What are Projected Financial Statements?

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. This information is typically derived from a revenue trend line, as well as expense percentages that are based on the current proportions of expenses to revenues.

Why Do You Need Projected Financial Statements?

There are several reasons why you might need to create projected financial statements. They are as follows:

Fund raising. Investors who are considering purchasing your stock will want to have a better understanding of the future prospects of the business, since this impacts the future value of the shares they plan to purchase.
Debt viability. If you hold substantial amounts of debt, you will want to model the financial condition of the business in future periods, to see if you can make the necessary payments on that debt.
Strategic planning. The management team will want to view the projected future performance of the firm, to see if they need to make any changes to its growth trajectory, perhaps by pivoting into a different market area.

Best Practices for Projected Financial Statements

A better set of projected financial statements will incorporate the following features:

A statement of cash flows
Expense projections that include step costs for major points at which revenues increase or decline
Consideration of the pace at which the business can reasonably grow, based on its prior history
Consideration of the corporate bottleneck operation on the ability to grow
The ability of the business to attract the funding needed in order to accomplish the financial results stated in the plan