How to Build Realistic Financial Projections for Your Business Plan
Updated: 7 days ago
Financial projections turn your business plan into numbers: what you expect to sell, what it will cost and when cash will come in and go out. Lenders, funding programs and partners read them closely, but they matter most to you, because they show how much money you need, when cash may run short and whether the business can pay you.
Realistic projections do not predict the future perfectly. They are built from assumptions you can explain and tested against what happens if those assumptions are wrong.
Start with your assumptions, not your totals
Every number should trace back to an assumption you can explain. Keep your assumptions on a separate spreadsheet tab so readers can follow your logic and you can change one input without rebuilding everything.
Sales drivers: expected customers, prices, how often customers buy and how quickly sales build after you open.
Costs: supplier prices, rent, wages, insurance, software and other recurring costs.
Timing: when customers will pay you and when you must pay suppliers, staff and lenders.
Evidence: where each figure comes from, such as a written quote, pre-sales, a pilot, your own sales history or industry data.
Label estimates as estimates. An estimate you plan to test is more credible than a precise-looking number with nothing behind it.
Build your sales forecast from the bottom up
A top-down forecast assumes you will win a share of a large market. A bottom-up forecast starts with what your business can actually deliver and sell, so it is easier to defend.
Work out your capacity: how many customers, jobs or units you can serve each month with your space, equipment and people.
Multiply that capacity by your average price to see what a fully booked month is worth.
Apply a realistic share of that capacity, starting low and building over your first months.
Adjust for seasonality, holidays and planned closures.
Compare the result with what customers, competitors and industry data tell you.
For example, suppose a one-person mobile bike repair service can complete five jobs a day, works 20 days a month in season and charges an average of $80 per job. A fully booked month is worth about $8,000. If you expect to be booked about half the time while you build a customer base, start closer to $4,000 a month, and in Edmonton, lower the forecast for the winter months.
Estimate your costs completely
Missing costs make projections look better than they are. Group costs so nothing is forgotten:
Direct costs that rise with sales, such as materials, inventory, packaging, subcontractors and payment processing fees.
Fixed operating costs such as rent, utilities, insurance, software, phone and internet, professional fees and business licences.
People costs: wages, plus the employer's share of Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, which employers remit to the CRA along with employees' deductions. Also allow for vacation and holiday pay under provincial employment standards, and for workers' compensation premiums where coverage is required.
Your own pay: whether you take a salary or draw money from the business, include what you need to live on.
One-time startup costs such as equipment, deposits, leasehold improvements, opening inventory, your website and branding.
A contingency for costs you have not identified yet.
Use written quotes wherever you can. They are stronger evidence than figures from memory.
Turn the numbers into three core statements
Business plans usually present projections as three linked statements:
Projected income statement (profit and loss): revenue, direct costs, gross margin, operating expenses and net profit or loss for each period.
Cash flow forecast: opening cash, cash in, cash out and closing cash for each month, which shows whether you can pay your bills on time.
Projected balance sheet: what the business will own and owe, and the owner's equity, at the end of each year.
A common format is monthly figures for the first 12 months, then quarterly or annual figures for the following year or two. Ask your lender or funding program what it expects.
Profit and cash are not the same. A sale on 30-day terms counts as revenue when you invoice, but the cash arrives later. Loan principal repayments and equipment purchases reduce your bank balance without appearing in full as expenses that month. If you are registered for GST/HST, the tax you collect is not revenue: the CRA's guidance is that you hold it in trust until you send it to the CRA, so track it separately.
Test your projections before anyone else does
Once your first version is built, try to break it:
Run scenarios. Next to your expected case, build a cautious one with slower sales, higher costs and later payments. If the business only works in the best case, rethink the plan before committing money.
Find your break-even point, the sales level at which you cover all costs, and how long it takes to get there.
Check your lowest cash point. Your lowest monthly bank balance shows how much funding or reserve you need. BDC notes that many entrepreneurs like to have enough cash available to cover about 90 days of operations.
Compare with industry data. Innovation, Science and Economic Development Canada's Canadian Industry Statistics site publishes free financial performance data by industry, with reports by province. It includes average revenue, cost of sales, wages and benefits, and net profit for businesses with annual revenues of $30,000 to $5 million (at the time of writing). If your margins look far better than your industry's, be ready to explain why.
Check consistency. Staff numbers, prices, opening dates and marketing budgets in your projections should match the rest of your plan.
Keep your projections useful after launch
Projections are not just for a loan application. Once you open, compare actual results with your forecast every month:
Note where you were off and why.
Update your assumptions and roll the cash flow forecast forward so you can always see the next 12 months.
Act early if cash is tighter than planned: follow up on unpaid invoices sooner, adjust spending or speak with your lender.
For a starting point, BDC offers a free financial plan template in Excel (you fill in a short form to get it). Whatever tool you use, keep it simple enough to update yourself.
How First Global Citizen can help
We help founders build financial projections as part of a business plan or feasibility study. We work through your assumptions with you, build the sales forecast, cost estimates, cash flow forecast and projected statements in a spreadsheet you can keep updating, and check that the numbers match the rest of your plan.
Each engagement has a fixed fee set out in a written proposal before any work begins. When you need tax, accounting or legal advice, we coordinate with independent licensed professionals. Decisions on loans and funding rest with the lender or program. To talk about your plan, book a free consultation.
This article is general information only. It is not legal, tax, accounting or financial advice. Fees and requirements can change, so confirm current details with the relevant government agency or registry. For advice about your situation, consult a qualified professional.
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