projected statement of financial position in business plan

• Business Planning

Business Plan Financial Projections

Written by Dave Lavinsky

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

• They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
• Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
• Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

• Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
• Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. Cash Flow Statement & Projection

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

• The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
• It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. Balance Sheet Projection

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to Create Financial Projections

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

• Gross margin ratio
• Operating margin ratio
• Return on assets (ROA)
• Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

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How To Create Financial Projections for Your Business Plan

Building a financial projection as you write out your business plan can help you forecast how much money your business will bring in.

Planning for the future, whether it’s with growth in mind or just staying the course, is central to being a business owner. Part of this planning effort is making financial projections of sales, expenses, and—if all goes well—profits.

Even if your business is a startup that has yet to open its doors, you can still make projections. Here’s how to prepare your business plan financial projections, so your company will thrive.

What are business plan financial projections?

Business plan financial projections are a company’s estimates, or forecasts, of its financial performance at some point in the future. For existing businesses, draw on historical data to detail how your company expects metrics like revenue, expenses, profit, and cash flow to change over time.

Companies can create financial projections for any span of time, but typically they’re for between one and five years. Many companies revisit and amend these projections at least annually. 

Creating financial projections is an important part of building a business plan . That’s because realistic estimates help company leaders set business goals, execute financial decisions, manage cash flow , identify areas for operational improvement, seek funding from investors, and more.

What are financial projections used for? 

Financial forecasting serves as a useful tool for key stakeholders, both within and outside of the business. They often are used for:

Business planning

Accurate financial projections can help a company establish growth targets and other goals . They’re also used to determine whether ideas like a new product line are financially feasible. Future financial estimates are helpful tools for business contingency planning, which involves considering the monetary impact of adverse events and worst-case scenarios. They also provide a benchmark: If revenue is falling short of projections, for example, the company may need changes to keep business operations on track.

Projections may reveal potential problems—say, unexpected operating expenses that exceed cash inflows. A negative cash flow projection may suggest the business needs to secure funding through outside investments or bank loans, increase sales, improve margins, or cut costs.

When potential investors consider putting their money into a venture, they want a return on that investment. Business projections are a key tool they will use to make that decision. The projections can figure in establishing the valuation of your business, equity stakes, plans for an exit, and more. Investors may also use your projections to ensure that the business is meeting goals and benchmarks.

Loans or lines of credit 

Lenders rely on financial projections to determine whether to extend a business loan to your company. They’ll want to see historical financial data like cash flow statements, your balance sheet , and other financial statements—but they’ll also look very closely at your multi-year financial projections. Good candidates can receive higher loan amounts with lower interest rates or more flexible payment plans.

Lenders may also use the estimated value of company assets to determine the collateral to secure the loan. Like investors, lenders typically refer to your projections over time to monitor progress and financial health.

What information is included in financial projections for a business?

Before sitting down to create projections, you’ll need to collect some data. Owners of an existing business can leverage three financial statements they likely already have: a balance sheet, an annual income statement , and a cash flow statement .

A new business, however, won’t have this historical data. So market research is crucial: Review competitors’ pricing strategies, scour research reports and market analysis , and scrutinize any other publicly available data that can help inform your projections. Beginning with conservative estimates and simple calculations can help you get started, and you can always add to the projections over time.

One business’s financial projections may be more detailed than another’s, but the forecasts typically rely on and include the following:

True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories:

Income statement

Projected income statements, also known as projected profit and loss statements (P&Ls), forecast the company’s revenue and expenses for a given period.

Generally, this is a table with several line items for each category. Sales projections can include the sales forecast for each individual product or service (many companies break this down by month). Expenses are a similar setup: List your expected costs by category, including recurring expenses such as salaries and rent, as well as variable expenses for raw materials and transportation.

This exercise will also provide you with a net income projection, which is the difference between your revenue and expenses, including any taxes or interest payments. That number is a forecast of your profit or loss, hence why this document is often called a P&L.

Balance sheet

A balance sheet shows a snapshot of your company’s financial position at a specific point in time. Three important elements are included as balance sheet items:

• Assets. Assets are any tangible item of value that the company currently has on hand or will in the future, like cash, inventory, equipment, and accounts receivable. Intangible assets include copyrights, trademarks, patents and other intellectual property .
• Liabilities. Liabilities are anything that the company owes, including taxes, wages, accounts payable, dividends, and unearned revenue, such as customer payments for goods you haven’t yet delivered.
• Shareholder equity. The shareholder equity figure is derived by subtracting total liabilities from total assets. It reflects how much money, or capital, the company would have left over if the business paid all its liabilities at once or liquidated (this figure can be a negative number if liabilities exceed assets). Equity in business is the amount of capital that the owners and any other shareholders have tied up in the company.

They’re called balance sheets because assets always equal liabilities plus shareholder equity. 

5 steps for creating financial projections for your business

• Identify the purpose and timeframe for your projections
• Collect relevant historical financial data and market analysis
• Forecast expenses
• Forecast sales
• Build financial projections

The following five steps can help you break down the process of developing financial projections for your company:

1. Identify the purpose and timeframe for your projections

The details of your projections may vary depending on their purpose. Are they for internal planning, pitching investors, or monitoring performance over time? Setting the time frame—monthly, quarterly, annually, or multi-year—will also inform the rest of the steps.

2. Collect relevant historical financial data and market analysis

If available, gather historical financial statements, including balance sheets, cash flow statements, and annual income statements. New companies without this historical data may have to rely on market research, analyst reports, and industry benchmarks—all things that established companies also should use to support their assumptions.

3. Forecast expenses

Identify future spending based on direct costs of producing your goods and services ( cost of goods sold, or COGS) as well as operating expenses, including any recurring and one-time costs. Factor in expected changes in expenses, because this can evolve based on business growth, time in the market, and the launch of new products.

4. Forecast sales

Project sales for each revenue stream, broken down by month. These projections may be based on historical data or market research, and they should account for anticipated or likely changes in market demand and pricing.

5. Build financial projections

Now that you have projected expenses and revenue, you can plug that information into Shopify’s cash flow calculator and cash flow statement template . This information can also be used to forecast your income statement. In turn, these steps inform your calculations on the balance sheet, on which you’ll also account for any assets and liabilities .

Business plan financial projections FAQ

What are the main components of a financial projection in a business plan.

Generally speaking, most financial forecasts include projections for income, balance sheet, and cash flow.

What’s the difference between financial projection and financial forecast?

These two terms are often used interchangeably. Depending on the context, a financial forecast may refer to a more formal and detailed document—one that might include analysis and context for several financial metrics in a more complex financial model.

Do I need accounting or planning software for financial projections?

Not necessarily. Depending on factors like the age and size of your business, you may be able to prepare financial projections using a simple spreadsheet program. Large complicated businesses, however, usually use accounting software and other types of advanced data-management systems.

What are some limitations of financial projections?

Projections are by nature based on human assumptions and, of course, humans can’t truly predict the future—even with the aid of computers and software programs. Financial projections are, at best, estimates based on the information available at the time—not ironclad guarantees of future performance.

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What are Projected Financial Statements and Why Do I Need Them as Part of my Business?

Krystal - February 28, 2019

Projected financial statements take into account past financial trends, market conditions, possible changes and management expectations to arrive at a future financial picture.

Accounting alone only looks at past financial data. That is, the expenses you’ve already incurred and income you’ve already earned. As well as the assets and liabilities you currently have on the books.

While this information is critical in assessing your company’s results and decision making, it does not give you enough insight into your future performance.  

Think of accounting and bookkeeping as step one. Your business has dozens if not, hundreds or thousands of transactions monthly. In order for you to make any sense of it all, you need bookkeeping to organize this information into financial statements.

And those financial statements are reviewed regularly to help you make profitable decisions. But how can you measure the impact of those decisions? How can you see the financial picture those decisions will make?

Projected financial statements.

Consider your projected financial statements as your step two in the accounting and bookkeeping process.

You want your business to have longevity. Apart of that is planning and preparing for the future. Projected financial statements help you do just that.

Breaking Down Projected Financial Statements Further

Projected financial statements are also called pro forma financial statements. The term pro forma simply means “as a matter of form”.

In the business world, pro forma, or projected financial statements, are typically used to focus on certain figures, such as sales or profit.

Projected financial statements are most effectively used to examine the effects of a particular decision.

For example, if you are considering adding a new product line, you would use pro forma financial statements to see how the addition would impact your business overall.

Projected financial statements look similar, if not, the same as regular financial statements. So when examining them, you’ll see the same accounts and structure as you would on your normal statements.

Pro forma financial statements can consist of a balance sheet, profit or loss, cash flow statement or more. Most statements that are produced to reflect present financial information can be translated to present future information.

You can see what your business is projected to look like at some point in the future. Planning never seemed so easy!

Why Projected Financial Statements Should be a Regular Part of Your Accounting?

You guessed it. Planning. Projected financial statements help you plan for the future.

Given the many different decisions and scenarios you’re faced with every day, projections help you decipher between them all. This allows the decisions you do make to be backed by numbers and financial analysis.

Let’s think of it this way. When you make a major decision in your personal life, how do you go about choosing the best option?

First, you examine the possible options and their corresponding outcomes. From there, you choose the option with the most favorable results.

You need to have this sort of analysis as part of your business decision making as well.

Projected financial statements is the way to review your possible outcomes before making a decision. While no projection is perfect, having one mitigates the risk of uncertainty and losses.

Projections Vs Forecasts: What’s the Difference?

Projections and forecasts are not one and the same. Though, people tend to use these terms interchangeably. Maybe even yourself!

The difference between the two is slight, yet significant.

Remember when we said projected financial statements are used to help assess a possible business decision? A financial forecast operates differently.

Instead, a financial forecast only takes into account current conditions and expectations to arrive at a future value.

Clear as mud? Let us explain.

Financial forecasts are predictions of future financial performance based on today’s facts. If nothing were to change in your business, what would your numbers look like? That’s a financial forecast.

On the other hand, a financial projection considers a hypothetical course of action. In our previous example, we considered adding a new product line and how that would impact your financial results.

At larger companies, financial forecasts are what’s provided to external users. For example, if you are seeking outside funding from investors or banks, financial foreasts are used to assess your company’s sustainability.

In general, you should expect the objectives in a forecast to be met.

Again, projections have a speculative element. An element that is not true today but if it was, what would that look like?

Financial projections are more geared towards internal users to aid in decision making. However, certain external users, like investors, may want to see the financial impact of a particular decision. A financial projection would show this.

You could also think of projected financial statements as a way to answer ‘what if’ questions.

“What if I added a new service?”

“What if I invested in new equipment?”

“What if I took out a bank loan?”

“What if I added a new employee?”

The list goes on.

Both financial forecasts and projections have important roles in your business. It’s important to understand the difference between the two and how to use them. Both can be used to drive profitability and growth within your business.

How to Prepare Projected Financial Statements?

Preparing regular financial statements can be hard. So there’s no doubt that projected financial statements have its difficulties.

This is where the help of a CPA or CFO comes to play.

Full-time CFOs can be pricey for a small business. But consider hiring a part-time CFO. They have the expertise a full time CFO would have at a small fraction of the price.

In either case, there are some general steps a CFO does to prepare projected financial statements.

1. Examine comparative reports. Assuming you have accounting and bookkeeping records, the first step is comparing results across periods.

Compare this year’s profit and loss to last year’s, and the year before. What trends do you notice?

Has profit increased? Why?

Did you implement any major changes during this time? And how has it impacted your financials? By what percentage?

This exercise should be done for each of your main financial statements. (I.e. profit and loss, balance sheet, cash flow statement, etc.).

2. Safely make assumptions. The primary purpose of projecting your financial statements is to present ‘what if’ scenarios and make decisions based on those projections.

Not every account on your financial statement is impacted by a ‘what if’ scenario. Therefore, you should safely assume those accounts will remain the same or deviate at the same rate historically.

For example, if you want projected financial statements prepared to show the effects of a new service line, your rent expense is not likely impacted by this.

Therefore, if you pay $500 per month for rent, you should expect that amount to be the same on your projected financial statement.

The same is true for other accounts. Not every account would be dependent on your ‘what if’. These accounts are considered independent variables.

Adding to this example, maybe your rent expense consistently goes up 3% per year. This should be reflected in your projected financial statements.

Even though rent expense is independent of adding a new service line, history shows that it increases 3% per year.

3. Make projections on relevant accounts. Once independent accounts have been projected from step 2, it is time to make reasonable projections on the other accounts.

Again, using our adding a service line example. Consider which accounts would be impacted.

How are sales affected? Expenses? Assets?

Would there be any new accounts added? Are there any that would be eliminated?

Answering questions like these will help in the preparation of your projections.

Coming up with the actual number of sales or expenses the new service line will earn or incur is the trickiest part.

Your business trends, ratio analysis, market conditions, and risk analysis should all be employed to arrive these numbers.

Once your projections are complete, you have more leverage in making the best possible decisions for your business.

Your CFO’s Role

Ratio analysis, risk analysis, and financial trends are just a few concepts that can sound foreign to a non-financial expert. Yet, these are the necessary elements for preparing a financial projection.

A CFO has the expertise, resources, and education to apply these concepts without you having to delve too deep in the details.

A CFO does more than preparing your financial projections. They are responsible for the monitoring and management of your company’s financial performance.

Their job is to learn and understand the details of your financial situation and provide strategy to grow your business.

Their specific duties vary from company to company. Based on your needs and goals, they will deliver the appropriate level of service to your business.

Limitations on Projected Financial Statements

As with anything that concerns the future, uncertainty exists. Uncertainty is the core limitation placed on projected financial statements. There are other limitations that you should keep in mind.

Unforeseen Situations

Though a thorough analysis should be performed before actually projecting out data, circumstances do exist that could alter expectations.

The analysis and calculations could be reasonable but some unforseen situation occurred such as a recession or new competitor.

This is why it’s important that your projections are conservative and adaptable to changes.

Narrowed Focus

Because financial projections focus on a ‘what-if’ scenario, a business owner might lose sight of other areas of the business.

In the case of adding a new service line, an owner might neglect their other service lines. This can cause those areas to experience negative side effects.

Make sure to continue to monitor all areas of your business, even when implementing a decision based on projections. It’s counterproductive to grow in one area of your business but decline in every other area.

Developing projected financial statements takes time. Time to gather financial data, market conditions, competitor information and more.

Time that you may not have. Especially, if you’re a non-expert in this area.

What ends up happening is your projections end up being wrong, incomplete or just not done. But if you want to see growth and expansion in your business, preparing financial projections should not be ignored.

Instead, consider hiring a part-time CFO. They have the time, knowledge and know how to accomplish this for you.

Now that you know what projected financial statements are, you should have a clear understanding of why you need them for your business.

The reason is to make smarter, better, more profitable business decisions.

Too many business owners blindly make decisions without any real rationale or evidence to back them.

There’s no surprise as to why so many businesses fail. It’s because of the lack of financial insight.

Don’t let this be you.

Use the financial information your business is producing to effectively plan and prepare for the future.

Every decision you make should make financial sense. In addition, you should have at least an idea of what the financial consequences of those decisions are.

This is what projected financial statements do.

Preparing them is not easy and there’s a good bit of financial analysis and research that goes into it. Which is why you should hire a part-time CFO for your business.

Part-time CFOs are cheaper than full-time ones but still have the knowledge you need to make good business decisions.

You need more than a bookkeeper or tax accountant. You need a part-time CFO.

Here at LYFE Accounting, we have experienced and knowledgeable CFOs ready to help you through every financial decision.

Contact us today to learn more!

One Response

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How to Prepare a Financial Plan for Startup Business (w/ example)

Free Financial Statements Template

Ajay Jagtap

• December 7, 2023

13 Min Read

If someone were to ask you about your business financials, could you give them a detailed answer?

Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.

Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.

A business plan’s financial plan section is no easy task—we get that.

But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.

Ready to get started? Let’s begin by discussing startup financial planning.

What is Startup Financial Planning?

Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.

Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.

Key Takeaways

• Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
• Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
• Preparing a financial plan is easier and faster when you use a financial planning tool.
• Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.

Why is Financial Planning Important to Your Startup?

Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.

A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.

It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .

Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.

Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.

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Key Components of a Startup Financial Plan

Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.

Income Statement

An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.

Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.

Your income or P&L statement must list the following:

• Cost of goods or cost of sale
• Gross margin
• Operating expenses
• Revenue streams
• EBITDA (Earnings before interest, tax, depreciation , & amortization )

Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.

Cash flow Statement

A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.

This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.

Your cash flow projection consists of the following three components:

✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.

✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.

✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.

Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.

Balance Sheet

Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.

Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.

This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.

Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:

Here is what’s the core purpose of having a balance-sheet:

• Indicates the capital need of the business
• It helps to identify the allocation of resources
• It calculates the requirement of seed money you put up, and
• How much finance is required?

Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.

Break-even Analysis

Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.

For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.

Remember, anything you sell beyond the break-even point will result in profit.

You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.

• Fixed costs: fixed expenses that stay the same no matter what.
• Variable costs: expenses that fluctuate over time depending on production or sales.

A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.

Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.

How to Create a Financial Section of a Startup Business Plan?

1. determine your financial needs.

You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.

Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.

Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.

Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.

Having learned to determine financial needs, let’s head straight to setting financial goals.

2. Define Your Financial Goals

Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.

Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.

However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.

Feeling overwhelmed? Just define your financial goals—you’ll be fine.

You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.

3. Choose the Right Financial Planning Tool

Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.

Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.

Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.

Create a Financial Plan with Upmetrics in no time

Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.

Start Forecasting

4. Make Assumptions Before Projecting Financials

Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.

You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.

You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.

After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.

5. Prepare Realistic Financial Projections

It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.

Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.

Following are the two key aspects of your financial projections:

Revenue Projections

In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.

It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.

The following are the key components of an accurate revenue projection report:

• Market analysis
• Sales forecast
• Pricing strategy
• Growth assumptions
• Seasonal variations

This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.

Expense Projections

Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.

Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.

These are the most common costs to consider while projecting expenses:

• Fixed costs
• Variable costs
• Employee costs or payroll expenses
• Operational expenses
• Marketing and advertising expenses
• Emergency fund

Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.

6. Consider “What if” Scenarios

After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.

Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.

Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.

7. Build a Visual Report

If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.

Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.

Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.

Here’s what Upmetrics’ dashboard looks like:

8. Monitor and Adjust Your Financial Plan

Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.

There are multiple ways to monitor your financial plan.

For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.

Consider making necessary adjustments if your assumptions are not resonating with actual numbers.

Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.

And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.

Startup Financial Plan Example

Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.

Important Assumptions

• The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
• The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
• The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
• Sales are cash basis – nonaccrual accounting
• Moderate ramp- up in staff over the 5 years forecast
• Barista salary in the forecast is $36,000 in 2023.
• In general, most cafes have an 85% gross profit margin
• In general, most cafes have a 3% net profit margin

Projected Balance Sheet

Projected Cash-Flow Statement

Projected Profit & Loss Statement

Break Even Analysis

Start Preparing Your Financial Plan

We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.

Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.

So what are you waiting for? Try Upmetrics and create your financial plan in a snap.

Build your Business Plan Faster

with step-by-step Guidance & AI Assistance.

Frequently Asked Questions

How often should i update my financial projections.

Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.

How do I estimate startup costs accurately?

You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.

What financial ratios should startups pay attention to?

Here’s a list of financial ratios every startup owner should keep an eye on:

• Net profit margin
• Current ratio
• Quick ratio
• Working capital
• Return on equity
• Debt-to-equity ratio
• Return on assets
• Debt-to-asset ratio

What are the 3 different scenarios in scenario analysis?

As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:

• base-case (expected) scenario
• Worst-case scenario
• best case scenario.

About the Author

Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more

Reach Your Goals with Accurate Planning

Free Financial Templates for a Business Plan

By Andy Marker | July 29, 2020

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In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.

Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .

Financial Plan Templates

Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders

Business Financial Plan Template

Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.

Download Financial Plan Template

Word | PDF | Smartsheet

Financial Plan Projections Template for Startups

This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.

‌ Download Startup Financial Projections Template

Excel | Smartsheet

Income Statement Templates for Business Plan

Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.

Pro Forma Income Statement/Profit and Loss Sample

Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.

‌ Download Pro Forma Income Statement Sample - Excel

Small Business Profit and Loss Statement

Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.

‌ Download Small Business Profit and Loss Template - Excel

3-Year Income Statement Template

Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.

Download 3-Year Income Statement Template

For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”

Cash Flow Statement Templates for Business Plan

Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.

Simple Cash Flow Template

Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.

Download Simple Cash Flow Template

12-Month Cash Flow Forecast Template

Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.

‌ Download 12-Month Cash Flow Forecast

3-Year Cash Flow Statement Template Set

Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.

Download 3-Year Cash Flow Statement Template

For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”

Balance Sheet Templates for a Business Plan

Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.

Small Business Pro Forma Balance Sheet

Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.

Download Pro Forma Balance Sheet Template

Monthly and Quarterly Balance Sheet Template

Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.

Download Monthly/Quarterly Balance Sheet Template - Excel

Yearly Balance Sheet Template

Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.

Download Yearly Balance Sheet Template - Excel

For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”

Sales Forecast Templates for Business Plan

Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.

Basic Sales Forecast Sample Template

Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month. 

Download Basic Sales Forecast Sample Template

12-Month Sales Forecast Template for Multiple Products

Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.

Download 12-Month Sales Forecasting Template for Multiple Products

3-Year Sales Forecast Template for Multiple Products

Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.

Download 3-Year Sales Forecast Template - Excel

For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”

Break-Even Analysis Template for Business Plan

A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.

Break-Even Analysis Template

Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.

Download Break-Even Analysis Template

For additional resources, visit, “ Free Financial Planning Templates .”

Business Budget Templates for Business Plan

These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.

Startup Budget Template

Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.

Download Startup Budget Template

Small Business Budget Template

This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.

Download Small Business Budget Template

Professional Business Budget Template

Established organizations will appreciate this customizable business budget template, which  contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts. 

‌ Download Professional Business Budget Template

For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”

Other Financial Templates for Business Plan

In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.

Startup Funding Requirements Template

This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.

Download Startup Funding Requirements Template - Excel

Personnel Plan Template

Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure. 

Download Personnel Plan Template - Excel

Elements of the Financial Section of a Business Plan

Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan. 

Below, you’ll find a quick overview of the components of a solid financial plan.

• Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
• Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
• Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
• Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
• Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
• Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
• Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.

Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan  here . 

Visit this  free non-profit business plan template roundup  or download a  fill-in-the-blank business plan template  to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to  Microsoft Excel ,  Microsoft Word , and  Adobe PDF  business plan templates. Read our articles offering  startup business plan templates  or  free 30-60-90-day business plan templates  to find more tailored options.

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7 Financial Forecasting Methods to Predict Business Performance

• 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

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What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

• Income statements
• Balance sheets
• Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

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Writing a Business Plan—Financial Projections

Spell out your financial forecast in dollars and sense

Creating financial projections for your startup is both an art and a science. Although investors want to see cold, hard numbers, it can be difficult to predict your financial performance three years down the road, especially if you are still raising seed money. 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 . Be sure to follow the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board , a private-sector organization responsible for setting financial accounting and reporting standards in the U.S. If financial reporting is new territory for you, have an accountant review your projections.

Sales Forecast

As a startup business, you do not have past results to review, which can make forecasting sales difficult. It can be done, though, if you have a good understanding of the market you are entering and industry trends as a whole. In fact, sales forecasts based on a solid understanding of industry and market trends will show potential investors that you've done your homework and your forecast is more than just guesswork.

In practical terms, your forecast should be broken down by monthly sales with entries showing which units are being sold, their price points, and how many you expect to sell. When getting into the second year of your business plan and beyond, it's acceptable to reduce the forecast to quarterly sales. In fact, that's the case for most items in your business plan.

Expenses Budget

What you're selling has to cost something, and this budget is where you need to show your expenses. These include the cost to your business of the units being sold in addition to overhead. It's a good idea to break down your expenses by fixed costs and variable costs. For example, certain expenses will be the same or close to the same every month, including rent, insurance, and others. Some costs likely will vary month by month such as advertising or seasonal sales help.

Cash Flow Statement

As with your sales forecast, cash flow statements for a startup require doing some homework since you do not have historical data to use as a reference. This statement, in short, breaks down how much cash is coming into your business on a monthly basis vs. how much is going out. By using your sales forecasts and your expenses budget, you can estimate your cash flow intelligently.

Keep in mind that revenue often will trail sales, depending on the type of business you are operating. For example, if you have contracts with clients, they may not be paying for items they purchase until the month following delivery. Some clients may carry balances 60 or 90 days beyond delivery. You need to account for this lag when calculating exactly when you expect to see your revenue.

Profit and Loss Statement

Your P&L statement should take the information from your sales projections, expenses budget, and cash flow statement to project how much you expect in profits or losses through the three years included in your business plan. You should have a figure for each individual year as well as a figure for the full three-year period.

Balance Sheet

You provide a breakdown of all of your assets and liabilities in the balances sheet. Many of these assets and liabilities are items that go beyond monthly sales and expenses. For example, any property, equipment, or unsold inventory you own is an asset with a value that can be assigned to it. The same goes for outstanding invoices owed to you that have not been paid. Even though you don't have the cash in hand, you can count those invoices as assets. The amount you owe on a business loan or the amount you owe others on invoices you've not paid would count as liabilities. The balance is the difference between the value of everything you own vs. the value of everything you owe.

Break-Even Projection

If you've done a good job projecting your sales and expenses and inputting the numbers into a spreadsheet, you should be able to identify a date when your business breaks even—in other words, the date when you become profitable, with more money coming in than going out. As a startup business, this is not expected to happen overnight, but potential investors want to see that you have a date in mind and that you can support that projection with the numbers you've supplied in the financial section of your business plan.

Additional Tips

When putting together your financial projections, keep some general tips in mind:

• Get comfortable with spreadsheet software if you aren't already. It is the starting point for all financial projections and offers flexibility, allowing you to quickly change assumptions or weigh alternative scenarios. Microsoft Excel is the most common, and chances are you already have it on your computer. You can also buy special software packages to help with financial projections.
• Prepare a five-year projection . Don’t include this one in the business plan, since the further into the future you project, the harder it is to predict. However, have the projection available in case an investor asks for it.
• Offer two scenarios only . Investors will want to see a best-case and worst-case scenario, but don’t inundate your business plan with myriad medium-case scenarios. They likely will just cause confusion.
• Be reasonable and clear . As mentioned before, financial forecasting is as much art as science. You’ll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective you’ll be at collecting on accounts receivable. It’s best to be realistic in your projections as you try to recruit investors. If your industry is going through a contraction period and you’re projecting revenue growth of 20 percent a month, expect investors to see red flags.

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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How to forecast financial statements: balance sheets, income statements.

Small businesses perform financial forecasting by analyzing historical data and using it to predict the company’s future financial performance. Preparing financial statement forecasts helps small businesses plan their future growth and manage cash flow .

Here are the main financial forecasting topics covered below:

How to Forecast Financial Statements

What are pro forma financial statements, how to forecast an income statement, how to forecast a balance sheet, how to forecast cash flow, how to forecast depreciation.

Small businesses forecast financial statements by looking at relevant historical data and using the information to make future predictions about the financial state of the company.

There are three fundamental financial statements that small businesses typically issue: income statements, balance sheets and cash flow statements.

The three financial statements can be looked at holistically to understand the overall financial health of your business. Forecasting can be done for a business’s income statements and balance sheets. A cash flow forecast can then be derived from the data in your income statement and balance sheets.

Documents showing your business forecasts are called pro forma financial statements. Together, these documents can provide valuable accounting insights to help you better plan for your business’s future growth.

Pro forma financial statements are based on projections and assumptions about the business. Pro forma statements allow you to compare actual financial events to your financial plan and make any necessary adjustments throughout the year. Most small businesses tend to prepare pro forma financial statements for periods of six months or one year.

Pro forma financial statements are usually required if you need a bank loan or other form of business financing.

Small businesses can develop a pro forma income statement to forecast the company’s profits or losses for a specific time period. Here are the steps for forecasting your income statement:

Analyze Historical Data

To accurately forecast your company’s profits or losses, you’ll first need to understand its past performance and use that data to predict future financial outcomes. Make sure you’re using comparable data. If you’re developing a pro forma income statement for a one-year period beginning January 1, 2020, you’ll want to look at historical data from the same period in previous years. Best practices suggest analyzing at least two periods worth of historical data, so you would want to look at income statements from January 1, 2018 and January 1, 2019.

Forecast Your Revenue

The easiest way to create a revenue (or sales) forecast is to input your annual growth rate. Look at the percentage growth in revenue over previous periods, and use that information to make an informed assumption about your future revenue.

Predict Cost of Goods Sold

As a service-based business, cost of goods sold might not seem to directly apply to your company. However, for businesses involved in renewable energy or solar services, it’s crucial to consider potential cost savings associated with the federal solar tax credit . This credit can significantly impact your overall expenses, so carefully assess how it influences your cost structure. But service-based businesses should think of their costs related to labor, employment tax and benefits as their cost of goods sold. Sometimes, this is called the cost of services instead.

Determine Your Operating Expenses

Analyze your past operating expenses and compare them to your expected revenue to determine what your expected operating costs will be in your forecast. Operating expenses include office rent, business insurance, office supplies, salary and benefits for employees, and more.

Forecasting your business’s balance sheet involves estimating your company’s assets and liabilities for a future date. A balance sheet is a financial document that gives a summary of your business’s financial position on a specific day. Balance sheet forecasts, or pro forma balance sheets, are used to project how your company will manage its assets in the future.

To create a pro forma balance sheet you’ll follow the following steps:

Input Your Short-Term and Long-Term Assets

Begin by inputting your short-term assets, which includes your current cash assets and your accounts receivable . Then, input your long-term assets, which would include things like: buildings, property and vehicles.

Include Your Current and Long-Term Liabilities

Account for your current liabilities, which include all liabilities that your business must settle in cash within the next year. You’ll also include long-term liabilities, which are all your liabilities due in more than one year. Liabilities include payroll, labor services and loan payments.

Calculate Your Final Figures

To figure out your final projections, just subtract your liabilities from your assets. This final forecast of your balance sheet will give you important insights into how secure your business’s financial position will be at a future date and can help you decide if you need to consider cutbacks or apply for loans.

To forecast your business’s cash flow you’ll estimate the amount of cash flowing into and out of your company for a specific future period. A pro forma cash flow statement can help you identify where your business may experience cash shortfalls in future, so you can plan accordingly to offset lean times.

Here are the steps to forecasting your cash flow statement:

Estimate Your Anticipated Sales by Month

Use at least two years of historical sales data to calculate what sales you can anticipate by month. Make sure to look at seasonal data to see if there are patterns to your sales. You’ll also want to factor in any future plans, like if you know that a big new client will sign on to your business in the coming months.

Predict When You’ll Receive Payments

Estimate when you’ll receive future payments by relying on historical data. If you invoice clients using a 30-day billing cycle, you can predict when you’ll receive payments based on those due dates. If one of your clients frequently pays you after the due date, you’ll want to factor that into your projections.

Estimate Your Costs

Most small businesses have both fixed and variable costs . Account for your fixed costs, including rent and utilities. Your variable costs fluctuate based on how much work you’re producing. For a service-based business, variable costs could include printing, postage and travel costs related to business meetings.

The most straightforward method of forecasting depreciation is the Straight-Line Method. For small business accounting , depreciation is used to allocate the cost of a purchased asset over its useful lifetime.

If you use the Straight-Line Method for forecasting depreciation, the depreciation of an asset is recorded evenly across the span of its useful lifetime. The equation used to forecast depreciation is:

(Cost of Asset – Residual Value of Asset) / Estimated Useful Lifetime of Asset

So, let’s say you bought a work vehicle for $10,000. The vehicle has a residual value of $500 and an expected lifetime of five years. Here’s the calculation:

($10,000.00 – $500.00) / 5

= $1900.00 per year or $158.33 per month.

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Planning, Startups, Stories

Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: projected profit and loss.

Continuing with my series here on standard business plan financials, all taken from my Lean Business Planning site, the Profit and Loss, also called Income Statement, is probably the most standard of all financial statements. And the projected profit and loss, or projected income (or pro-forma profit and loss or pro-forma income) is also the most standard of the financial projections in a business plan.

• It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
• It then shows Direct Costs (or COGS, or Unit Costs).
• Then Gross Margin, Sales less Direct Costs.
• Then operating expenses.
• Gross margin less operating expenses is gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps , in the previous section.
• Then it shows depreciation, interest expenses, and then taxes…
• Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.

The following illustration shows a simple Projected Profit and Loss for the bicycle store I’ve been using as an example. This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting . But still this is standard.

A lean business plan will normally include sales, costs of sales, and expenses. To take it from there to a more formal projected Profit and Loss is a matter of collecting forecasts from the lean plan. The sales and costs of sales go at the top, then operating expenses. Calculating net profit is simple math.

Keep your assumptions simple. Remember our principle about planning and accounting. Don’t try to calculate interest based on a complex series of debt instruments; just average your interest over the projected debt. Don’t try to do graduated tax rates; use an average tax percentage for a profitable company.

Notice that the Profit and Loss involves only four of the Six Key Financial Terms . While a Profit and Loss Statement or Projected Profit and Loss affects the Balance Sheet because earnings are part of capital, it includes only sales, costs, expenses, and profit.

Hi, In case of bank financing for machineries and working capital, how can it be broken down in to the expense stream? ( capital + interest)

When you spend on assets is not deductible from income, and is therefore not an expense. What you spent to repay the principle of a loan is not deductible, and therefore not an expense. The interest on a loan is deductible, and is an expense.

Excuse me, may I know if the project profit & loss should plan for the first year only or for year 1-3 in business plan of a new company?

Kattie Wan, I recommend for normal cases the projected profit and loss monthly for the first 12 months, and two years annually after that. There are always special cases, though; every business is different.

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Business Plan Financial Projections Template

Identify financial requirements and objectives, draft projected income statement, detail projected balance sheet, calculate projected cash flow statement, apply appropriate financial ratios analysis.

• 1 Current Ratio
• 2 Gross Profit Margin
• 3 Return on Investment
• 4 Debt-to-Equity Ratio
• 5 Inventory Turnover

Adjust for inflation rate predictions

Consider the impact of business growth on financial projections, check cost assumptions for products and services, investigate potential risks and variables in the financial projection, approval: financial analyst for initial review.

• Draft projected income statement Will be submitted
• Detail projected balance sheet Will be submitted
• Calculate projected cash flow statement Will be submitted
• Apply appropriate financial ratios analysis Will be submitted
• Adjust for inflation rate predictions Will be submitted
• Consider the impact of business growth on financial projections Will be submitted
• Check cost assumptions for products and services Will be submitted
• Investigate potential risks and variables in the financial projection Will be submitted

Incorporate feedback and modify financial projections accordingly

Cross-check with industry standards and competitor analysis, analyse break-even point and profitability metrics, compile final draft of financial projections, approval: ceo review and validation of final draft.

• Incorporate feedback and modify financial projections accordingly Will be submitted
• Cross-check with industry standards and competitor analysis Will be submitted
• Analyse break-even point and profitability metrics Will be submitted
• Compile final draft of financial projections Will be submitted

Send financial projections for external auditing

Conduct scenario analysis for best-case, worst-case, and most likely outcomes, discuss and finalize plan with key stakeholders, approval: board of directors.

• Send financial projections for external auditing Will be submitted
• Conduct scenario analysis for best-case, worst-case, and most likely outcomes Will be submitted
• Discuss and finalize plan with key stakeholders Will be submitted

Implement financial projections into overall business plan

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Home > Financial Projections Template Excel

Financial Projections Template Excel

This free 4 page Excel business plan financial projections template produces annual income statements, balance sheets and cash flow projections for a five year period for any business.

Financial Projections Template Download

What’s included in the financial projection template, 1. income statements.

The first page of the financial projection template shows income statements for the business for 5 years.

2. Balance Sheets

3. Cash Flow Statements

The third page provides the cash flow statements for 5 years.

4. Ratios and Graphs

The final page of the financial projections template contains a selection of useful financial ratios for comparison purposes. In addition it shows revenue, net income, cash balance, and cumulative free cash flow by year in graph form for easy reference.

How to use the Financial Projections Template

If you want to know how to use the financial projections template, then we recommend reading our How to Make Financial Projections post, which explains each step in detail.

More Financial Projections Templates and Calculators

Select a category from the menu to the right or chose one of the templates or calculators below.

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Financial projections are critical to the success of your business plan, particularly if the purpose is to raise finance.  Accordingly we have designed our financial projection for startup template to help you test your business idea and create a five year business plan financial projection.

The financial projection template will help you to carry out your own financial projections and test your business idea. Therefore simply amend the highlighted input elements to suit your purposes, and the financial projection template does the rest.

Alternatively, you can use our online calculator to provide a quick and easy way to test the feasibility of your business idea.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. Michael has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

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Start » startup, business plan financials: 3 statements to include.

The finance section of your business plan is essential to securing investors and determining whether your idea is even viable. Here's what to include.

If your business plan is the blueprint of how to run your company, the financials section is the key to making it happen. The finance section of your business plan is essential to determining whether your idea is even viable in the long term. It’s also necessary to convince investors of this viability and subsequently secure the type and amount of funding you need. Here’s what to include in your business plan financials.

[Read: How to Write a One-Page Business Plan ]

What are business plan financials?

Business plan financials is the section of your business plan that outlines your past, current and projected financial state. This section includes all the numbers and hard data you’ll need to plan for your business’s future, and to make your case to potential investors. You will need to include supporting financial documents and any funding requests in this part of your business plan.

Business plan financials are vital because they allow you to budget for existing or future expenses, as well as forecast your business’s future finances. A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.

Sections to include in your business plan financials

Here are the three statements to include in the finance section of your business plan:

Profit and loss statement

A profit and loss statement , also known as an income statement, identifies your business’s revenue (profit) and expenses (loss). This document describes your company’s overall financial health in a given time period. While profit and loss statements are typically prepared quarterly, you will need to do so at least annually before filing your business tax return with the IRS.

Common items to include on a profit and loss statement :

• Revenue: total sales and refunds, including any money gained from selling property or equipment.
• Expenditures: total expenses.
• Cost of goods sold (COGS): the cost of making products, including materials and time.
• Gross margin: revenue minus COGS.
• Operational expenditures (OPEX): the cost of running your business, including paying employees, rent, equipment and travel expenses.
• Depreciation: any loss of value over time, such as with equipment.
• Earnings before tax (EBT): revenue minus COGS, OPEX, interest, loan payments and depreciation.
• Profit: revenue minus all of your expenses.

Businesses that have not yet started should provide projected income statements in their financials section. Currently operational businesses should include past and present income statements, in addition to any future projections.

[Read: Top Small Business Planning Strategies ]

A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.

Balance sheet

A balance sheet provides a snapshot of your company’s finances, allowing you to keep track of earnings and expenses. It includes what your business owns (assets) versus what it owes (liabilities), as well as how much your business is currently worth (equity).

On the assets side of your balance sheet, you will have three subsections: current assets, fixed assets and other assets. Current assets include cash or its equivalent value, while fixed assets refer to long-term investments like equipment or buildings. Any assets that do not fall within these categories, such as patents and copyrights, can be classified as other assets.

On the liabilities side of your balance sheet, include a total of what your business owes. These can be broken down into two parts: current liabilities (amounts to be paid within a year) and long-term liabilities (amounts due for longer than a year, including mortgages and employee benefits).

Once you’ve calculated your assets and liabilities, you can determine your business’s net worth, also known as equity. This can be calculated by subtracting what you owe from what you own, or assets minus liabilities.

Cash flow statement

A cash flow statement shows the exact amount of money coming into your business (inflow) and going out of it (outflow). Each cost incurred or amount earned should be documented on its own line, and categorized into one of the following three categories: operating activities, investment activities and financing activities. These three categories can all have inflow and outflow activities.

Operating activities involve any ongoing expenses necessary for day-to-day operations; these are likely to make up the majority of your cash flow statement. Investment activities, on the other hand, cover any long-term payments that are needed to start and run your business. Finally, financing activities include the money you’ve used to fund your business venture, including transactions with creditors or funders.

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What are Projected Financial Statements & Why You Need Them?

It’s easy to get caught up in a good business idea and want to dive in head-first, but any businessman worth their salt knows that you can’t just leap into an entrepreneurial venture without a plan. Projected financial statements are your friend when it comes to building out a future for your business, and a monthly accounting arrangement with a trained CPA will bring much-needed expertise to your venture.

What is a Projected Financial Statement?

A projected financial statement is just what it sounds like: an analysis of a company’s decisions and implementations that will offer a realistic picture of what results a strategic plan will have. A full-service accountant can prepare a projected financial statement by examining a combination of the company’s own history and current trends throughout the industry and the broader economy to evaluate the success of proposed initiatives.

Preparing a projected financial statement can be a big lift, which is why it’s important to get an expert in the field to help you. Keep in mind that projected financial statements are living documents and may change significantly over time, which is why it’s important to review your numbers with monthly accounting-especially for SMBs.

A well-researched projected financial statement demonstrates the reliability of your business venture, and reliable business owners have an easier time negotiating to fund with both banks and investors to get a better deal.

Putting together a projected financial statement is invaluable as you develop a strategic plan for your business, and it pays to have an expert help you. Years of experience that can help you project far into the future is just one of the benefits of full-service accounting for SMBs . You need to understand how much money your business will actually need to operate and grow, and where you are most likely to get that money from.

It may be somewhat corny, but when it comes to projected financial statements, the real financial planning is the data analysis you generate along the way. Putting together a projected financial statement will give you a leg up with lenders and start a new strategic business plan outright.

To manage your business profitably, you need the right financial data, advice, and services. Complete Small Business Solutions offers you with the accounting, bookkeeping, tax, business consultation, payroll and other business services you need most. Contact us today to fix an online appointment for a free discussion on accounting and tax strategies.

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Details to be considered while Preparing Projected Financial Statements

Kaushal Soni

Projected P&L Statement

Projected balance sheet, projected financial statements, estimated financial statements, provisional financial statements.

Projected financial statements are mainly used to analyze the financial performance of the business. It is widely used in the field of finance where businesses wish to avail loans from the banks or NBFCs. From projected financial statements, lenders can analyse the creditworthiness, future performance and growth of the business. The meaning of “Projected” here is different from provisional or estimated. Let us understand this in detail.

Line Items to be considered while preparing projected Profit & Loss Accounts and Balance Sheet

The following are the main accounts:

• Sales Revenue
• Cost of goods sold
• Gross Profit
• Sales, General and Administrative expenses
• Depreciation 
• Interest cost
• Tax expenses 

By including all the above main factors, one can derive the Net Profit in Projected Profit & Loss statement.

• Account receivable
• PPE (Property, Plant & Equipment
• Other current assets 
• Long term assets such as investments, deposits etc.
• Trade Payables
• Other current liability 
• Long term debt (Loans, Debentures etc.)
• Share capital
• Retained earnings 

Difference between Projected, Estimated & Provision Financial Statement

Projected P&L and Balance sheet is prepared on the basis of projection i.e. for which period is not started. 

Estimated Balance Sheet is prepared for future Data (for which the period is started but not completed) on the basis of projection i.e. for the period which already started but not completed.

Suppose, for CC limit extension or taking fresh loans,  Bank demands financial statements of current year i.e. still not completed. In such a case, on projection (on the basis of past performance) we provide to bank an estimated financial statements.

Provisional financial statements are unaudited in nature. It is prepared on the basis of actual or past data i.e. for the period which is already completed.

Suppose the balance sheet is prepared for FY 2020-21 as on 31st March 2021, which is not yet finalized, but banks or financial institutions demand for the balance sheet, then we provide them with a provisional balance sheet.

Projected financial statements incorporate current trends and expectations to arrive at a financial picture that management believes it can attain as of a future date. At a minimum, projected financial statements will show a summary-level income statement and balance sheet.

Unlike a past balance sheet that shows a business’s actual, historical financial positions, a projected balance sheet communicates expected changes in future asset investments, outstanding liabilities and equity financing.

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How to Write a Business Plan Executive Summary (Example Included!)

How do you turn your brilliant business idea into a reality? You've done your homework and know that to get investors or partners, you need a business plan . But more than that, you want to really stand out and make a strong first impression—and that's where the business plan executive summary steps in.

This key section gives a quick snapshot of your entire business strategy, and is designed to catch the interest of potential investors, stakeholders, or partners. It can be the difference between landing that dream deal or getting lost in the slush pile.

So, what's better than a business plan executive summary example to point you in the right direction? Below, you'll find a great one—plus tips on what to include, what to avoid, and how to craft yours.

What is a business plan executive summary?

A business plan executive summary is a condensed overview of the key elements of your business plan. It introduces your business, what you offer (products or services), your target market, and what sets you apart from the competition. It also outlines your financial projections and funding needs (if applicable) and gives a clear picture of your company description and vision.

Your business plan executive summary could be decisive in several situations:

• Pitching to investors: Investors often make preliminary decisions based on the executive summary. A well-crafted summary can get you a meeting and a chance to present your full business plan.
• Summarizing for stakeholders: Stakeholders need to quickly understand your business's direction and key strategies. An executive summary gives them a concise update.
• Business competitions: In many business plan competitions, judges rely on the executive summary to decide which plans move to the next round.

Now that you understand the importance of an executive summary in a business plan, let’s see the key components that make up a winning one.

What should an executive summary include in a business plan

Crafting an effective executive summary means transforming the most critical elements of your business plan into a clear and compelling story. It's typically positioned at the beginning of the document but is written last to ensure it accurately reflects the entire plan.

Here are the key parts of an executive summary in a business plan:

Mission statement

Your mission statement is the heart of your business; it can grab your audience's attention and clarify your business’s core values and objectives. Briefly describe your company’s purpose and what you aim to achieve.

Company history and management team

Provide a brief overview of your business’s history, noting key milestones and achievements. Introduce your management team, highlighting their experience and expertise. This section helps build credibility and shows that you have a capable team behind the business.

Products or services

Describe the products or services your business offers, focusing on what makes them unique and how they meet market needs. This part should clearly explain the value your offerings provide.

Target market

Define your target customers, including their demographics, needs, and pain points. Highlight the demand for your products or services and how your business meets this demand. Assess your main competitors, identifying their strengths, weaknesses, and market share.

Competitive edge

Identify what sets your business apart from the competition. This could be unique technology, excellent customer service, a strong brand, patents, or trademarks—anything that really gives you an edge. Emphasize these strengths to show why your business will thrive in the market.

Financial projections

Give a high-level overview of your financial projections, covering revenue, profit margins, and growth expectations. This section should reassure readers about your business’s financial viability and potential for success. Do not forget to include the amount of funding you're seeking and how you'll use it to achieve your goals.

Speaking of funding, you can build your dream business with the help of a high-paying job—browse open jobs on The Muse »

How to write a business plan executive summary: Dos and Don'ts

So, how do you write an executive summary for a business plan? Here's what you should do—and what you should avoid.

• Hook them early: Start with a captivating introduction that grabs the reader's attention. This could be a strong opening statement or an impactful statistic that highlights your most compelling value proposition.
• Write with clarity: Keep your language clear and straightforward. Using jargon or technical terms could confuse your audience.
• Tell a story : People are naturally drawn to stories. Try to frame your business plan executive summary as a narrative that includes challenges and successes.
• Focus on impact: Prioritize the most important information. Remember, it's a summary, not the full story.
• Quantify your success: Use data and metrics whenever you can to back up your claims about market size, growth potential, and financial projections.
• Proofread like a pro: Typos and grammatical errors can leave a negative impression. Double (or triple) check your work before sending it out. Don’t just use spelling and grammar check—actually re-read it to catch any mistakes.
• Showcase your passion: That should be the easy part. Just let your enthusiasm for your business and its mission shine through!
• Bury the lead: Don't wait until the end to share your most important information. Start strong and capture their interest right away.
• Be too vague: Instead, be specific and provide concrete details. Vague statements don’t add value or clarity, so they don't belong in your business executive summary.
• Ignore your audience: Tailor your summary to the needs and interests of your audience. Consider what they need to know and what will capture their interest.
• Overpromise and underdeliver: Be realistic about your projections and timelines. Setting unrealistic expectations can damage your credibility.
• Get bogged down in details: Save the nitty-gritty details for your full business plan. Focus on the key highlights in your executive summary.
• Forget the call to action: Tell your readers what you want them to do next. Do you want them to invest? Partner with you? Clearly outline your desired outcome.
• Write in a vacuum: Get feedback from trusted advisors or mentors before finalizing your summary. Fresh eyes can help spot areas for improvement.

Business plan executive summary example

Wondering how these tips look in action? Here's the business plan summary example you've been looking for.

This one is for a fictitious company—let's call it Econnovate—specializing in renewable energy solutions. Use it as a guide to craft your own business plan executive summary.

Mission and vision statements

Econnovate is revolutionizing the energy landscape with innovative, sustainable solutions that empower businesses and communities to embrace a cleaner future. Our mission is to use the power of renewable energy sources to provide innovative, affordable, and sustainable energy solutions to reduce our reliance on fossil fuels and create a more environmentally conscious world.

Founded in 2021, Econnovate is a team of passionate engineers and environmental enthusiasts dedicated to developing cutting-edge renewable energy technologies. Our team boasts over 50 years of combined industry experience, including experts in technology, marketing, and operations. Headquartered in Denver, CO, we operate with a global mindset, serving clients across diverse industries and geographies.

Our products

Econnovate's flagship product, SolarMax, is a cutting-edge solar panel system that offers 20% more efficiency than conventional panels. Additionally, we provide EcoBattery, a state-of-the-art energy storage solution that maximizes the utility of our solar panels, ensuring energy availability even during non-sunny periods. Our products are designed to be both cost-effective and easy to install, making sustainable energy accessible to a wider audience.

The global renewable energy market is expected to grow at a CAGR of 7.8% over the next decade. Our target market includes environmentally conscious homeowners and businesses seeking sustainable energy solutions. With increasing regulatory support and growing environmental awareness, the demand for our products is poised for substantial growth.

Econnovate’s proprietary solar technology not only increases efficiency but also reduces costs, giving us a significant edge over competitors. We not only provide renewable energy solutions but also adhere to sustainable practices in our own operations. Additionally, our exceptional customer service and strong brand reputation further differentiate us in the marketplace. We also offer comprehensive warranties and maintenance services, ensuring long-term customer satisfaction and loyalty.

We project a 30% annual revenue growth over the next five years, with profitability expected to be achieved by year three. Our robust financial model is based on conservative estimates and thorough market analysis. By year five, we anticipate generating $50 million in annual revenue, with a healthy profit margin of 15%.

We are seeking $2 million in funding to scale our manufacturing capabilities and expand our market reach. This investment will enable Econnovate to double production capacity and increase market share by 15% within two years. The funds will be allocated to enhancing our production facilities, boosting our marketing plan, and expanding our sales team.

1. What is an executive summary in a business plan?

It's a concise summary of the key points of a business plan, highlighting the business’s mission, products or services, market, competitive advantages, financial projections, and funding needs. The goal is to give a quick overview that captures the reader’s interest and encourages them to read the full plan.

2. How long should an executive summary be?

An executive summary is typically one to two pages long. It should provide a concise overview without overwhelming the reader. Focus on the most important aspects of your business plan, making sure each point is clear and impactful.

3. Can I use a template to write an executive summary?

Yes! Templates offer an effective structure and help ensure you cover all essential elements. But don't just fill in the blanks. Tailor the template to fit your business and make it your own. (Feel free to use our example as a guide.)

4. Should an executive summary be written in first person or third person?

An executive summary is typically written in the third person to maintain a professional tone. However, if your business plan is for internal use or a more personal presentation, using the first person can be appropriate. The key is to keep your writing clear and professional at all times.

5. How do I make my executive summary stand out?

To make your executive summary stand out, focus on being clear and compelling. Start with a strong opening statement that grabs attention. Use visual elements like bullet points, headings, and charts to make it easy to read. Highlight your unique selling points and ensure your summary is free of complex jargon and technical language.

Remember, your executive summary is often the first impression of your business, so make it count!

How to Write an Investment Proposal [Template + Examples]

Published: June 28, 2024

As a writer, I’m extremely familiar with the concept of proposals. We write these sorts of proposals to convert clients, persuade buyers, and grow our business in the short term. However, investment proposals are a bit different — these proposals are written with a unique purpose for a specific audience and with some high stakes attached.

An investment proposal is the key to long-term business growth for many businesses, so it’s important to get it right.

In this article, I’ll define investment proposals, compare them to the business proposal, and then break down the components. I’ll provide a template, look at investment proposal examples, and even hear some tips for writing from a professional.

Table of Contents

What is an Investment Proposal?

Investment proposal vs. business proposal, 10 components of an investment proposal, how to write an investment proposal [+template], investment proposal examples [+tips].

An investment proposal is a document outlining the plan for a business. You use it to attract or convert investors to fund your organization. It covers the strategy of your business, the market, and financial projections, making it an essential document for conversion — empowering them to invest.

Don't forget to share this post!

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Politics latest: 'Emergency' prisons plan revealed - as government urged to decriminalise drug possession

The new government is expanding the early release scheme to ease pressure on prisons amid a lack of spaces - amid calls to go further and decriminalise drug posession.

Sunday 14 July 2024 07:15, UK

• General Election 2024
• Justice secretary announces 'emergency measures' to tackle prison population 'crisis'
• Listen to Electoral Dysfunction wherever you get your podcasts
• New data shows just 708 places left in adult male prison estate last week
• Decriminalise drug possession, government urged
• Starmer hits out at 'gross irresponsibility' of previous government
• Beth Rigby: A whirlwind of international diplomacy for the new PM - but it will only get harder from here
• Live reporting by Jennifer Scott and (earlier)  Ben Bloch

We are signing off now after a big week in Westminster that saw Labour making its first moves as the new government, and the Conservatives trying to work out what their future in opposition looks like.

But don't worry, we will be back on Sunday morning to cover all the political news from the weekend and bring you the latest with Trevor Phillips. 

See you then!

Friday marks the end of the first full week for hundreds of new MPs who came to Westminster after the general election.

But for some of the newbies, there was an even bigger task coming their way - being promoted to ministers.

Our political reporter Alix Culbertson takes at look at the new Labour politicians who have already found themselves on Sir Keir Starmer's frontbench.

Jess Phillips says there are "still things that I worry about" after the government confirmed it would be letting prisoners out of jail early to help with overcrowding. 

The Labour MP and now minister in the Home Office tells Sky News' Electoral Dysfunction podcast that "by no means is any of this perfect" and the situation was a "terrible, terrible thing". 

She adds: "It's still not something that you would ever want to be doing. And there are still things that I worry about."

But Ms Phillips defends the decision too, especially around the exclusion of domestic abusers and stalkers from the policy, saying it is "a shift from what it was... when the Tories were doing it".

She says: "You do what you can in the initial hours that you have to do it, and that isn't the end.

"We will now work on exactly how to make sure that as many possible safeguards can be put in place for potential victims whose perpetrators are being released."

The full episode of Electoral Dysfunction will be released here later this evening, so keep an eye on your feeds.

The victims' commissioner for England and Wales has welcomed the government's decision to exclude domestic abusers and stalkers from its new early release scheme for prisoners. 

Baroness Newlove called the move a "welcome and necessary step, reflecting the concerns raised by victims and those who advocate for them".

In a statement, she said there needs to be "clear communication with victims" during the process to ensure the government has their trust, including informing them if release dates are brought forward and allowing them to request protection measures. 

She demanded the probation service is "properly resourced to effectively manage licensing conditions and exclusion zones, which are vital for public safety and victim reassurance".

Baroness Newlove added: "Public safety must remain the top priority as these changes are implemented. 

"We must acknowledge these exclusions have limitations and cannot address every potential risk."

The chief inspector of prisons is warning the move by the government to tackle overcrowding in jails will "inevitably lead to the early release of some risky offenders". 

In a statement, Charlie Taylor welcomed the decision by Justice Secretary Shabana Mahmood to release prisoners who had completed 40% of their sentences to free up space, saying the "recognition of the seriousness of the situation, and swift action to manage the prison populations to relieve the immediate strain many jails are under" was positive. 

However, he added: "This latest measure will inevitably lead to the early release of some risky offenders, and will add to the workload of already stretched prison OMUs (offender management units) and probation services.

"How these men are prepared for release and how prisons and probation are supported in managing them will be vital."

Mr Taylor said his organisation will be "watching this very closely - as well as any plans that are developed once the immediate pressure is relieved that seek to make prisons places of genuine purpose, help people to break the cycle of reoffending and protect the public from future harm".

Former home secretary and likely Conservative leadership contender Suella Braverman has blasted the government in a somewhat odd way - namely for "picking up Tory ideas".

As we have just reported, Justice Secretary Shabana Mahmood has announced plans to release prisoners who have served 40% of their sentences to help alleviate overcrowding in jails, subject to some exemptions. 

A similar plan was said to have been proposed by the now former justice secretary Alex Chalk last year, but was understood to have been blocked by Number 10 over fears of a backbench rebellion from Tory MPs. 

Tweeting after the government announcement was made, Ms Braverman said: "I opposed this, both inside & outside government.

"With 40 MPs, I tabled amendments to the Sentencing Bill to stop the early release of criminals and put public safety first.

"We managed to stop the government doing it."

She added: "Labour is picking up Tory ideas and putting the public at risk."

Ms Braverman also claimed "everyone and his mother should run to be leader" of her party when the contest kicks off. 

But she said all contenders have "got to start taking responsibility for what we did, and for the things we shamefully left undone - such as not building enough prisons".

The justice secretary has announced that the government will conduct a review into how the "crisis" in prisons was "allowed to happen".

Shabana Mahmood explained: "It will look at how and why necessary decisions were not taken at critical moments. And the lessons that must be learned by future governments, from the failures of the last."

She added: "The legacy of those who last occupied 10 Downing Street is prisons in crisis, moments from catastrophic disaster.

"Our legacy will be different.

"A prisons system brought under control. A probation service that keeps the public safe. Enough prison places to meet our needs. And prisons that break the cycle of reoffending - and create better citizens, not better criminals."

The justice secretary has set out what would happen if the government does not implement these "emergency measures" to reduce the prison population.

Shabana Mahmood said: "Soon, the courts would grind to a halt, unable to hold trials.

"The police would have to stop carrying out arrests. With officers unable to act, criminals could do whatever they want, without consequence.

"We could see looters running amok, smashing in windows, robbing shops and setting neighbourhoods alight.

"In short, if we fail to act now, we face the collapse of the criminal justice system. And a total breakdown of law and order."

She declared this "the legacy of the last Conservative government" and the consequences of their "failure" to address the issue.

The new justice secretary has placed the blame for the "crisis" in prisons firmly at the door of the previous government.

Shabana Mahmood said of the Conservative Party: "Time and again, they ducked the difficult decisions that could have addressed this challenge.

"Instead, they kept the public in the dark about the state they had left this country in. They were too weak to heed the warning signs that were flashing. They chose instead to put the country at risk."

There have been reports that her predecessor, Alex Chalk, tried to implement the emergency measures she is announcing today in order to ease the crisis, but former PM Rishi Sunak blocked it.

"But, instead of taking responsibility, she said, "Rishi Sunak called an election. He tried to hoodwink the electorate. And he was punished at the ballot box."

Echoing language used to describe the people who appeased the Nazis in the 1930s, Ms Mahmood said: "Those responsible – Sunak and his gang in No 10 – should go down in history as the guilty men.

"The guilty men who put their political careers ahead of the safety and security of our country. It was the most disgraceful dereliction of duty I have ever known."

By Mollie Malone, news correspondent

These measures from the justice secretary will be seen among the prison and probation sector as a proper attempt to reset and alleviate the immediate prisons crisis (see previous post).

But it doesn’t solve everything. Far from it.

The justice secretary admits today that the core announcement to lower the automatic release point from 50% to 40% is in itself an emergency measure.

At the moment, we are lurching from one emergency measure to the next.

There are safeguards in place that didn't exist under the previous controversial scheme launched by the Conservative government in October - allowing eligible offenders to be released up to 70 days before the end of their sentence.

Those safeguards might help offset some fears expressed by victims groups.

But it certainly doesn't offer a long term solution.

"Although it will be a law, it still does not resolve how we use prison in the long term," said one prison source.

"If we carry on with court backlogs and send more people to prison, we will be in the same position all over again," they said.

The government are committing to building more prison places.

But their prisons minister James Timpson fundamentally disagrees with that approach and thinks a third of people that are in prison shouldn't be there

There are lots of questions yet to answer about what meaningful reform looks like.

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