Financial Projection
A financial projection is an estimate or forecast of a company’s future financial performance. It’s typically based on the company’s historical data, industry trends, market research, and other relevant factors. Financial projections are an essential part of business planning and strategy, as they help a company to plan for its future, make informed business decisions, and secure funding.
Financial projections typically cover a period of one to five years and include the following elements:
- Income Statement Projection: This includes projected revenues, cost of goods sold (COGS), gross margin, operating expenses, taxes, and net income. Revenue projections are often based on factors like historical growth rates, market research, sales contracts in hand, and economic trends.
- Cash Flow Projection: This shows how changes in the balance sheet and income statement will affect cash and cash equivalents. It includes projections for operating cash flow, investing cash flow, and financing cash flow.
- Balance Sheet Projection: This shows the company’s projected assets, liabilities, and equity. It includes items like cash, accounts receivable, inventory, property, plant and equipment, accounts payable, debt, and shareholder’s equity.
- Financial Ratios: These include projected profitability ratios, liquidity ratios, efficiency ratios, and leverage ratios, providing a more detailed picture of the company’s expected financial health.
It’s important to note that financial projections are based on assumptions and therefore inherently uncertain. They should be reviewed and updated regularly to reflect new information and changes in the business environment. Additionally, a good financial projection will also include different scenarios (like a best case, a most likely case, and a worst case) to prepare for various possibilities.
Example of a Financial Projection
Let’s take a hypothetical example of a startup company, XYZ Tech, that is developing a new mobile app. They’ve been in business for one year and are preparing financial projections for the next three years to present to potential investors.
Here’s a simplified version of their projected income statement:
| Year | 2024 | 2025 | 2026 |
|---|---|---|---|
| Revenue | $500,000 | $1,000,000 | $1,500,000 |
| Cost of Goods Sold | $200,000 | $400,000 | $600,000 |
| Gross Margin | $300,000 | $600,000 | $900,000 |
| Operating Expenses | $250,000 | $300,000 | $350,000 |
| Net Income | $50,000 | $300,000 | $550,000 |
These projections suggest that XYZ Tech expects to double its revenue each year, while also managing to control its cost of goods sold and operating expenses to achieve growing net income.
Now, let’s have a look at the projected balance sheet for 2024:
| Assets | Amount |
|---|---|
| Cash | $100,000 |
| Accounts Receivable | $50,000 |
| Inventory | $30,000 |
| Property, Plant & Equipment | $20,000 |
| Total Assets | $200,000 |
| Liabilities | Amount |
|---|---|
| Accounts Payable | $40,000 |
| Short-Term Debt | $30,000 |
| Long-Term Debt | $50,000 |
| Total Liabilities | $120,000 |
| Equity | Amount |
|---|---|
| Common Stock | $50,000 |
| Retained Earnings | $30,000 |
| Total Equity | $80,000 |
This projected balance sheet suggests that the company is expecting to maintain a healthy amount of cash, manage its liabilities, and gradually increase its equity through retained earnings.
Remember, this is a simplified example. In reality, financial projections would be more detailed and cover additional areas like cash flow and key financial ratios. Also, these projections should be considered alongside assumptions about market growth, customer behavior, and other factors.
