ComplianceFinanceFebruary 10, 2021

Planning financial statements and projections data

When you develop a business plan, financial projections and cash flow analysis are among the most critical elements. New and existing businesses that need financing will have to demonstrate the profit potential of the enterprise in order to convince a lender to provide needed funding.

Unless you're thinking of starting a religious or charitable organization, the primary reason you're starting a business is because you think you can make money. The drive to be your own boss might have caused you to quit being an employee and start your business, but the quest for income is what keeps it going. When you develop a business plan, financial projections and cash flow analysis are among the most critical elements.

If you're like most startup businesses, you are probably going to experience at least a short period during which expenses exceed revenue. Without plans for adequate cash reserves, borrowing capacity, or other means of meeting those expenses, a cash shortfall can cause the early demise of your new business. It doesn't matter that the idea behind the business is fundamentally sound; without adequate capital, you won't make it.

The timing of revenues and expenses are critical to all businesses, whether new or established. Even if revenues exceed expenses, the actual receipt of cash has to occur in time to meet expenses as they become due. Assessing your expenses, both recurring (e.g., rent, wages, payments to vendors) and nonrecurring (e.g., unexpected repairs) is vital. One way to do this type of planning is to check out our discussion of cash flow. This will give you a good idea of the type of analysis you'll need to prepare for this portion of your business plan.

The type of financial information that you're going to need to prepare this analysis will depend on whether your business is an established enterprise or is just starting out. If you're writing a plan for a new business, you'll need to survey your assets and borrowing ability. However, since your business probably has few assets and no prior financial history, you're going to have to rely almost entirely on financial projections.


You plan to open a business that builds custom furniture. You used your projected cash flow statement to study the effect of changes in the cost of materials and supplies. It reveals that if those costs rise by more than 20 percent from their present levels, your monthly receipts might not be enough to pay your suppliers and employees. Your contingency plans might include raising your sales price or securing a line of credit until costs return to expected levels.


You have a close personal interest in the financial performance of your business. So does everyone else who might be looking at your business plan. Not surprisingly, the portions of your plan dealing with the projected financial performance of your plan will come under the closest scrutiny. A potential lender will want to know what you'll be doing with the money lent to you and how you plan to generate the necessary income to pay the money back.

Fortunately, the financial projections are the most formalistic and stylized documents that you will have to prepare. By formalistic, we mean that there are no surprises or difficult computations lurking behind your financials. The point is to project, in a mathematically correct fashion, the anticipated monetary results of your business operations. By stylized, we mean that the format of your financial documents will be dictated in large part by accounting conventions and the specific requirements of your audience.

Don't forget that startup businesses, or business expansions, frequently involve a startup budget that is different in character from the operating budget of an ongoing business. These startup costs will be rolled into your profit and loss projections.

The following list sets forth the major elements of the financial portion of your business plan. The first two items are applicable to any business. The third discusses the types of information that an existing or ongoing business needs to provide, while the fourth discusses the special financial planning issues that a new business must address. The last item presents a number of calculations that can be used to diagnose a business's financial condition.

  • Projected profit and loss statement.
  • Projected cash flow.
  • Historical financial information.
  • Startup business financial information.
  • Financial ratios.

In some cases, you may have prepared the financial portions of your plan to conform to generally accepted accounting principles. This will usually occur when you prepare a plan in an effort to obtain a loan or line of credit, and the bank or potential investor you're dealing with requests or requires it. It also means that it is likely you'll need to get an accountant involved in preparing that portion of the plan. If the financial material was created in conformity with GAAP, that fact should be noted at the appropriate location within the plan. The same is true if the financial statements have been audited.

Projecting financial results from operations

A projected profit and loss statement is a financial document that reflects the amount of profit or loss you expect your business to generate in future periods. This is an essential document that you or your accountant should put together. It will be a useful tracking tool for objectively determining whether your business is likely to make a profit and be successful or generate losses and eventually fail.

Your projected profit and loss statement will list revenues from sales or services provided, your cost for goods or services provided, operating expenses such as wages, rent, advertising, and net income or loss.

Tools to Use

You'll find a sample income statement template in the Business Tools. Remember that a projected profit and loss statement includes your best estimates of future results rather than historical information. If there are trends, it's reasonable to take them into account. Remember the disclaimer from investment firms: "Past performance is no guarantee of future results."


Depending on whether you are preparing a projected profit and loss statement for an existing business or a startup enterprise, you may have some difficulty coming up with reliable estimates. For instance, if you have an existing business, you'll have an easier time making projections because your historical financial information will help you forecast what your business might do in the future. On the other hand, if you're just starting your business, you're going to have to do some outside research.

We recommend that you hit your local library, chamber of commerce, and other industry associations for information on demographics such as population, average age, and median income of the target market you're hoping to attract. This will help you determine whether there is a market for your product or service and also give you an idea of any future growth trends. Dun & Bradstreet and other financial information purveyors can provide information regarding industry averages.

You'll also want to check out your local competition and the services they offer in order to realistically determine the share of new customers you can expect to gain with your new business. Finally, and probably most importantly, you'll want to talk to your prospective vendors and suppliers. These businesses are not only a good source of market information, but they also can provide you with accurate estimates of what your startup expenses may include.

Projected cash flow statement

Your projected cash flow is very important to most lenders because it provides an indication of whether you will have enough cash to pay your suppliers, vendors, and other creditors on time (not to mention the lender itself!). This information also functions as a planning tool for you. If your cash flow estimates show that you will occasionally not have enough money to pay your bills, you can arrange in advance for other sources of funds to get you through cash flow crunches.

Determine your cash flow by taking your inflows of cash (cash you're receiving) and subtracting your outflows of cash (cash you're paying out).

Tools to Use

While you may present this information in any format you choose, we recommend that you use the format given in the cash flow budget worksheet provided in Business Tools. This worksheet provides a comprehensive listing of most inflows and outflows of cash you will encounter in your business. In addition, it presents this information to you and your audience in a simple and concise fashion

If you are preparing a cash flow budget worksheet for an existing business, you can base your estimates of cash sources and uses on historical information. If you're a startup business, you should base your estimates of cash sources and uses on the revenues and expenses listed in the projected profit and loss statements. Accordingly, we recommend that you review the projected profit and loss statement section and complete a projected profit and loss statement before completing the cash flow budget worksheet.

Historical financial information for new and startup businesses

An existing business can bolster the credibility of its business plan by documenting the results of its ongoing operations. A proven track record is very persuasive evidence of your chances for continued success. Hopefully, you've been creating and maintaining financial records since the inception of your business. If so, most of your work is done. The following list describes the types of information that you would ordinarily include in a business plan. As always, the relative importance of each type of document will vary based on your particular business.

If you're assembling a business plan for an existing business, make sure to include the following historical financial information for the last three to five years (or from the inception of the business if less than three years old):

  • A balance sheet, which lists the type and value of your business's assets, liabilities, and ownership interest.
  • An income statement, which lists the revenues, expenses, and net income of your business for a stated period of time, usually a year.
  • Your business's tax returns for the three most recent years.
  • A cash flow budget, which lists by month the cash you took in, the cash you spent, and whether you had a cash surplus or deficit at the end of a month.

For existing businesses, these financial statements are the most objective pieces of evidence that lenders will look at to either support or contradict your forecasts for future performance. With that in mind, make sure that you present this information in a format that is accurate, concise, and easy to follow. Most lending institutions and venture capitalists will give a long, critical look at your historical financial information. If you have thrown together the data in such a way that they have to hunt around and piece together information that was supposed to be in one place, you can bet that they won't look favorably upon the rest of your operation as a whole.

Tools to Use

For this reason, we suggest you follow the format provided in the balance sheet, income statement, and cash flow budget worksheet included in Business Tools. In developing these financial statements, we have included most of those financial categories that are likely to apply to your business and that will be of the greatest interest to your audience.


Startup business financial information

If you're just starting out, you face a special challenge because you don't have an established track record on which to rely. There is no history of operations, profitable or otherwise. Instead, you must rely heavily on your ability to sell yourself as a potentially successful business owner. It doesn't matter whether you're using your business plan in an effort to obtain financing or to convince prospective employees to work for you. You need to convince whoever reads your plan that you have a genuine opportunity for success. In large part, your ability to sell yourself is a substitute for the historical information that doesn't exist.

Your plan should include personal financial information in lieu of the historical information that an ongoing business can provide. This personal financial information should identify the amount and source of funding that you have available to invest in the business. It should provide specific details regarding any personal assets that you plan to use in running your business. Other documents that may be required, particularly if you're trying to obtain outside financing, are your personal income tax returns for the last few years.

Just like an established business, you're also going to need to provide projected profit and loss statements and projected cash flow budget worksheets. These documents quantify the results you expect to achieve through your operations. Be sure to include any startup costs that you'll incur prior to opening your business when you develop these estimated financial statements. While your business will probably involve certain expenses that are unique to your industry, don't forget some of these more common startup expenses:

  • Professional fees (legal or accounting).
  • Regulatory charges (licensing, cost to incorporate).
  • Security deposits on rented space.
  • Computer equipment and cash registers.

Using financial ratios in your business plan

Financial ratios provide you and your audience with an objective basis for comparing the performance of your business with other businesses in your industry. In addition, financial ratios also provide you with the tools necessary to assess whether certain operations of your business need fine-tuning. The following list explains how each of the financial ratios is calculated and what it reveals about your business's financial health. The list does not include all of the ratios that you or your accountant might calculate. However, it does include those financial ratios that should be included in your business plan. They provide a clear picture of your business's ability to generate a profit, pay bills on a timely basis, and utilize assets efficiently.

  • Current Ratio = Current Assets / Current Liabilities

This ratio is the most commonly used measure of short-term solvency. It indicates the amount of current assets, such as cash, accounts receivable, and inventory, that can be converted into cash to pay your short-term liabilities.

  • Quick Ratio = (Cash + Stocks &; Bonds Held for Investment + Accounts Receivable) / Current Liabilities

This ratio is a variation of the Current Ratio. It looks at current assets, but only those that can be quickly converted into cash to meet short-term liabilities. Many lenders are interested in this ratio because it does not include inventory, which may or may not be easily converted into cash.

  • Profit Margin Ratio = (Net Income + Interest Expense for the Period) / Revenues

This ratio provides a good indication of your business's ability to manage operating expenses at a given amount of revenues. For example, if your profit margin has been diminishing over consecutive periods and revenues have remained the same, you may want to take a close look at your operating expenses to see if you can cut overhead costs without affecting sales.

  • Average Collection Days to Receivable Ratio= Annualized Accounts Receivable / Annual Net Credit Sales

This ratio represents the average length of time it takes your business to convert credit sales into cash. It is calculated by multiplying your current account receivables by the number of days in the year. The result, annualized account receivables, is divided by your total annual credit sales. The resulting ratio shows the average number of days it takes to collect on receivables. A ratio that is high by industry standards will generally indicate that your business needs to improve its credit policies and collection procedures.

  • Debt Ratio = Total Debt / Total Assets

This ratio indicates the amount of debt your business has taken on relative to the total assets it owns. A high debt ratio indicates that creditors have financed a substantial portion of your business. This is often a red flag to potential lenders since it increases the possibility of bankruptcy if your net sales are not enough to meet your monthly debt and interest payments.

  • Return on Total Assets = Net Income / Total Operating Assets

This ratio indicates the rate of return being generated by the assets of your business. In some cases, consecutive periods of diminishing ratios may indicate a poor utilization of your plant and operating equipment. On the other hand, one or two periods of a lower ratio may not be cause for concern. In many instances, businesses gearing up for future growth invest in operating assets that do not immediately begin generating additional sales.


The appendix is the repository for those items that aren't part of the plan itself, but that are helpful or useful to someone reading the plan. It contains the material that supports and explains the conclusions and assumptions contained within the plan. If you think it is likely that a reader will seek further information regarding some portion of the plan, include the appropriate material in the appendix. That way, you avoid having to dig through the material you accumulated while preparing the plan if a question arises as to the information presented within the body of the plan.

The appendix also houses, for example, sample marketing material. If you plan to run magazine ads, copies of the ads could be included in the appendix. Consider material for inclusion only if you believe that it adds to or clarifies the rest of the plan. If you are just starting out, consider including resumes of key employees if you are relying on their skill and experience.

Mike Enright
Operations Manager
small business services


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