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?

Here are five scenarios in which projected financial statements might be useful:

Securing business loans. Lenders often require projected financial statements to assess a company’s ability to repay loans. Accurate projections of revenue, expenses, and cash flows help demonstrate financial stability and creditworthiness to banks.
Attracting investors. Startups and growing businesses use projected financial statements to showcase potential profitability and growth to attract venture capital or angel investors. Detailed forecasts of revenue, profits, and return on investment help build investor confidence.
Strategic planning and budgeting. Management relies on projected income statements, balance sheets, and cash flow statements to plan for expansion, hiring, or capital expenditures. These projections help align resources with long-term strategic goals and set realistic budgets.
Mergers and acquisitions. During negotiations for mergers or acquisitions, projected financial statements provide insight into the future financial performance of the target company. Accurate projections help determine fair valuation and inform decision-making for both buyers and sellers.
Managing cash flow and debt. Companies use projected cash flow statements to anticipate periods of cash shortages or surpluses. This helps in making informed decisions about managing debt, timing payments, or investing excess cash effectively.

In each of these scenarios, projected financial statements serve as valuable tools for planning, decision-making, and demonstrating financial viability to stakeholders.

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