9 Steps to Prepare Financial Projections in a Business Plan

You’re excited about your business idea, potential investors are nodding along, and then someone asks, "How much revenue do you expect in the next year?"

Silence. Suddenly, that confident pitch doesn’t seem so confident.

This is exactly why financial projections matter. Without them, you as a business owner could underbudget for costs, overbudget for profits, or worst of all, burn out cash when you need it most. Simply put, financial projections are about testing strategies and preparing for the unknown.

That said, let’s understand what financial projections in a business plan are and how to create them.

What are business plan financial projections used for

Financial projections in business plans are used by business owners, investors, and lenders. When done accurately using the right financial forecasting models, they help in multiple areas:

Internal planning and budgeting

With accurate financial projections, existing businesses can set realistic budgets and allocate resources efficiently. If a retailer opens a new store—they can prepare financial projections for planning their budget and calculate the expected costs.

Attract investors and secure funding

With accurate financial projections, you can justify the funding requests of business owners and demonstrate expected revenue growth, profitability, and cash inflows. A strong financial projection supported by valid financial documents can show the company's financial position to the lenders.

Assess business performance

When comparing the financial performance of the company, it assists companies in determining financial strengths and weaknesses. If the revenue you estimated is less or expenses are more than anticipated—you can determine the reasons and make adjustments accordingly.

Make big business decisions

When you need to make major business moves—for example, product launches, market expansion, or hiring new employees—you need financial backing. Financial projections help prove whether the business can afford these investments.

Plan for contingencies and risks

Risks are part and parcel of your business. Accurate financial projections can help your business anticipate the potential financial risks ahead and prepare relevant backup strategies ahead.

Secure business loans & credit lines

Lenders often look for financial projections to understand whether your business is capable of repaying a loan. If your company has strong projections—you may be able to secure higher loans at lower interest rates, or more flexible repayment plans.

How to create financial projections for your business

1. Define your objective

Before diving into business numbers, figure out why you’re creating the financial projection.

Assuming your target is to address the investors for the growth of your business in the future. On this basis, emphasize the stability of your business's cash flow and the repayment ability of the loan.

However, if your target is raising funds, specify why you require the funds, how you’ll utilize them, and when you’ll be profitable.

The purpose for making financial projections also counts, such as if you’re seeking funding, they must indicate why you require the money, how it’ll be spent, and when your business should break even.

2. Gather relevant data

Financial projections are only as good as the data behind them. While they involve assumptions—backing them up with solid numbers and insights makes them more reliable.

To get a complete picture, utilize both quantitative information (hard figures) and qualitative information (market trends and analysis).

Begin by gathering your current financial information—your income statements, cash flow statements, and balance sheets.

The income statements reflect revenue, expenses, and profitability whereas the cash flow statement follows the inflow and outflow of money within the business. The balance sheet provides an overview of assets and liabilities and reflects what your business owes or possesses.

Since past data alone isn’t enough, market research is just as important—look at industry trends, competitor performance, and customer behavior to predict demand, spot risks, and refine your assumptions. If you’re a startup without historical financial data, use industry benchmarks to estimate revenue potential and cost structures.

Combining existing financial records and external market data creates a more accurate and realistic financial projection.

3. Choose a financial forecasting tool

Manually updating financial projections takes too much time, increasing the risk of errors. A good forecasting tool automates calculations, keeps forecasts accurate, and makes the whole process more efficient.

While choosing a financial forecasting tool—consider these:

• Choose a financial forecasting tool that is easy to use, especially if you're not a finance pro.
• AI-powered features help with complex calculations and improve accuracy.
• Integrations with accounting software like QuickBooks or Xero enable real-time data syncing and reduce manual entry.
• Scenario analysis features allow you to test “what-if” situations, like a slow sales month or an unexpected expense.
• Real-time data syncing ensures forecasts stay updated.
• Visual reports make it easier to present projections to investors or stakeholders.
• Scalability matters—choose a tool that can handle more complex financial data as your business grows.
• Ensure the pricing fits your budget without cutting essential features.

4. Forecast sales

A reliable sales forecast helps businesses plan for growth, manage cash flow, and allocate resources wisely. The approach you take depends on whether your business has historical data or if you're relying on market research and competitor analysis to make estimates.

Sales forecasts are typically built using two main approaches: top-down forecasting and bottom-up forecasting.

Top-down forecasting begins with the overall picture—examining the entire market size and making an estimate of how much of it can be grabbed by the business.

For instance, a new fashion clothing store researches that the combined fashion retail market in its city is $100 million. If it conservatively guesses that it can capture 0.2% of this market, its estimated annual revenue would be $200,000. Although this provides a rough estimate, it doesn't include actual business constraints such as inventory capacity, marketing coverage, or demand.

Bottom-up forecasting does the opposite—it begins with concrete, internal business information, like unit sales, prices, and capacity, and constructs a forecast from the bottom up.

Taking the same boutique example, the owner calculates that they can sell 500 pieces per month at an average of $50 per piece. With this, the estimated monthly revenue would be $25,000, resulting in an annual company revenue estimate of $300,000.

In contrast to top-down forecasting, this is grounded in a true sales capacity and customer demand, so it is more realistic and stress-tested. The idea is to use a combination of the two methods—begin with a market-based approach and calibrate it with real sales data.

5. Forecast expenses

Getting a solid estimate of your expenses is just as important as predicting sales. If you don’t plan for costs properly, even a business with great sales can run into cash flow problems.

Established businesses use past financial data to predict expenses. But if you’re just starting—you’ll need to rely on cost estimates, industry standards, and AI-driven tools to get a realistic projection.

By using AI for financial forecasting, you can take the guesswork out of it by analyzing patterns, spotting cost trends, and adjusting forecasts in real time. They can even flag seasonal spikes, inflation effects, or unexpected price jumps from suppliers.

For businesses without historical data, industry benchmarks are a lifesaver. Many industries have standard cost percentages for rent, salaries, marketing, and inventory—you can set reasonable expense estimates instead of guessing.

Types of business expenses to include in your forecast

If you don’t have past data, use industry-standard cost ratios as a starting point. For example, let’s say, retail businesses allocate around 30% of revenue to inventory, 10% to marketing, and 15% to rent and utilities—AI-driven tools can refine these estimates as new data comes in and flag any unexpected spending trends.

6. Build and test different scenarios

No budget forecast is infallible—markets change, surprise expenses occur, and customer demand may shift. That's why it's so important to run various scenarios to plan for best- and worst-case scenarios.

Running two different scenarios allows companies to anticipate threats, realign strategies, and make informed choices under varying financial scenarios.

For instance, a clothing store does cost and sales projections for the coming year. To create best-case, most-likely, and worst-case scenarios, the boutique considers:

Historical sales data (if available)

If the boutique last year’s average revenue was $35,000 per month, and revenue grew by 5% annually, the boutique might estimate $36,750 as the baseline for next year.

Customer foot traffic & conversion rate

The boutique tracks foot traffic of 1,000 people per month. If 40% buy something, the conversion rate comes to 400 purchases per month. Likewise, the average purchase value is $87.50 and the projected revenue is 400×$87.50, i.e., $35,000/month.

Industry benchmarks & seasonal demand

Retail businesses see a 40%-50% boost in sales during peak seasons like holidays. Economic downturns or slow months might cause a 30% dip in revenue.

The boutique then prepares three different scenarios based on these assumptions:

In the best-case scenario, sales exceed expectations and allow the business to reinvest in marketing and expand its product line. Whereas, in the most likely scenario, sales align with predictions and cover costs comfortably. In the worst-case scenario, sales drop significantly covering just operating expenses and the boutique may need to reduce spending.

7. Create financial statements

Financial documents like annual income statements, cash flow statements, and balance sheets show where your money is coming from, where it’s going, and how healthy your business is. These financial statements are essential for tracking profits, managing cash flow, and making smart financial decisions.

While many businesses still use Excel spreadsheets for this, it can be a hassle—as they require complex formulas, constant updates, and a lot of time. One small mistake can throw off your entire forecast. That’s where AI-powered forecasting tools like Upmetrics, QuickBooks, LivePlan, and Futrli come in handy.

They can:

• Generate financial reports instantly
• Sync directly with accounting software
• Run different financial scenarios
• Reduce errors and save time

8. Build visual reports

Spreadsheets full of numbers can be overwhelming. Instead of digging through rows of data, and visual reports—it becomes easier to track trends, compare forecasts with actual performance, and adjust strategies.

Whether you’re updating stakeholders, pitching to investors, or making internal decisions, how you present financial data is just as important as the numbers themselves.

A simple chart can instantly show trends that might take hours to spot in a spreadsheet. For example, a line graph can reveal unexpected spikes in sales, while a bar chart can compare actual performance against projections.

9. Track with actuals

A financial forecast is just a best guess. Real-world results can turn out differently. Hence it’s important to track actual numbers against projections to see what’s working, what’s not, and what needs adjusting.

Let’s say a clothing boutique projected monthly sales of $35,000, but after reviewing the actual numbers, they only hit $28,000.

Without tracking, they might assume it was just a slow month. But deeper analysis could reveal the real reasons—maybe a marketing campaign underperformed, inventory ran low, or customer footfall decreased due to weather. On the flip side, if actual sales exceed projections, it signals an opportunity.

Instead of manually checking spreadsheets, AI-powered forecasting tools can do the heavy lifting by syncing real-time sales, expenses, and cash flow data.

How to choose the right forecasting tool

Here’s what to look for:

• Ease of use: A tool should be intuitive, with a user-friendly interface that doesn’t require a finance degree to navigate.
• Customization options: Since every business is different, look for software that allows you to tailor projections based on your industry, revenue model, and expenses.
• Automation & AI capabilities: The best tools automate data entry, pull real-time financial data, and use AI for smarter forecasting.
• Integration with accounting software: Seamless syncing with QuickBooks, Xero, or other accounting tools ensures your projections stay accurate and up to date.
• Scenario planning: The ability to test “what-if” scenarios (e.g., increased costs, slower growth) helps you prepare for different business conditions.
• Collaboration features: If you’re working with a team or investors, choose a tool that allows multiple users to access and modify projections.
• Reporting & visualization: Clear, easy-to-understand reports, charts, and dashboards make it easier to track financial trends and share insights.
• Scalability: Your forecasting needs will grow as your business expands. Pick a tool that can handle increasing complexity over time.
• Cost & value: A fancy tool with too many features can be overkill. Make sure you’re getting the best value for your needs without unnecessary expenses.

Conclusion

Financial projections are what make your business well-prepared.

Whether you're trying to secure funding or simply avoid running out of cash, having a clear picture of your future revenue and expenses makes all the difference.

But let’s be honest—manually building financial projections can feel overwhelming. That’s where AI-powered forecasting tools change the game. Instead of endless spreadsheets and guesswork—tools like Forecastia can pull real-time data, analyze patterns, and generate projections in minutes.