Projected Financial Statements: How to Build Financial Projections in Excel

Projected financial statements are critical tools for both new startups and established businesses, providing a forecast of future financial health. Often required by potential investors, banks, and other stakeholders, these documents offer an essential peek into the company’s future, predicting cash flow, revenue, and profitability. If you're planning on scaling your business, a good financial projection in Excel can give you the clarity and confidence to make informed decisions.

Why Excel is Ideal for Financial Projections

Excel remains one of the most versatile and accessible tools for creating financial projections. The sheer flexibility Excel offers allows you to design highly customized financial statements tailored specifically to your business needs. Whether you’re projecting for one year, five years, or even a decade into the future, Excel’s array of functions, charts, and tables offer the perfect framework for producing insightful, professional reports.

In this article, we will explore how to create projected financial statements using Excel in great detail. You'll also learn how to integrate dynamic financial models that can adjust to changes in key assumptions like revenue growth, expenses, and profit margins. But before we dive into the technical aspects, let’s briefly cover the major components of projected financial statements.

Key Components of Projected Financial Statements

1. Income Statement (Profit & Loss Statement)
   The income statement summarizes your company’s financial performance over a period of time, generally a quarter or a year. It outlines revenues, costs, operating income, and ultimately, net profit. A projected income statement estimates future earnings based on assumptions like sales growth, pricing changes, and cost of goods sold (COGS).

   Key Line Items:

   • Revenue
   • Cost of Goods Sold (COGS)
   • Gross Profit
   • Operating Expenses (e.g., marketing, administrative costs)
   • Operating Profit
   • Net Profit

2. Balance Sheet
   This is a snapshot of your company’s financial position at a given point in time. It includes assets, liabilities, and equity. A projected balance sheet estimates the future financial standing of the company by evaluating changes in cash, accounts receivable, inventory, and accounts payable.

   Key Line Items:

   • Assets (Current and Non-current)
   • Liabilities (Short-term and Long-term)
   • Shareholders' Equity

3. Cash Flow Statement
   The cash flow statement shows how much cash is flowing into and out of the business. A projected cash flow statement anticipates how much cash the company will generate and use over the projection period. It helps in identifying if you will have enough cash to meet future obligations.

   Key Line Items:

   • Cash from Operating Activities
   • Cash from Investing Activities
   • Cash from Financing Activities

4. Assumptions
   Assumptions are the backbone of any financial projection. To build robust projections, you need to include key assumptions about sales growth rates, operating costs, and other financial metrics. These should be realistic and based on industry standards or past performance.

Step-by-Step Guide: How to Create Projected Financial Statements in Excel

Step 1: Gather Historical Data and Assumptions

To begin, collect historical data from your business for at least the past two years. This data will act as a foundation for your assumptions. Input these values into an Excel spreadsheet in clearly labeled rows and columns.

Step 2: Forecast Revenue

Revenue forecasting involves estimating future sales based on your company’s current and projected growth. Start by calculating the growth rate from historical data. For instance, if your revenue has grown by 10% over the past two years, you might assume the same for the coming year.

In Excel:

• Use the AVERAGE function to compute the average growth rate.
• Create a formula to project future revenues using a growth rate:
  =Previous Year Revenue * (1 + Growth Rate)

Step 3: Forecast Expenses

Project your costs based on your sales forecasts and expected business activities. Typically, expenses rise with revenue, but not necessarily at the same rate. To keep your projections accurate, consider breaking down expenses into fixed and variable categories.

In Excel:

• Use formulas to link expenses to revenues where appropriate. For instance, if your COGS is typically 50% of your revenue, you can use the following formula:
  =Projected Revenue * COGS percentage
• For fixed expenses, use historical averages or contractual obligations (rent, salaries, etc.).

Step 4: Build the Income Statement

Now, populate the income statement with your projected revenue and expenses:

• Gross Profit: Revenue - COGS
• Operating Profit: Gross Profit - Operating Expenses
• Net Profit: Operating Profit - Taxes

Step 5: Create the Balance Sheet

To project a balance sheet, you’ll need to predict changes in the company’s assets, liabilities, and equity. Excel can help calculate future balances based on revenue and expense forecasts. Consider factors like asset depreciation, debt repayment schedules, and shareholder investments.

• Assets: Sum up cash, inventory, and accounts receivable based on expected growth.
• Liabilities: Project debts and accounts payable using historical payment trends.
• Equity: Calculate retained earnings based on profits projected in your income statement.

Step 6: Build the Cash Flow Statement

Cash flow projection involves estimating how much cash will come in and go out over the coming months or years. A simple way to calculate this in Excel is by linking the cash flow statement to both your income statement and balance sheet.

In Excel:

• Cash Flow from Operations: Start with net income and add back non-cash expenses (like depreciation).
• Cash Flow from Investing: Estimate capital expenditures and investments.
• Cash Flow from Financing: Project inflows/outflows from borrowing or equity funding.

Step 7: Create a Dynamic Model in Excel

The best way to handle projections is by building a dynamic financial model. This allows you to tweak key assumptions (like sales growth or operating expenses) and instantly see how those changes affect your financial statements.

• Create input cells for your assumptions (e.g., growth rate, expense percentages).
• Link these assumptions to the relevant cells in your income statement, balance sheet, and cash flow statement.
• Use Excel’s Data Tables or Scenario Manager to simulate different financial scenarios.

Case Study: Financial Projections for a Tech Startup

Let’s imagine you are projecting financial statements for a tech startup. Your company specializes in developing AI-driven SaaS tools for small businesses.

• Revenue Projections:
  Based on your product adoption rates and market analysis, you expect a 20% growth in users over the next year. Your average revenue per user is expected to increase by 5% as you introduce new features.

  Using Excel, you can create a formula that dynamically calculates future revenue:
  =Current Year Users * (1 + Growth Rate) * (1 + Price Increase Percentage)

• Expense Projections:
  You anticipate fixed costs to grow moderately, while variable costs (such as cloud hosting) scale with your user base. Using historical data and benchmarks from competitors, you estimate that your hosting costs will increase by 15% for every 10% increase in users.

• Cash Flow Projections:
  Cash flow is critical for startups. By carefully modeling customer acquisition costs (CAC) and projecting when users will pay (monthly or annually), you can adjust your cash flow projections. For example, annual subscription payments provide a big upfront cash influx, but you must plan for monthly expenses.

Best Practices for Financial Projections in Excel

• Use Sensitivity Analysis: Test how sensitive your projections are to changes in key assumptions. For example, what happens to profitability if sales grow by 10% instead of 20%? Excel’s Scenario Manager and What-If Analysis tools are perfect for this.

• Include a Dashboard: A dashboard with key metrics (like EBITDA, profit margins, and burn rate) provides a quick overview for stakeholders. Use Excel's charts and graphs to visualize these metrics clearly.

• Check for Consistency: Ensure that your balance sheet balances and that projected net income flows into retained earnings.

• Revisit and Update: Financial projections should be revisited regularly. As your business environment changes, adjust your projections to reflect the latest trends, data, and business goals.

Conclusion: Excel as Your Financial Projection Power Tool

Creating projected financial statements in Excel is an empowering process that helps businesses plan for future growth, anticipate challenges, and communicate confidently with investors. From startups to established businesses, anyone can leverage Excel's functionality to build dynamic, insightful financial projections.

Remember to approach the process systematically: start with realistic assumptions, utilize Excel’s powerful functions, and always revisit your projections regularly.

By doing so, you not only demonstrate financial acumen but also position your business to capitalize on opportunities and navigate future uncertainties.