Financial Projections for a Business Plan, With a Worked Example

Financial projections for a business plan are your best estimate of what the business will sell, spend, earn and hold in cash over the next 3 to 5 years. They’re the part of the plan lenders and investors check hardest, and the part founders dread most.

The good news: the logic is simpler than it looks. Three statements, one break-even figure and a short list of assumptions. Once you see how they link, it clicks. We’ll build a small example from scratch so you can see every number move.

3 or 5 year projections: which do you need?

It depends on who’s reading and what they’re deciding.

3 years suits most bank loans, local grants and small business plans. It’s long enough to show the business settling down after launch, and short enough that the numbers still mean something. Most loans for a small firm run for a similar period.

5 years suits investors and fast-growing businesses. An investor wants to see where the company could be when they might sell their stake. Some visa and grant schemes also want a longer view to judge growth and job creation.

Many lenders also want the first year month by month. The UK’s Start Up Loans scheme, for example, asks for a cash flow forecast covering 12 months. If your annual figures are solid, splitting Year 1 into months is mostly about timing: when you open, when sales ramp up and which months are seasonal.

How far ahead financial projections for a business plan should go

If you’re unsure, do 3 years and make them good. A tight 3-year forecast with sourced assumptions beats a 5-year one where years four and five are guesses with a growth rate on top. If your reader asks for 5, extend it, and say clearly which assumptions drive the later years.

Shorter can be fine too. A one or two-year forecast is often enough for an internal budget or an idea you’re still testing.

The three statements in financial projections for a business plan

Each statement answers a different question. Together they give the full picture.

Income statement (profit and loss)

Does the business make a profit? The income statement starts with revenue, takes away cost of sales to give gross profit, then takes away running costs, depreciation and interest to give profit before tax. Tax comes off last.

It records income and costs when they’re earned or incurred, not when cash changes hands. That’s why you also need a cash flow.

Cash flow statement

Will you run out of money? Profit and cash aren’t the same thing. You can be profitable on paper and still bounce a supplier payment because customers pay in 60 days. The cash flow tracks real money in and out, including loans received, loan repayments and equipment bought.

The number to watch is the lowest cash balance. That’s how much working capital you need, and it’s what keeps a loan officer awake.

Balance sheet

What does the business own and owe? Assets (equipment, stock, cash, money owed by customers) on one side. Liabilities (loans, money owed to suppliers, tax due) and equity (what the owners put in plus profits kept in the business) on the other.

The two sides must be equal. If they’re not, there’s a mistake somewhere. Experienced readers check this first, because it’s the fastest way to tell whether the statements are properly linked.

A worked example: a small grooming salon

Let’s build 3-year financial projections for a business plan from scratch. Our example is a small dog grooming salon in a UK city, run by its owner with one part-time groomer in Year 1. Every figure below is illustrative.

Assumptions

• Start-up: equipment and fit-out of £12,000, paid for with £8,000 of the owner’s money and a £10,000 bank loan. That leaves £6,000 cash on opening day.
• Sales: 1,500 grooms at £45 in Year 1, 1,900 at £47 in Year 2 and 2,200 at £49 in Year 3.
• Cost of sales: shampoos, products and card fees at 10% of revenue.
• Running costs: rent of £9,600 a year, staff (including the owner’s pay) of £30,000 rising to £40,000, and other overheads (insurance, utilities, marketing, software) of £7,200 rising to £8,200.
• Equipment: written off evenly over 5 years, so depreciation is £2,400 a year.
• Loan: £2,000 repaid each year, with interest at 8% on the balance at the start of each year.
• Tax: an assumed 20% of profit, paid in the same year. This is for illustration only; check your own tax position.
• Simplifications: customers pay on the day, suppliers are paid straight away, no VAT and no dividends.

Income statement

£	Year 1	Year 2	Year 3
Revenue	67,500	89,300	107,800
Cost of sales (10%)	(6,750)	(8,930)	(10,780)
Gross profit	60,750	80,370	97,020
Rent	(9,600)	(9,600)	(9,600)
Staff, including owner’s pay	(30,000)	(38,000)	(40,000)
Other overheads	(7,200)	(7,800)	(8,200)
Depreciation	(2,400)	(2,400)	(2,400)
Loan interest	(800)	(640)	(480)
Profit before tax	10,750	21,930	36,340
Tax (assumed 20%)	(2,150)	(4,386)	(7,268)
Net profit	8,600	17,544	29,072

Year 1 is modest: £8,600 net profit after paying the owner a wage. As the salon builds a regular client base, profit rises. Notice that price rises of £2 a year do almost as much work as the extra grooms.

Cash flow

£	Year 1	Year 2	Year 3
Opening cash	6,000	15,000	32,944
Net profit	8,600	17,544	29,072
Add back depreciation	2,400	2,400	2,400
Loan repayment	(2,000)	(2,000)	(2,000)
Closing cash	15,000	32,944	62,416

Here’s the key link. Depreciation is a cost in the income statement, but no cash leaves the business, so it’s added back. The loan repayment is the opposite: cash goes out, but it isn’t a cost, because you’re paying back money you borrowed. Interest, by contrast, is a cost, and it’s already inside net profit.

Balance sheet (end of each year)

£	Year 1	Year 2	Year 3
Equipment (after depreciation)	9,600	7,200	4,800
Cash	15,000	32,944	62,416
Total assets	24,600	40,144	67,216
Bank loan outstanding	8,000	6,000	4,000
Owner’s capital	8,000	8,000	8,000
Retained profit	8,600	26,144	55,216
Total liabilities and equity	24,600	40,144	67,216

Both totals match every year. Check one: at the end of Year 1, the salon owns £9,600 of equipment and £15,000 of cash, total £24,600. It owes the bank £8,000, and the owner’s stake is £8,000 capital plus £8,600 profit kept in the business. £8,000 plus £8,000 plus £8,600 is £24,600. Balanced.

Break-even analysis

Break-even is the level of sales where you neither make nor lose money. It’s one of the first things a lender looks for, because it shows how much can go wrong before you’re in trouble.

The formula: fixed costs divided by the contribution from each sale. Contribution is the price minus the variable cost of that sale.

For our salon in Year 1, fixed costs are rent £9,600, staff £30,000, overheads £7,200, depreciation £2,400 and interest £800, a total of £50,000. Each £45 groom costs £4.50 in products and fees, leaving £40.50. £50,000 divided by £40.50 is about 1,235 grooms a year, or roughly 103 a month.

The plan expects 1,500 grooms, about 125 a month. That gap of 265 grooms (around 18% of planned sales) is the margin of safety. Sales could fall short by almost a fifth before the salon starts losing money. That’s the kind of sentence a lender wants to read.

Run the same sum for later years too. In Year 2, fixed costs rise to £58,440 as the salon takes on more staff time, but each groom now contributes £42.30. Break-even moves to about 1,382 grooms against 1,900 planned, so the margin of safety widens to roughly 27%. Rising costs are fine, as long as the cushion grows with them.

Setting assumptions you can defend

Your projections are only as good as your assumptions. A reader will poke at them, so make each one traceable.

• Sales volume: base it on capacity (hours, chairs, tables, vans) and evidence (footfall, enquiries, pre-orders), not on what you’d like to earn.
• Price: compare with named competitors. Say whether you’re cheaper, the same or premium, and why.
• Costs: use real quotes for rent, equipment and insurance. Use published wage rates for staff.
• Growth: explain what drives it, such as repeat customers, a second staff member or longer opening hours.
• Payment terms: if business customers pay in 30 or 60 days, your cash flow must show that delay.

For local market data, start with official statistics. The Office for National Statistics covers UK population and household spending, and most European countries have a national equivalent.

Best, base and worst case

Investors in particular like to see scenarios. Your base case is the plan above. A worst case might cut sales by 20% and delay the ramp-up; a best case might add a second groomer earlier. Showing all three proves you’ve thought about risk, and tells you how much cash buffer to keep.

What lenders and investors look for in your numbers

Different readers scan the same tables for different things.

A bank wants to see the loan repaid from the business’s own cash, with room to spare. They look at the lowest cash point, the margin of safety, how much you’ve put in yourself and whether costs look complete. In our example, the salon repays £2,000 a year while cash keeps rising, which is reassuring.

An investor looks at growth and margins. How fast does revenue rise, does gross margin hold up as you grow, and when does the business stop needing outside money? They’ll also ask what happens to their stake if you raise more later.

A grant panel or visa assessor often cares about jobs and viability. Make staff numbers easy to find, and show the business can pay its people and its owner without further help.

Whoever it is, they’ll test one or two assumptions in a meeting. Know where every number came from. “The rent is from the landlord’s written quote” is a strong answer. “I think it’s about right” isn’t.

If your business is already trading

Start from your actual accounts. Use last year’s figures as the base, then explain what changes: a new location, more staff, a price rise. Readers trust projections built on a track record far more than ones built from nothing, so show the history alongside the forecast.

Common mistakes in business plan financials

• Statements that don’t link. Typed-in numbers instead of formulas, so a change in one place doesn’t flow through.
• Treating loan repayments as costs. They reduce cash, not profit. Only the interest is a cost.
• Forgetting depreciation. Your equipment wears out. Spread its cost over its useful life.
• Ignoring tax and VAT timing. Tax bills arrive after the year they relate to, and VAT moves cash around each quarter.
• Full capacity from day one. A new business takes months to build up. Show the ramp-up.
• No owner’s pay. If the plan only works when you earn nothing, it doesn’t work.

A checklist for your financial projections

Before anyone else sees your numbers, check them yourself. These eight tests take about twenty minutes and catch most of the errors a loan officer would spot.

Where to find figures you can cite

Your assumptions are stronger with a source next to them. Written quotes from landlords and suppliers are the best evidence for costs. For market size and spending, use your national statistics office, such as the Office for National Statistics in the UK. For prices, a simple table of what three local competitors charge is often more convincing than a national average.

Building your own projections

You can build all of this in a spreadsheet. Set up your assumptions on one tab, then link every statement to them so nothing is typed in twice. GOV.UK’s write a business plan page links to free cash flow templates if you want a starting point.

Or let the Business Plan Generator do the linking. You enter prices, volumes, costs and funding, and it builds the income statement, cash flow, balance sheet and break-even for you, over anything from 1 to 5 years, all for a small one-off fee. Add the Excel model if you want live formulas and best, base and worst case scenarios to test your own assumptions. The pricing page has the details.

You also set the length of the written plan, from 1,500 to 10,000 words, and its structure. If your bank or grant body gives you a required outline, upload it and the plan follows those headings.

For the rest of the plan, our business plan template covers every section, and the guide on how to write a business plan takes you through it step by step. To see projections inside a full plan, read our dog grooming business plan or browse all sample plans.

Financial Projections for a Business Plan FAQs