Financial Projections

Financial projections: predicting the future

Financial projections (”pro-forma financials” or “pro-formas”) are a representation of what you think your company’s financial statements will look like in the future.  Creating these documents is often an arduous task for the entrepreneur because it requires him/her to make many assumptions and to build a model based on those assumptions and industry research.  Further, these projections often change, because the assumptions upon which they are based change.  Thus, pro-formas are living documents that will require the entrepreneur to keep them up to date on a regular basis.

Why would anyone go through such trouble if these are just estimates anyway?  Because investors demand it.  You will not get funding unless you produce and maintain financial projections.  More importantly, you must produce financial projections that you can explain and that are based on observable facts.  It’s easy to say you’re going to make $13M in revenue in year 5… but HOW are you going to get there?  What is the basis for this?  You have to be able to explain it all, which leads us to an important point.  None of the documents in your investor information package are stand-alone.  You will find that changes to one often require changes to all.

Ok, so you know what pro-formas are now, and you know why you need them… now how do you create them?  Well, it depends.  We will walk through some of the basics here, but there can be much more to it.  Keep in mind also that individual investors may want to see your financials in different formats or ask for different types of projections.  We will go over the most common here: income statement, balance sheet, and cash flow statement.