Financial projections are important since they give you the rough estimate of how much should you spend on a particular project. They not only give you a budget estimate, but also give you a sales estimate.
This provides investors with information about how they can expect return on their investment. Your three-year projection will vary depending on what kind of growth you expect your business to have. Three-Year Projections All business plans are written for a specific purpose, with most formal plans written in order to raise initial or continuing investment for the operation of the business.
Business plans should have pro forma spreadsheets for all past operations, if any, and projections out for the next three years.
These spreadsheets itemize all past and future expenses and income for the business. A time period of three years is used because it is long enough for investors to gain insight into the entrepreneur's thinking, but the longer-term the projection, the more likely it is to be inaccurate due to changing business needs.
Projecting Cash Return A cash return business has already reached the point where sales income exceeds the costs of operation, and some part of these profits are paid out to initial investors. Existing businesses that are profitable will need to detail in the business plan why profits are being paid out to some investors, while investment capital is still being sought for other expansion.
Most commonly, a cash return projection is used for a startup business, documenting when profitability is expected to be reached, and when the business will begin paying out on the startup investment. Projecting Profit Reinvestment A business using a profit reinvestment model will take future profits over some predetermined period of time, and reinvest that capital into business expansion.
Typically, these businesses will limit their growth to the amount that can be sustained by profitability. In these cases, the initial investors must wait a longer period of time before they receive any return on their investment capital, so business plans of this type demonstrate that a much larger return on investment will be provided in return for the longer period of reinvestment.
Projecting Multiple Capital Rounds Businesses that expect to grow very large, or which require a great deal of expensive expansion before going to market, may require several rounds of capital investment before showing any profitability. Examples of this model include computer hardware or biotechnology firms, where the first round of investment covers startup and design costs, but second or third rounds of investment are necessary for additional research and development before primary products or services are shipped to market.
This is the most complex form of business startup to run, as initial investors must be promised return on their investment in a way that is attractive to them but which does not dissuade future investors by selling too much equity or promising too much capital outflow.
References 1 Biz Plan It: Financial Projections -- Business Plan Basics About the Author Ellis Davidson has been a self-employed Internet and technology consultant, entrepreneur and author since He has written a book about self-employment for recent college graduates and is a regular contributor to "Macworld" and the TidBITS technology newsletter.
He is completing a book on self-employment options during a recession.How to write the financial plan section of the business plan: the income statement, cash flow projections, and the balance sheet (templates included).
Business Plan Tips: A Sample Industry Overview to Help You Write Yours. Our Best Money Tips, Delivered.
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You do this in a distinct section of your business plan for financial forecasts and statements. No business plan is complete until it contains a set of financial projections that are not only.
Three-Year Projections. All business plans are written for a specific purpose, with most formal plans written in order to raise initial or continuing investment for the operation of the business.
Regardless, short- and medium-term financial projections are a required part of your business plan if you want serious attention from investors. The financial section of your business plan should include a sales forecast, expenses budget, cash flow statement, balance sheet, and a profit and loss statement.
This free 3 page Excel business plan financial projections template can be used by any business to produce income statements, balance sheets and cash flow projections for the full five year period. The financial projections template is available for free download below.