Financial projections for a business plan are your estimates of future sales, costs, profit and cash, usually monthly for the first year and yearly for years two and three. To make them, you build a sales forecast from customer numbers and price, subtract the cost of goods and operating expenses to get a projected income statement, turn that into a cash flow forecast that includes loan payments, check it with a simple balance sheet, and work out your break-even point. Every number should trace back to an assumption written on one page.
This guide walks through each step with one made-up business and real arithmetic you can check. Copy the structure into a spreadsheet and swap in your own numbers.
What financial projections for a business plan include
A complete set has six parts:
- Sales forecast: how many units or customers, at what price, each month.
- Cost of goods sold (COGS): what it costs to make or buy what you sell.
- Operating expenses: rent, wages, insurance and the other costs you pay whether you sell or not.
- Projected income statement: revenue minus all costs, giving profit or loss.
- Cash flow forecast: the money actually going in and out of the bank, month by month.
- Balance sheet: what the business owns and owes at a point in time.
Add a break-even analysis and an assumptions page, and you have what most lenders and investors expect to see.
How far out should you go? The U.S. Small Business Administration’s guide to writing a business plan suggests a five-year outlook, with forecasted income statements, balance sheets, cash flow statements and capital expenditure budgets, and quarterly or even monthly projections for the first year. This example shows three years. Ask your lender which period they want before you start.
The financial projections example used here
Example: a made-up coffee shop called Ridgeline Coffee, opening in January. All numbers are for illustration only.
- Open 26 days a month (closed Sundays), 7 a.m. to 6 p.m.
- Average sale (ticket): $7.50 in year one
- Startup money: $42,000 from the owner and a $48,000 bank loan, for $90,000 in total
- Startup spending: $60,000 on equipment and leasehold improvements and $3,000 of opening inventory, leaving $27,000 in the bank on opening day
If you haven’t worked out your own startup budget yet, start with estimating startup costs. The opening cash figure in your projections comes from there.
Step 1: Build the sales forecast from the bottom up
There are two ways to forecast sales. Top-down starts with the size of the market and assumes you’ll win a share of it (“the town spends $10 million a year on coffee; we’ll get 3%”). Bottom-up starts with what one location can actually do: customers per day, times the average sale, times days open.
Use bottom-up. It’s tied to things you can observe and defend, such as foot traffic, seats, staff hours and the prices on your menu. Use the top-down number only as a sanity check that your forecast is a believable slice of the market. Your market analysis supplies the inputs for both.
The formula for Ridgeline Coffee:
Monthly revenue = customers per day × 26 days × $7.50
Sales start slowly and build as word spreads, then level off at 150 customers a day from month 8.
| Month | Customers per day | Transactions per month | Revenue |
|---|---|---|---|
| 1 | 80 | 2,080 | $15,600 |
| 2 | 90 | 2,340 | $17,550 |
| 3 | 100 | 2,600 | $19,500 |
| 4 | 110 | 2,860 | $21,450 |
| 5 | 120 | 3,120 | $23,400 |
| 6 | 130 | 3,380 | $25,350 |
| 7 | 140 | 3,640 | $27,300 |
| 8 | 150 | 3,900 | $29,250 |
| 9 | 150 | 3,900 | $29,250 |
| 10 | 150 | 3,900 | $29,250 |
| 11 | 150 | 3,900 | $29,250 |
| 12 | 150 | 3,900 | $29,250 |
| Year 1 | 39,520 | $296,400 |
Check month 1: 80 × 26 = 2,080 transactions, and 2,080 × $7.50 = $15,600.
Then check capacity. At 150 customers over an 11-hour day, the shop serves about 14 people an hour. One espresso machine and two people behind the counter can plausibly handle that. If your forecast needs more customers than your space, equipment or staff can serve, the forecast is wrong, not the plan.
Step 2: Estimate the cost of goods sold
COGS is what each sale costs you directly: for a coffee shop, beans, milk, cups, lids and the baked goods it buys in. It rises and falls with sales.
The simplest method is a percentage of revenue, worked out from your actual menu costs. Price out your top sellers ingredient by ingredient, then take a weighted average. Ridgeline Coffee assumes COGS of 30% of revenue, which leaves a gross margin of 70%.
Month 1: $15,600 × 30% = $4,680 COGS, so gross profit is $15,600 − $4,680 = $10,920.
If you sell several product lines with different margins (say, drinks and retail bags of beans), forecast each line separately and add them up.
Step 3: List operating expenses
Operating expenses (also called overhead or fixed costs) are the costs you pay every month no matter how busy you are. List each one; don’t use a single round “overhead” number.
| Monthly operating expense | Amount |
|---|---|
| Rent | $3,500 |
| Staff wages, including payroll costs | $7,800 |
| Owner’s salary | $3,000 |
| Utilities | $650 |
| Insurance | $250 |
| Marketing | $600 |
| Software, payment terminal and phone | $200 |
| Repairs and cleaning supplies | $300 |
| Bookkeeping and accounting | $200 |
| Total | $16,500 |
Two more costs sit below operating expenses on the income statement:
- Depreciation: the $60,000 of equipment spread over five years, or $60,000 ÷ 60 months = $1,000 a month. It’s a real cost, but no cash leaves the bank when you record it.
- Interest: the example loan is $48,000 at a made-up 7% a year, repaid at $1,000 of principal a month plus interest on the remaining balance. Month 1 interest is $48,000 × 7% ÷ 12 = $280. It falls each month as the balance shrinks.
Step 4: Put together the projected income statement
The income statement (profit and loss) puts it all together:
Profit = revenue − COGS − operating expenses − depreciation − interest
| Month | Revenue | COGS | Gross profit | Operating expenses | Depreciation | Interest | Profit (loss) |
|---|---|---|---|---|---|---|---|
| 1 | $15,600 | $4,680 | $10,920 | $16,500 | $1,000 | $280 | ($6,860) |
| 2 | $17,550 | $5,265 | $12,285 | $16,500 | $1,000 | $274 | ($5,489) |
| 3 | $19,500 | $5,850 | $13,650 | $16,500 | $1,000 | $268 | ($4,118) |
| 4 | $21,450 | $6,435 | $15,015 | $16,500 | $1,000 | $263 | ($2,748) |
| 5 | $23,400 | $7,020 | $16,380 | $16,500 | $1,000 | $257 | ($1,377) |
| 6 | $25,350 | $7,605 | $17,745 | $16,500 | $1,000 | $251 | ($6) |
| 7 | $27,300 | $8,190 | $19,110 | $16,500 | $1,000 | $245 | $1,365 |
| 8 | $29,250 | $8,775 | $20,475 | $16,500 | $1,000 | $239 | $2,736 |
| 9 | $29,250 | $8,775 | $20,475 | $16,500 | $1,000 | $233 | $2,742 |
| 10 | $29,250 | $8,775 | $20,475 | $16,500 | $1,000 | $228 | $2,747 |
| 11 | $29,250 | $8,775 | $20,475 | $16,500 | $1,000 | $222 | $2,753 |
| 12 | $29,250 | $8,775 | $20,475 | $16,500 | $1,000 | $216 | $2,759 |
| Year 1 | $296,400 | $88,920 | $207,480 | $198,000 | $12,000 | $2,976 | ($5,496) |
Check month 1: $10,920 − $16,500 − $1,000 − $280 = −$6,860.
Ridgeline Coffee loses money for six months and ends the first year $5,496 in the red. That’s normal for a new location, and an honest first year is more convincing than one that shows a profit from week one.
Three-year projected income statement
For years two and three, yearly figures are enough. The example assumes 170 customers a day at $7.75 in year two, 185 a day at $8.00 in year three, and operating expenses rising 4% a year.
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Customers per day | 80 to 150 | 170 | 185 |
| Average sale | $7.50 | $7.75 | $8.00 |
| Revenue | $296,400 | $411,060 | $461,760 |
| COGS (30%) | $88,920 | $123,318 | $138,528 |
| Gross profit | $207,480 | $287,742 | $323,232 |
| Operating expenses | $198,000 | $205,920 | $214,157 |
| Depreciation | $12,000 | $12,000 | $12,000 |
| Interest | $2,976 | $2,136 | $1,296 |
| Profit (loss) before income tax | ($5,496) | $67,686 | $95,779 |
Check year two revenue: 170 × 312 days × $7.75 = $411,060. Year three: 185 × 312 × $8.00 = $461,760.
The jump from year one to year two is large, and a lender will ask about it. Your assumptions page has to explain it: a full year at mature volume, plus a modest price increase. Income tax is left out here because it depends on your business structure and where you operate; ask an accountant what to set aside.
Step 5: Make the cash flow forecast
Profit isn’t cash. The cash flow forecast shows whether you can pay the bills each month, and lenders read it closely.
Start from the income statement and make two changes:
- Add back depreciation, because no cash left the bank.
- Subtract loan principal, because repaying the loan uses cash but isn’t an expense, so it doesn’t show on the income statement.
Ridgeline Coffee sells for cash and card and pays suppliers on delivery, so there are no customer invoices or supplier bills to wait on. If you sell on credit or get supplier terms, shift the cash in or out by the number of days you expect to wait.
| Month | Opening cash | Cash in (sales) | Cash out (COGS + operating) | Loan payment (interest + principal) | Closing cash |
|---|---|---|---|---|---|
| 1 | $27,000 | $15,600 | $21,180 | $1,280 | $20,140 |
| 2 | $20,140 | $17,550 | $21,765 | $1,274 | $14,651 |
| 3 | $14,651 | $19,500 | $22,350 | $1,268 | $10,533 |
| 4 | $10,533 | $21,450 | $22,935 | $1,263 | $7,785 |
| 5 | $7,785 | $23,400 | $23,520 | $1,257 | $6,408 |
| 6 | $6,408 | $25,350 | $24,105 | $1,251 | $6,402 |
| 7 | $6,402 | $27,300 | $24,690 | $1,245 | $7,767 |
| 8 | $7,767 | $29,250 | $25,275 | $1,239 | $10,503 |
| 9 | $10,503 | $29,250 | $25,275 | $1,233 | $13,245 |
| 10 | $13,245 | $29,250 | $25,275 | $1,228 | $15,992 |
| 11 | $15,992 | $29,250 | $25,275 | $1,222 | $18,745 |
| 12 | $18,745 | $29,250 | $25,275 | $1,216 | $21,504 |
| Year 1 | $296,400 | $286,920 | $14,976 |
Check month 1: $27,000 + $15,600 − $21,180 − $1,280 = $20,140. Check the year: $27,000 + $296,400 − $286,920 − $14,976 = $21,504.
In this example the yearly cash change equals the yearly loss, because depreciation and loan principal are both exactly $12,000 and cancel out. In your plan they almost certainly won’t match.
The number to look at is the lowest closing cash: $6,402 in month 6. That’s less than two weeks of operating expenses. A lender will see that cushion as thin, and so should you.
Test a bad year
Run the forecast again with fewer customers. If Ridgeline Coffee gets 20% fewer customers than planned every month, year-one revenue drops to $237,120 and gross profit to $165,984. After $198,000 of operating expenses, $12,000 of depreciation and $2,976 of interest, the loss is $46,992. The bank account goes below zero in month 4 and ends the year about $20,000 short.
So the owner needs a plan for that case before opening: more starting equity, a line of credit, or a smaller payroll until sales prove out. Showing that you’ve tested the downside makes the main forecast more believable, not less.
Step 6: Check it with a balance sheet
The balance sheet lists what the business owns (assets) and what it owes (liabilities), and the owner’s stake (equity) makes up the difference. It must balance: assets = liabilities + equity. If yours doesn’t, there’s a mistake somewhere in the other statements.
| Opening day | End of year 1 | |
|---|---|---|
| Cash | $27,000 | $21,504 |
| Inventory | $3,000 | $3,000 |
| Equipment, less depreciation | $60,000 | $48,000 |
| Total assets | $90,000 | $72,504 |
| Bank loan | $48,000 | $36,000 |
| Owner’s investment | $42,000 | $42,000 |
| Retained earnings (losses) | $0 | ($5,496) |
| Total liabilities and equity | $90,000 | $72,504 |
Check the end of year one: $21,504 + $3,000 + $48,000 = $72,504 in assets, and $36,000 + $42,000 − $5,496 = $72,504 on the other side. Inventory is assumed to stay at $3,000 because stock is replaced as it sells.
Step 7: Work out the break-even point
Break-even is the level of sales where revenue covers all your costs and profit is zero. BDC’s definition of the break-even point gives the formula as fixed (indirect) costs divided by the gross margin percentage, and break-even in units as that dollar figure divided by the unit price.
Break-even revenue = fixed costs ÷ gross margin %
Break-even units = break-even revenue ÷ price per unit
For Ridgeline Coffee in month 1:
- Fixed costs: $16,500 operating expenses + $1,000 depreciation + $280 interest = $17,780 a month
- Gross margin: 70%
- Break-even revenue: $17,780 ÷ 0.70 = $25,400 a month
- Break-even transactions: $25,400 ÷ $7.50 = 3,387 a month (rounded up)
- Per day: 3,387 ÷ 26 = 130.3, so 131 customers a day
The income statement agrees: month 6, at 130 customers a day and $25,350 of revenue, comes in at a $6 loss. Month 7, at 140 a day, is the first profitable month.
Put the break-even point in your plan as one plain sentence (“We break even at about 131 customers a day, which we expect to reach in month 7”) and compare it with your capacity and your market research. A break-even point close to your maximum capacity is a warning sign.
Step 8: Write the assumptions page
Every number above comes from a short list of assumptions. Put them on one page at the front of your financial section so a reader can check your logic without digging through spreadsheets.
| Assumption | Value | Where it comes from |
|---|---|---|
| Days open | 26 a month | Planned hours: closed Sundays |
| Customers per day | 80 in month 1, rising to 150 by month 8 | Foot-traffic counts at the site, nearby cafés |
| Average sale | $7.50, then $7.75 and $8.00 | Menu prices and expected order mix |
| COGS | 30% of revenue | Costed recipes for the top 10 items |
| Operating expenses | $16,500 a month, up 4% a year | Lease quote, payroll plan, insurance quote |
| Equipment | $60,000, depreciated over 5 years | Supplier quotes |
| Loan | $48,000 at 7%, $1,000 principal a month | Lender’s term sheet |
| Payment terms | Sales paid at once; suppliers paid on delivery | Card and cash sales only |
Write down the source for each one. “Lease quote dated March 3” carries far more weight than “industry average.”
How to make financial projections: the short checklist
- Write your assumptions first, each with a source.
- Forecast sales bottom-up: customers × price × days, month by month for year one.
- Check the sales forecast against your capacity and your market research.
- Set COGS from real product costs, not a guess.
- List every operating expense on its own line, including your own pay.
- Build the monthly income statement, then yearly totals for years two and three.
- Turn it into a cash flow forecast: add back depreciation, subtract loan principal, add timing for invoices and supplier terms.
- Find your lowest cash month and make sure you have a cushion.
- Build the balance sheet and confirm it balances.
- Calculate break-even and say in one sentence when you expect to reach it.
- Run a downside case with 20% lower sales.
- Have someone else re-add every total.
Common mistakes lenders spot
- The hockey stick. Flat for three months, then sales triple. Growth needs a cause you can name: a second shift, a new contract, a marketing push with a budget.
- Top-down-only revenue. “1% of a $50 million market” says nothing about how customers find you.
- Sales beyond capacity. The forecast needs more customers, units or billable hours than your space, equipment or staff can deliver.
- No owner’s pay. A profit that only exists because you work for free isn’t a profit. Show your salary or draw.
- Profit with no cash flow forecast. A profitable business can still run out of cash. Lenders want the monthly cash view.
- Missing loan principal. Principal repayments don’t appear on the income statement, so they’re easy to forget in the cash forecast.
- A balance sheet that doesn’t balance. It tells the reader the other statements have an error.
- No cushion. Cash that bottoms out near zero in the base case leaves no room for a slow month.
- Numbers that don’t match the text. The marketing section says 200 customers a day; the spreadsheet says 150. Pick one.
- Unexplained round numbers. “Marketing: $10,000” with no breakdown invites questions.
- No assumptions page. Without it, the reader can’t tell a careful forecast from a guess.
If you’re applying for a loan, ask the lender exactly which statements and periods they want. Canadian owners applying through the federal program can see what the plan for that loan should cover in our guide to a CSBFP loan business plan.
Where the projections go in your plan
Put a one-page summary (the three-year income statement, the lowest cash month, break-even and how much funding you need) in the financial section, and the monthly tables and assumptions in an appendix. Summarize the key figures again in your executive summary. For how the financial section fits with the rest of the plan, see how to write a business plan, step by step.
These examples are for illustration only. For tax treatment, depreciation rules and loan terms, check with an accountant and your lender.