth.