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com

Financial Projections for

your Business Plan – How
to Guide.
By Feargal Byrne B.A., M.B.S.
 Financial Projections for your Business Plan – How to Guide

About this How to Guide

For many people who have decided to start their own business putting together
financial projections is scary. Most aspiring entrepreneurs don’t know where to start.
This is understandable, because most entrepreneurs are not from a financial
background. They often outsource it to an accountant and never get to grips with their
financials. This is a major mistake. Understanding your financials is a key element to
your overall business strategy. The good news is that anyone can do their own
financial projections.
The goal of this book is to show non-financial entrepreneurs how to construct
financial projections for their own business. Much care was taken to make the
financial models described easy and straight forward to construct. As a result, all that
you need to know is how to add, subtract, multiply and divide in a spreadsheet. The
book was written from an entrepreneur’s perspective. It is hoped that you will find
this book extremely helpful as you build your financial projections and business plan.

Good luck in your venture.

Feargal Byrne

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 Financial Projections for your Business Plan – How to Guide

Table of Contents
Introduction....................................................................................................................4
Sales Assumptions .........................................................................................................5
Expense Assumptions ....................................................................................................7
Profit/Income Projections. .............................................................................................9
Cash Flow Projections .................................................................................................11
Balance Sheet Projections............................................................................................16
Conclusion ...................................................................................................................18

Table of Figures
Figure 1: Simple Sales Funnel for an Online Business..................................................5
Figure 2: Example Sales Assumptions Layout in a Spreadsheet...................................5
Figure 3: Sales Revenue layout in a Spreadsheet ..........................................................6
Figure 4: Sales Assumptions Formula View .................................................................6
Figure 5: Example of Expense Assumptions .................................................................7
Figure 6: Example Depreciation Layout in Expense Assumptions ...............................8
Figure 7: Formula View of Depreciation in Expense Assumptions .............................8
Figure 8: Profit/Income Projections Example................................................................9
Figure 9: Profit/Income Example Formula View .......................................................10
Figure 10: Seasonality Factors Example......................................................................11
Figure 11: Seasonality Factors Formula View.............................................................11
Figure 12: Cash Flow Projection Example ..................................................................12
Figure 13: Cash Flow Closing Balance Formula View ...............................................15
Figure 14: Balance Sheet Projection Example.............................................................16
Figure 15: Balance Sheet Formula View .....................................................................17

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 Financial Projections for your Business Plan – How to Guide

Introduction
Ok, so you have a business idea and would like to write a business plan. A key
component of your business plan is the financial projections. This is not as bad as it
seems, because if you have a clear vision of your business model you should have no
great problem building your financial projections.
It’s of key importance that you realize that the number one most important
thing in your financial projections is your assumptions. In order to have accurate and
believable projections you must thoroughly research your assumptions. Your
assumptions are the foundation of your plan. Once you can back up your assumptions
you will be able to answer most of the questions that investors may pose. You should
also build your projections from the bottom up. By this, I mean that you should avoid
the “1% of total market share” nonsense that many entrepreneurs present. You see,
your projections relate to your business strategy. As a result, your assumptions must
relate to actual expenses that you will have, and sales that are likely to be made based
on your strategy.
You must read the annual reports of your competitors and look at the key
financial indicators for your industry sector (Hints and tips on how to research your
financial projections can be found at the following website
http://www.lostjobstartbusiness.com/researchtips.html). However, the most important
thing you can use in your assumptions is common sense. Ask yourself, are these
assumptions realistic? If I were an investor would I invest based on these projections?
Secondly, you need spreadsheet software. You can use Microsoft Excel or the
open source OpenOffice Calc and the free Google Docs. Don’t worry if you are afraid
of spreadsheets. You only need to add, subtract, multiply and divide in your
projections. If you don’t know how to use a spreadsheet a simple search on Google or
YouTube will throw up hundreds of tutorials on how to do the simple calculations
above.

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 Financial Projections for your Business Plan – How to Guide

Sales Assumptions
Your sales assumptions should be a reflection of your sales funnel. The further you
can track back your sales assumptions the clearer they will be. You should start at the
top of the funnel and work your way down to the bottom, where the sales are.

Figure 1: Sample Sales Funnel for an Online Business

Unique Visitors

Mailing List
Subscribers

Sales

The above example shows a basic sales funnel for an internet business. The following
is how this sales funnel should look in a spreadsheet. A certain percentage of visitors
to the website sign up to the mailing list and a certain percentage of those who sign up
to the mailing list actually make a purchase.
Figure 2: Example Sales Assumptions Layout in a Spreadsheet

Unique % Sign No. Sign Conversion

Sales Visitors Up Up Rate No. Sales
Year 1 150000 15.00% 22500 1.00% 225
Year 2 250000 18.00% 45000 1.15% 517.5
Year 3 400000 20.00% 80000 1.25% 1000

You can see clearly how the sales figure is related to the number of unique visitors to
the website. The “No. Sign Up” figure is the “Unique Visitors” multiplied by the “%
Sign Up” rate. The “No. Sales” figure is the “No. Sign Up” multiplied by the
“Conversion Rate”.

Once you have worked out the number of units that you will sell, you need to multiply
it by the price that you will charge. In this example only one product will be sold.
However, if you intend to sell more products at different prices simply break the
number of units into the appropriate ratio for each product.

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 Financial Projections for your Business Plan – How to Guide

Figure 3: Sales Revenue layout in a Spreadsheet

Sales Revenue Price $ Sales - $

Year 1 800 $180,000
Year 2 1250 $646,875
Year 3 1350 $1,350,000

Below is the formula view of the example Sales Assumptions and Sales Revenue
layouts shown previously.

Figure 4: Sales Assumptions Formula View

A B C D E F
No. Sign Conversion
Sales Unique Visitors % Sign Up Up Rate No. Sales
4 Year 1 150000 0.15 =B4*C4 0.01 =D4*E4
5 Year 2 250000 0.18 =B5*C5 0.0115 =D5*E5
6 Year 3 400000 0.2 =B6*C6 0.0125 =D6*E6

A B C D
Sales
Revenue Price $ Sales - $
10 Year 1 800 =B10*F4
11 Year 2 1250 =B11*F5
12 Year 3 1350 =B12*F6

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 Financial Projections for your Business Plan – How to Guide

Expense Assumptions
It’s important to have accurate expense assumptions. In order to do this, you must
already have figured out your business model. Each expense must be researched. I
know that a lot of accountants recommend using the Key Financial Indicators for your
industry sector. However, it’s not enough to use only these, because your business
may have a different model to the industry standard. You should use the Key
Financial Indicators as a check and balance after you have built you assumptions from
the bottom up.

The best way to build you expense assumptions is to get actual quotes. Get quotes for
rent of a specific office, web hosting etc. The more specific your assumptions are,
then the better your projections will be. Make sure your marketing spend makes sense
in the context of your sales assumptions.

Once you have compiled your projections you can use the Key Financial Indicators to
pose questions to yourself on your financial projections. It’s also important that you
read the annual reports of similar public companies. For each expense you should ask
yourself the following - Why are my figures different to the industry Key
Financial Indicators?, and probably more important - Why are my figures different to
a company in the same industry with a similar business model?

Also, be aware that your expense assumption section will allow interested parties to
view a breakdown of the component expenses of the expense figures that you will
show in the Income/Profit projections. Therefore, it’s important to make sure that
each individual expense is clear and understandable. The easiest way to do this, is to
show each figure that comprises the total along with a brief description. The following
is an example:

Figure 5: Example of Expense Assumptions

Marketing
PPC 40000 70000 100000
Misc. 5000 7000 8000

Total Marketing $45,000 $77,000 $108,000

Website
Hosting 100 100 150
Domains 50 50 55

Total Website $150 $150 $205

You should reference the total figure in your profit/income projections.

Note: Depreciation

Depreciation is another word for usage. For instance, if you use a machine for a year
the machine will have accumulated wear and tear over that year. The depreciation of
the machine is the cost of that wear and tear.

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 Financial Projections for your Business Plan – How to Guide

You should include depreciation on your fixed assets in your expense assumptions.
Don’t worry, it’s not difficult. Basically, any equipment you intend to buy that will
last for more than one year should be depreciated. This is easy, you simply divide the
figure that you paid for the equipment by the number of years that it will be of use to
you. For instance, if you have a computer that will last you 4 years, divide the cost of
the computer by 4 and that is your depreciation for each year.

In the following example you can see how to work out depreciation in your expense
assumptions. Computers and office equipment which have a useful life of 4 years are
bought in year 1.

Figure 6: Example Depreciation Layout in Expense Assumptions

Fixed Asset
Purchases Year 1 Year 2 Year 3
Computers 3000
Office Equipment 1000
Opening Assets 4,000 4,000

Total Fixed Asset $4,000 $4,000 $4,000

Depreciation Life 4 Years

Year 1 Year 2 Year 3
Depreciation of
Assets $1,000 $1,000 $1,000

Here is the formula view of the same layout.

Figure 7: Formula View of Depreciation in Expense Assumptions

A B C D

51 Fixed Asset Purchases Year 1 Year 2 Year 3

52 Computers 3000
53 Office Equipment 1000
54 Opening Assets =B56 =C56
55
56 Total Fixed Asset =B52+B53+B54 =C52+C53+C54 =D52+D53+D54
57
58 *For P+L
59 Depreciation Life 4 Years
60 Year 1 Year 2 Year 3
61 Depreciation of Assets =B56/C59 =C56/C59 =D56/C59

In conclusion, the more specific you can get in your expense assumptions the better.

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 Financial Projections for your Business Plan – How to Guide

Profit/Income Projections.
You will be happy to know that once you have finished your sales and expense
assumptions the rest is easy. In summary, your Profit/Income projections are your
sales less your expenses. Lay these out for 3 years. Reference the figures in your
sales and expense assumptions. This allows any change in your assumptions to be
reflected in your Profit/Income projections. Remember to include depreciation in
your Profit/Income projections.

Here is an example of Profit/Income projections.

Figure 8: Profit/Income Projections Example

Profit/Income Projections

Year 1 Year 2 Year 3

Sales $180,000 $646,875 $1,350,000

Expenses
Rent & Rates $8,000 $8,000 $8,000
Marketing $45,000 $77,000 $108,000
Website $150 $150 $205
Salaries $75,000 $135,000 $150,000
Outsourcing $30,000 $31,000 $35,000
Light and Heat $1,500 $1,600 $1,800
Office and Admin $370 $430 $500
Depreciation $1,000 $1,000 $1,000
Accounting and Legal $9,000 $3,000 $3,000

Total Expenses $170,020 $257,180 $307,505

Net Profit/Loss $9,980 $389,695 $1,042,495

You should show your Profit/Income projections on a different worksheet to your

assumptions. Likewise, you should also show your Cash Flow and Balance Sheet
projections each on separate worksheets. Again, it’s crucial that you reference your
assumptions from your Profit/Income projections (See. Figure 9 Profit/Income
Example Formula View).

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 Financial Projections for your Business Plan – How to Guide

Figure 9: Profit/Income Example Formula View

A B C D

Profit/Income Projections

Year 1 Year 2 Year 3

4 Sales =Assumptions!D10 =Assumptions!D11 =Assumptions!D12
5
6 Expenses
7 Rent and Rates =Assumptions!B16 =Assumptions!C16 =Assumptions!D16
8 Marketing =Assumptions!B22 =Assumptions!C22 =Assumptions!D22
9 Website =Assumptions!B28 =Assumptions!C28 =Assumptions!D28
10 Salaries =Assumptions!B35 =Assumptions!C35 =Assumptions!D35
11 Outsourcing =Assumptions!B41 =Assumptions!C41 =Assumptions!D41
12 Light and Heat =Assumptions!B43 =Assumptions!C43 =Assumptions!D43
13 Office and Admin =Assumptions!B49 =Assumptions!C49 =Assumptions!D49
14 Depreciation =Assumptions!B61 =Assumptions!C61 =Assumptions!D61
15 Accounting and Legal =Assumptions!B63 =Assumptions!C63 =Assumptions!D63
16
17 Total Expenses =SUM(B7:B16) =SUM(C7:C16) =SUM(D7:D16)
18
19 Net Profit/Loss =B4-B17 =C4-C17 =D4-D17

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 Financial Projections for your Business Plan – How to Guide

Cash Flow Projections

This is probably the most important part of your financial projections. Cash Flow is
all about timing. It’s about when you get paid and when you pay others. The first
thing you should do is lay out your seasonality factors for your business. This will
reflect accurately the times of year that your business is most active. An easy way to
do this is to lay out the 12 months of the year and assign a weighting to each month.
All the weightings for 12 months must total 1. Here is a snapshot so you get the idea.
Payment is received 30days after a sale:

Figure 10: Seasonality Factors Example

Year 1 MTH 1 MTH 2 MTH 3

Seasonality Factors 0.02 0.03 0.05

Inflows
Sales 0 €3,600 €5,400
Figure 11: Seasonality Factors Formula View

A B C D
Year 1 MTH 1 MTH 2 MTH 3
4 Seasonality Factors 0.02 0.03 0.05
5
6 Inflows
7 =B4*'Profit and =C4*'Profit and
Sales 0 Loss'!$B$4 Loss'!$B$4

After this, it’s all about the application of common sense. Think through how your
business will operate and try to pin down when you will pay each expense. If some
sales will not be received until the following year, these should appear in the Balance
Sheet as Debtors and not in the Cash Flow. If an expense will not be paid until the
following year they should appear as Creditors in the Balance Sheet and not in the
Cash Flow.

When you realize that the cash flow and balance sheet projections are intrinsically
linked your projections will become much easier.

It’s a good idea to complete your Cash Flow projections before starting your Balance
Sheet.

Your Cash Flow projections should look like the following example.

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 Financial Projections for your Business Plan – How to Guide

Figure 12: Cash Flow Projection Example

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 Financial Projections for your Business Plan – How to Guide

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 Financial Projections for your Business Plan – How to Guide

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 Financial Projections for your Business Plan – How to Guide

The most complicated part of your cash flow projections is setting up your rolling
balance for each month.

Firstly, you need to subtract your total outflows from your total inflows for each
month. This gives you your cash inflow/outflow for that particular month. Next,
underneath this, put the cash that you have at the beginning of the month. Finally, add
the total outflow/inflow to the cash that you had at the start of the month (Opening
Balance) in order to find the cash that you have at the end of the month otherwise
known as the Closing Balance. The Closing Balance for month 12 is the Closing
Balance for the year. The following is the Closing Balance formula view for the first
four months of Year 1.
Figure 13: Cash Flow Closing Balance Formula View
A B C D E

23 Total Outflows =SUM(B13:B21) =SUM(C13:C21) =SUM(D13:D21) =SUM(E13:E21)

24
25 Total
Inflow/Outflow =B10-B23 =C10-C23 =D10-D23 =E10-E23
26
27 Opening Balance 0 =B28 =C28 =D28
28 Closing Balance =B25+B27 =C25+C27 =D25+D27 =E25+E27

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 Financial Projections for your Business Plan – How to Guide

Balance Sheet Projections

Your balance sheet is a snapshot of what your business owns and what your business
owes at a particular point in time. For your projections it should be on the last day of
each year.

Figure 14: Balance Sheet Projection Example

Balance Sheet Y/E YR 1 Y/E YR 2 Y/E YR 3

Fixed Assets $ $ $
Fixed Assets @ Cost 4,000 4,000 4,000
Depreciation 1,000 2,000 3,000

NBV 3,000 2,000 1,000

Current Assets
Debtors 7,200 25,875 54,000
Cash 49,280 416,800 1,432,170

Total Current Assets 56,480 442,675 1,486,170

Current Liabilities
Creditors 4,500 0 0

Total Current Liabilities 4,500 0 0

Total Net Assets 54,980 444,675 1,487,170

Financed by:
Equity Investment 45,000 45,000 45,000
Net Profit 9,980 399,675 1,442,170

Total Shareholders'
Equity 54,980 444,675 1,487,170

Here you show your Fixed Assets less any depreciation. The total figure for this is
then added to the total figure for your current assets. Your current assets include your
cash balance if it is positive, any debtors you have and anything that you have paid in
advance for next year. These two figures equal your total assets.

Your current liabilities are subtracted from your total assets. Your current liabilities
include you cash balance if it is negative, any creditors (people who you owe money
to). Basically, anything that needs to be paid but you haven’t got round to it yet.

When you subtract the current liabilities from the total assets figure you will get the
Total Net Assets. After this stage, you should put together the “Financed by” section
of the balance sheet. This section shows the funding that the business has received.

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 Financial Projections for your Business Plan – How to Guide

You will have both “external” funding in the form of equity and “internal” funding in
the form of retained profits.

List your total equity investment along with any retained profits. Remember, that for
year 2 and 3 your retained profits should be the balance (total amount) of retained
profits and not only the retained profits for that year.

If you have built your financial projections correctly you should see your Total Net
Assets equal the total in the “Financed By” section of your Balance Sheet. After all,
your balance sheet is called a balance sheet for a reason.

Figure 15: Balance Sheet Formula View

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 Financial Projections for your Business Plan – How to Guide

What if it doesn’t balance?

Oh No!!!! My Balance Sheet doesn’t Balance!!!!!!!!!!

Calm down, take a deep breath and compose yourself. Switch your brain to logical
mode and start looking at your projections. Most mistakes come from your cash flow.
Review every figure in your cash flow with your Profit/Income projections. If you
find differences, ask yourself what’s the reason for the difference and is it reflected in
the balance sheet?

Some common troubleshoots are that debtors and creditors figures have not been
worked out correctly. Also, the seasonality factors may not be multiplied by the
appropriate month (there may be a lag of 1 month if you make sales on 30 days
credit).

Conclusion
Well done! you have read a “how to” guide on Financial Management and particularly
one on your dreaded financial projections. It wasn’t that bad now was it? You can
download the sample plan that has been used for the demonstrations shown in this
book from:

http://www.lostjobstartbusiness.com

I hope you have found this “how to” guide interesting but more importantly, helpful.

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