Financial projections help you anticipate revenue, expenses, and cash flow so you can make more informed business decisions. Microsoft Excel offers some of the best tools for building forecasts. Here’s how to create your projections and adjust them as market conditions change.
Gather your financial documents
You’ll need the following documents to create a financial projection:
- Balance sheet.
- Cost of goods sold (COGS).
- Startup expenses.
- Sales forecast.
- Payroll costs.
- Income statements.
- Operating expenses.
- Cash flow statements.
- Break-even analysis.
- Financial ratios.
- Amortization and depreciation for your business.
Use Excel’s Forecast Sheet tool
Excel's Forecast Sheet tool will analyze any historical financial data and create a forecast based on those trends. For instance, you can pull up your net revenue for the previous years and instantly generate a forecast. Here are the steps you’ll take:
- Open an Excel sheet with your historical sales data.
- Select data in the two columns with the date and net revenue data.
- Click on the Data tab and pick "Forecast Sheet."
- Enter the date your forecast will end and click "Create."
- Title and save your financial projection.
You can also use this method to forecast cash flow and operating profit. Developing a financial projection in Excel from scratch can be time-consuming, and errors can lead to inaccurate results. Learn more by viewing Microsoft's tutorial on creating a forecast in Excel.
It’s also a good idea to review your financial forecasts quarterly to incorporate new data and market insights.
Key financial metrics investors care about
If you plan to look for funding, there are specific metrics investors and lenders focus on that show how profitable your business is, such as:
- Net income: This is your company’s bottom line after you subtract all expenses, like rent, payroll, taxes, and supplies, from the total revenue. It shows whether your business is making a profit.
- EBIT (earnings before interest and taxes): Also referred to as operating profit, this shows how much money your business earns from its regular operations before you account for interest or taxes. It’s a good way to measure performance over time.
- EBITDA (earnings before interest, taxes, depreciation, and amortization): This metric makes it easier to compare your performance to other companies, particularly in industries with large equipment or startup costs.
- Operating margin: This measures how much profit you make from each sale. A higher margin means your business is running efficiently and keeping costs under control.
- Return on equity (ROE): This shows how well your business is using investors’ or owners’ money to generate profit. A higher ROE means you’re getting more return for every dollar invested.
- Interest coverage ratio: This tells investors how easily your business can pay the interest on its debts. The higher the ratio, the more comfortably you can handle your loan payments.
Common mistakes in financial projections
Here are some common mistakes to avoid when creating financial projections:
- Overestimating revenue: Overestimating revenue can lead to cash flow problems and cause you to make poor financial decisions.
- Underestimating expenses: Underestimating your costs can cause unnecessary financial issues. Review historical data to create an accurate estimate of your costs and develop a plan for addressing any unexpected bills that may arise.
- Not accounting for revenue variations: If your revenue fluctuates from month to month, it’s important to account for this in your financial projections.
- Ignoring external factors: Scenario analysis can help you account for different factors that could impact your company’s cash flow.
- Relying on low-quality data: Using inaccurate or outdated data will affect the reliability of your financial forecast. Continuously update your data to ensure it’s accurate and relevant.
How to adjust projections based on market conditions
Financial projections are living documents that should evolve over time. Especially since external factors, like inflation, consumer demand, or policy changes, can significantly impact revenue and expenses.
Use Excel’s What-If Analysis or Scenario Manager to create best-case, moderate, and worst-case scenarios. Comparing these projections helps you anticipate risks and plan accordingly. It’s also a good idea to review your financial forecasts quarterly to incorporate new data and market insights.
How to present financial projections to investors
When presenting projections, clarity and credibility matter most. Use clear visuals, charts, and summaries to highlight your assumptions about sales, expenses, and growth. Tie your projections to concrete goals, like expanding operations or hiring staff, and show how funding will support those objectives. You should also be prepared to explain your methods and data sources.
Jessica Elliott also contributed to this article.
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