Financial Projections

About Financial Projection

A financial projection shows the expected revenues, expenses, and cash flows of a business over a forecast period. This forecast may be used internally as the basis for a more detailed budget, or it may be presented to outsiders. In the latter case, a financial projection may be used to convince a lender to provide a business with a loan, or investors to buy shares in the firm.  A financial projection is based on a combination of historical results, expectations for changes in the relevant market, and other changes in the circumstances of the business, such as an investment in a new product line.

Types of financial projections

Here’s a list of several types of financial projections:

• Cash flow projections: These are financial statements about the company’s future expenses and revenues. They show businesses how much cash may be available to pay their expenses in the future.
• Operating budget projections: These are financial statements that show how much money a business may need to conduct operations in the future. They can help businesses determine whether they can spend money on marketing or research for their products or whether they can change their pricing strategy.
• Cost projections: Businesses also use projections to predict future costs like product development, marketing or investments in new processes or technologies. These are all important for determining how much money may be available in the future to invest in the company or to create a surplus.
• Capital budgeting projections: Capital budgeting projections show what resources a business may need for a project. Businesses use this type of projection to determine whether an investment may pay off long term.
• Treasury projections: These projections show how much money a business may need to finance its operations and investments in the future.
• Sale of company projections: These projections help determine what may happen if a company sells or closes its business. For example, these estimates can help businesses determine exactly how much money employees may receive if they lose their jobs because of a sale of the company.
• Pension plan cash flow projection: Pension plan cash flow projections show how much money a business needs to sustain a pension plan and pay out benefits for retirees. Companies that have defined benefit pension plans and want to improve their finances by reducing their liabilities and risks in the future often use this information.

Best practices for creating financial projections

Here are some tips for creating effective financial projections:

• Use realistic assumptions about the future. Be realistic about your expectations for the future so you create projections that have a good chance of being accurate. You can analyze many factors to help predict the future, including sales trends, demographic information, previous performance and economic indicators, like interest and inflation rates for your industry.
• Base your projections on the future. Make sure you show how your financial projections may change as conditions and markets change. This way, your projections may be more accurate and useful to management.
• Present projections clearly and simply. Put all the information that you present clearly on one page or spreadsheet. You may also prepare a brief summary of the main ideas of the projection, like a one-page executive summary, to show your key points to management quickly and easily.
• Check your conclusions with others. You can create a better projection by involving other people to help you check the accuracy of all of your assumptions about the future, including the data you use and how realistic your conclusions are.