Financial Forecast: The Ultimate Guide to Business Profitability & Viability
You’ve successfully mapped out your entire business strategy, market analysis, legal structure, and operational plans are complete. But there’s one pivotal question remaining: Will your business be profitable? And, more practically, how will you finance your initial investments and first months of activity?
The Financial forecast is the mandatory bridge between your business idea and financial reality. If the forecast is positive, full steam ahead! If not, you must strategically review your model: Can you reduce expenses? How can you increase revenue? Perhaps by shifting your target market? This critical analysis, built around a solid Financial forecast, ensures you aren’t building on uncertain foundations.
What is the financial forecast?
The Financial forecast, often simply called “the forecast” or “financial projections”: it is a structured analysis that predicts the inflows and outflows of money for your company over a specified period (typically the first three years).
The core objective is to measure financial profitability and long-term viability. However, a robust Financial forecast serves several other strategic purposes:
- Optimal Financing: Estimating precise financing needs to secure loans or attract investors.
- Strategic Planning: Optimizing major purchasing and capital investment policies.
- Cash Management: Ensuring the company always maintains sufficient working capital to meet day-to-day operating expenses.
This analysis is systematically required for any business creation or takeover, making it the bedrock of your official business plan.
Key Objectives & Tools of the Financial Forecast
A well-executed Financial forecast provides clear answers to your most pressing business questions:
| Key Business Question | Core Financial Forecast Tool | Strategic Benefit |
| What resources are needed to launch the project? | Initial and 3-Year Financing Plan | Verifies the balance between resources (debt, equity) and uses (fixed assets, start-up costs). |
| Will the project be profitable over the medium term? | The Forecast Income Statement (or P&L) | Measures expected revenue against all expenses to determine Net Income. |
| Will the company always have enough cash on hand? | The Cash Flow Plan (or Treasury Forecast) | Prevents liquidity crises by mapping monthly receipts and disbursements. |
| At what point does the business cover its costs? | The Break-Even Point (or Profitable Level) | Determines the minimum turnover required to achieve zero profit/loss. |
The six steps to make your financial forecast for business creation
The forecast in summary
As specified above, the financial forecast consists of several documents:
- the income statement;
- profitable level ;
- interim management balances (SIG);
- the initial and three-year financing plan;
- the cash flow plan;
- the balance sheet.
Each of these documents has a specific importance. The set allows you to have an overall view of the profitability and viability of your business in the near future. Note also that you build your business plan from these elements. Also, it is essential to familiarize yourself with these different terms. Before anything else, discover the financial forecast in summary.
1. Income statement
You will often find the income statement under the abbreviation CR. The purpose of this document is to give you a precise overview of your accounting year over a given period (usually a year) by summarizing your company’s expenses and income. In other words, we add up the income on one side, and the expenses on the other. Subtraction makes it possible to determine the profit… or the loss made by the company.
However, there are obviously subtleties to be aware of. What is called depreciation? Is it taken into account in the income statement? What are fixed charges? What about variable charges? Should payment terms be taken into account? In this article, we answer all these questions and give you the keys to creating your own income statement.
Income Statement Projection
| Line Item | 2022 (Historical) | 2023 (Projections) |
| Revenue | $86 000 | $103 200 |
| COGS | $22 000 | $56 760 |
| Gross Profit | $64 000 | $46 440 |
| Operating Expense | $9 000 | $9 288 |
| Operating Income (EBIT) | $55 000 | $37 152 |
| Interest Expense | $3 500 | $3 500 |
| Profit Before Tax | $51 500 | $33 652 |
| Taxes @22% | $11 330 | $7 403 |
| Net Income | $40 170 | $26 249 |
Formulas:
- Gross Profit = Revenue – COGS
- Operating Income = Gross Profit – Operating Expense
- Profit Before Tax = Operating Income – Interest Expense
- Taxes = Profit Before Tax * Tax Percentage
- Net Income = Profit Before Tax – Taxes
2. Intermediate Management Balances
the intermediate management balances (IMB) are indicators determined in cascade (Iacob C., 1996) in the form of money accumulation margins, designed to perform a specific function the remuneration of the factors of production and of financing of future activity, which highlights the stages of the formation of the net result of the accounting period in close connection with the structure of the incomes and expenses of the company activity.
Abbreviated as IMB, intermediate management balances are tools that allow the analysis of the company’s results. It’s about :
- the gross margin (or commercial margin);
- added value;
- gross operating surplus;
- operating profit;
- the current result before tax;
- of the result of the complete accounting exercise.
Like the income statement, they are calculated from expenses and income. The use of these indicators is important during the business creation phase. In this article on intermediate management balances, we come back to precisely what these elements are, their usefulness and how to calculate them.
Profit and Loss Statement (P&L): A Key Tool for Business Success and PnL statement in Excel
3. The Profitable Level (Break-Even Point)
This is the answer to the crucial question: “What turnover must I achieve to obtain a zero result?”
Calculating the Break-Even Point is obtained by meticulously separating fixed and variable costs to determine the Margin on Variable Costs. This figure is essential for setting realistic sales targets and assessing the risk of the venture.
4. The financing plan
Also known as the “Uses/Resources Table,” this plan checks the financial balance of your company by answering: “What working capital do I need, and how will I secure it?”
Key focus: analyzing the balance between Fixed Assets (tangible, intangible, financial) and the Working Capital Requirements (WCR), ensuring they are adequately financed by stable long-term resources.
5. The cash flow plan
What “mass” of money should come out of my cash box… and when? It is by carrying out the cash flow plan of your company that you can get the answer to this crucial question. Indeed, being in balance over a year does not necessarily mean that the revenue will arrive in time to cover each expense… hence the usefulness of this forecasting tool! This allows you to strategically manage your cash flow, by forecasting monthly receipts and disbursements.
However, be careful not to neglect certain items (VAT refund, capital contribution, etc.). In this article dedicated to the cash flow plan, we tell you everything about how to build and implement it.
Read also: Cash Management: Maximizing Financial Stability through Effective Cash Flow Management
6. The balance sheet
Everything else assimilated and ready? Well, it’s time to worry about the balance sheet! This is in a way a “snapshot” of the financial state of the company at a given moment. It is broken down into “assets” (the resources available to the company) and “liabilities” (employment than she does).
How to make this snapshot? How to build it? Why is it essential to your business forecast? These are the questions we answer in this article on the balance sheet.
Certainly! Building on the simplified forecast from Year 1, here are the projected Income Statement and Break-Even Point calculations for Year 2 and Year 3.
We’ll assume a conservative 10% revenue growth and a corresponding 5% increase in operational expenses annually.
Simplified Financial Forecast Examples (Years 2 & 3)
1. Projected Income Statement (P&L)
| Line Item | Year 1 ($) | Year 2 ($) | Year 3 ($) |
| Sales Revenue | 120,000 | 132,000 | 145,200 |
| Coût des Marchandises Vendues (CMV) (30%) | 36,000 | 39,600 | 43,560 |
| Gross Profit | 84,000 | 92,400 | 101,640 |
| Total Operating Expenses | 50,000 | 52,500 | 55,125 |
| Operating Income (EBIT) | 34,000 | 39,900 | 46,515 |
| Interest Expense (Fixed) | 1,000 | 1,000 | 1,000 |
| Profit Before Tax | 33,000 | 38,900 | 45,515 |
| Taxes (Assumed 25%) | 8,250 | 9,725 | 11,379 |
| Net Income | 24,750 | 29,175 | 34,136 |
Notes on Projections:
- Revenue Growth: Year 2 is 10% higher than Year 1 ($120,000 * 1.10 = $132,000). Year 3 is 10% higher than Year 2.
- CMV: Stays fixed at 30% of the new, higher revenue.
- Operating Expenses: Increases by 5% each year, accounting for inflation and minimal growth-related costs ($50,000 * 1.05 = $52,500 in Year 2).
- Net Income: Shows a healthy upward trend, indicating increased viability and profitability.
2. Break-Even Point Projection
The Break-Even Point (B.E.P) remains relatively stable as Fixed Costs increase slowly.
| Calculation | Year 1 ($) | Year 2 ($) | Year 3 ($) |
| Contribution Margin Ratio | 0.70 | 0.70 | 0.70 |
| Total Fixed Costs (Excluding COGS) | 50,000 | 52,500 | 55,125 |
| Break-Even Point (in Sales) | 71,428 | 75,000 | 78,750 |
| Margin of Safety (Revenue – B.E.P) | 48,572 | 57,000 | 66,450 |
Key Takeaway: While the total sales required to break even increases slightly due to rising operating costs, the actual gap between projected revenue and the B.E.P (the Margin of Safety) widens significantly, confirming the project is becoming less risky over time.
Final Strategic Takeaway
A Financial forecast is not a static document; it is a dynamic tool for continuous strategic planning. It forces you to define your business model, validate your assumptions, and prepare for future financing. By mastering these six components, you provide investors and partners with the credible and professional financial roadmap they need to back your venture.
Would you like to explore a specific component of the Financial forecast in more detail, such as an in-depth guide to calculating the Break-Even Point?
Foto credit: krzys16 via Pixabay
Financial Projections: Forecasting and Planning the Future of Your Business
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