Financial Forecasting Explained: A Simple Guide to Financial Forecast

We know early on that it’s impossible to predict the future, no matter how many people (like potential investors) seem to be pressing us to do so. But isolating our assumptions as the only variables that financial forecasting for startups drive our financial projections, allows us to focus the conversation on just a few key areas. A prime area in which real-time steering can be highly effective is financial planning and analysis.

Financial projections typically include projections of income, expenses, cash flow, and balance sheet items. Startups create financial projections in the form of a “Pro Forma Income Statement” — which simply means a financial forecast. Early-stage startups are still building their financial models with assumptions, forecasting everything from sales revenue to marketing costs to a basic cash flow projection. Budgeting and forecasting software like PlanGuru, Prophix, and Adaptive Insights enable startups to develop and manage budgets, create financial forecasts, and analyze financial performance. These tools help startups make data-driven decisions based on projected revenues, expenses, and cash flows.

Financial modeling and projections vs. financial forecasting

You can create different types of financial projections for startups, including short-term, medium-term, and long-term projections. While short-term projections tend to be focused on the first year of your business, a long-term projection may cover three to five years. Financial forecasting can involve creating three pro forma financial statements—a pro forma income statement, a pro forma balance sheet, and a pro forma cash flow statement. Pro forma statements are financial documents that provide insights into how various scenarios might unfold under assumed conditions. Financial forecasting helps startups anticipate future financial performance, set realistic goals, and make better business decisions based on projected revenues, expenses, and cash flows. It also helps them identify potential financial problems and develop strategies to address those issues before they become critical.

You would use the research process outlined in this article to create your projections. When forecasting your startup costs, your specific location, concept, size and scale of business will make a dramatic difference in what it costs to launch your business. I don’t recommend that you just take the first “average startup cost” number that you find in a Google search because your specific situation matters. You will need to do your own research for each startup cost, but I have actually found it helpful to use ChatGPT to ask for a list of common startup expenses for business XYZ so that I don’t forget any common expenses. If you have a stable, existing business, then it is possible that the best approach to creating sales projections is simply to take last year’s numbers and apply a growth rate based on your expectations of growth. Since that approach is quite straightforward I am not going to spend any time on that today.

Income forecasting

The financial statements themselves are also interrelated (see image below). When a model includes the possibility to input loans, it needs to account for the loan repayment and interest payments, as these have an impact on cash flows. Below you can find a simple example of a €100,000 loan with a duration of 10 years and an interest rate of 10%. If you want to check whether your personnel forecast is realistic, you could divide your projected revenues in a given year by the number of employees (‘FTEs’ or full time equivalents) for that year.

A three-statement model also enables you to calculate your financial ratios, such as liquidity, solvency, and profitability, that indicate your financial health and sustainability. A three-statement model is a comprehensive and consistent way of presenting your financial forecast to investors and stakeholders. There are many opinions on whether a startup needs to create a forecasted balance sheet and how many years a set of projections should be.

How do you write a financial projection for a startup?

Depending on the desired outcomes and the corresponding complexity of your financial model you can decide whether or not to add additional schemes such as working capital, depreciation and tax carryforwards. You can look for a financial model template including these elements on the web. If you do not want to worry about these elements at all, our financial planning software for startups does all the calculations for you. If you want to include tax carryforwards in your financial model, you likely need a separate tax scheme as part of your model. As an entrepreneur it is likely that you have negative results in the first couple of years of operations. If you have negative results this basically means you have expenses that exceed revenues (more costs than income) leading to an operating loss.

• In order to forecast our business on a go-forward basis, we’ll use our Assumptions tab to project what our business might do throughout the year.
• An article that outlines how to start a dispensary, roughly how much it could cost to start, and how profitable the dispensary might be.
• As they strive for profit and fight to ensure they have the capital they need to cover their expenses, businesses need a roadmap for navigating the future.
• For internal financial forecasting, you should develop pro forma statements projecting six months to one year into the future.
• The quality of your financial forecasts impacts the decisions you make, so it may be worth investing in tools that give you better insights.
• You can use financial forecasting to predict the performance of several areas of business, ranging from sales and revenue to cash flow and income generation.

Growth-focused organizations tackle these challenges by establishing a single version of financial truth. One method is consolidating and migrating multiple ERP systems to a next-generation cloud ERP, providing a unified business architecture for convenient access to the right data anywhere. The inclusion of a cloud-based analytics and planning solution further enhances the advantages of this exercise, yielding real-time insights. QuickBooks makes it easy to monitor relevant sales data and manage cash flow in one place. Investors and lenders know that your startup’s financial analysis isn’t set in stone, but you need to ensure it’s realistic. Lending institutions and investors have seen too many overly optimistic entrepreneurs about their businesses.

Cost of goods sold (COGS)

The financial forecasting process includes the analysis of past business performance, current business trends, and other relevant factors. In general, any investment decision needs an accurate assessment of its financial consequences (revenues and costs). They will prepare (if not the team itself e.g. the marketing team for digital ads budget) estimates for the considered project. This standalone budget is then included in the business’ overall financial forecasts.

Financial projections are predictions of a company’s future performance using historical data and anticipated (or planned) changes and events, as well as assumptions about changes in market conditions. The most fundamental form of a financial model is the Three Statement Model, which includes an interconnected balance sheet, income statement and cash flow statement. Some of the other resources listed here are multifaceted accounting solutions that happen to cover financial forecasting — not PlanGuru. This application is primarily dedicated to creating financial projections.