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Knowledge Base Project Finance

• Knowledge Base
• Project Finance
• Overview Project Finance

The Ultimate Guide to Project Finance

Table of content, project finance: what is it, basic project finance process, common parties involved in project finance deals, funding for capital-intensive projects, off-balance sheet activities, non-recourse financing option, setting up the special purpose vehicle (spv).

• Financial Modeling - An Essential Aspect of Project Finance

The Future of Project Finance

Have you ever wondered how the Burj Khalifa was funded? The world’s tallest building was designed to be the centerpiece of Downtown Dubai. At a certain point, its original developers experienced financial problems. Through Project Finance , the UAE government granted monetary aid to fund the building’s completion.

Large-scale infrastructure projects, such as the construction of power plants, transportation infrastructure, and other capital-intensive endeavors, typically seek project finance. These projects often require significant upfront investment and have a long-term revenue stream that can support debt repayment.

Project finance is a unique financing approach used specifically for capital-intensive projects. This guide will explain everything you need to know about it and the future of project finance.

Project finance is a financing approach where a lender provides financing to a specific project, and the project’s cash flows are used to repay the loan. It is commonly used to fund large-scale capital investments, such as infrastructure and energy projects.

Unlike traditional bank loans, project finance focuses on a project’s potential success rather than its sponsors’ creditworthiness. It enables project owners to raise debt and equity financing without risking their balance sheets.

Project finance also includes off-balance sheet financing, which allows companies to acquire funding for a project by setting up special-purpose vehicles (SPVs) that are legally separate from the company and do not appear on its balance sheet. This type of financing provides more flexibility for companies because it does not affect their credit ratings or the debt-to-equity ratio in their financial statements .

Additionally, it can be structured as non-recourse financing, meaning the lenders cannot go after the sponsors if the special purpose vehicle fails to make timely payments on its debts. It provides an alternative form of funding that allows companies to manage risk while taking advantage of higher returns associated with long-term investments.

Project finance funds large-scale infrastructure projects that are often too risky or costly for traditional financing methods, such as bank loans. The process of project finance typically involves several stages, as outlined below:

• Project Identification : The first step in project finance is identifying a suitable project. It may involve conducting a market analysis, determining the potential risks and rewards associated with the project, and preparing a financial feasibility study .
• Project Development : Once a suitable project has been identified, the next step is to develop a business and financial plan with a detailed project schedule and budget.
• Structuring the Financing : The next step is to structure the financing for the project. The process involves identifying potential funding sources, such as equity investors, lenders, and other financing partners. The financing structure will typically include a mix of debt and equity financing.
• Due Diligence : Before financing can be secured, potential lenders and investors will typically conduct due diligence to evaluate the project’s feasibility and assess its potential risks and rewards. Due diligence may involve a review of the project plan, financial statements, market analysis, and other relevant documents.
• Negotiation of Terms : The next step is to negotiate the financing terms once due diligence has been completed. It may involve negotiating the interest rate, repayment schedule, covenants, and other key terms of the financing agreement.
• Closing & Disbursement : The next step is to close the financing and disburse the funds once the financing terms have been agreed upon. This stage typically involves the preparation and execution of legal documents, such as loan agreements and security documents.
• Construction & Operation : With financing secured, the project can move into the construction and operation phase. During this phase, the project team will oversee the construction and operation of the project and work to manage any risks or challenges that arise.
• Repayment : As the project generates revenue, the financing partners will be repaid according to the terms of the financing agreement. It is the final stage of debt repayment, dividends distribution to equity investors, and other reimbursement forms.

The project finance process can be complex and time-consuming, but it can also be a highly effective way to fund large-scale infrastructure projects. Successful project finance requires a thorough understanding of the project, careful planning and execution, and effective management of risks and challenges.

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Financial institutions with a high-risk tolerance are frequently among the sponsors, or investors, in a project finance arrangement. Organizations in the same sector, a contractor interested in the project, the government, or other public institutions may also serve as sponsors. Each project sponsor who participates in a project finance venture has a specific goal that varies based on the sponsor type. 

In brief, four types of key parties are very often involved in such transactions:

• Sponsoring contractors  are interested in participating in the effort by contributing equity and subordinated debt. Contractors also develop, build, or operate plants. This developer assumes the risk of planning, creating, and building a project. They are responsible for acquiring all essential licenses and legal permissions to complete the project.
• Financial Investors  are motivated to put money into high-profit ventures. They tend to take risks and want a significant return on their investments. They act as the asset’s operator, operating and caring for it after construction. These include overseeing employees, managing day-to-day operations, and may even involve marketing initiatives to guarantee optimal utilization of available capacity.
• Industrial Sponsors  find a connection between the program and their primary business. They provide products and services to finish building projects on schedule and within budget. These parties are frequently hired as subcontractors by developers or operators.
• Public Sponsors refer to a government or quasi-governmental entity that supports the project through financial assistance, guarantees, or other forms of public backing. Public sponsors play a crucial role in project finance, particularly in large infrastructure projects that require significant investment and have long-term revenue streams.

Project finance deals require collaboration between all parties to ensure that projects are completed on time, within budget, and according to agreed specifications. By understanding their respective roles and responsibilities, stakeholders can minimize risks associated with project finance deals and maximize their chances of success.

Key Elements of a Project Finance Structure

A standard project finance method works under a Build-Operate-Transfer (BOT) structure. In a BOT arrangement, a private entity (the project developer or sponsor) is responsible for the project’s construction, operation, and maintenance for a specified period. At the end of this period, the ownership and operation of the project are transferred to the public sector or the project owner.

Among the key elements of a project finance structure are the following:

• Capital-Intensive Projects
• Non-Recourse Financing
• Special Purpose Vehicle

When it comes to funding for large, capital-intensive projects, traditional funding can often be inadequate. It is where project finance comes in. Project finance is commonly used for long-term investments, such as infrastructure or construction.

Real estate building & construction is a prime example of capital-intensive projects. Mining, oil fields, and renewable energy (i.e., hydrogen plants, solar parks , etc.) can also benefit from a project finance deal. Its specialized risk assessment process and structured repayment terms can be a well-poised tool to grow its business and expand its reach. It allows them to secure substantial debt financing, allocate risks efficiently, and align debt repayment with the project’s cash flow generation.

Overall, project finance provides a robust financial framework for capital-intensive projects. These benefits make project finance attractive for funding large-scale infrastructure, energy, and other capital-intensive projects.

Activities not displayed on a company’s balance sheet are called off-balance sheet activities. Off-balance sheet operations are utilized in project finance to raise lender risk while lowering borrower risk. A special purpose vehicle (SPV), a separate organization that will own and oversee the project, is created to do this. Loan repayment falls on the SPV rather than the borrower.

Off-balance sheet financing refers to arrangements in which no debt or equity is recorded under the company’s general ledger account. It allows companies to avoid the liabilities associated with these projects. When companies take off-balance sheet financing, they can keep their debt off their balance sheet and limit their risk exposure.

Some common examples of this type of financing include capital leasing, joint venture arrangements, and forward contracts. By utilizing these forms of financing, companies can minimize the amount of long-term debt they need to incur to complete their projects. It allows them to focus more resources on other areas of their business that require capital investments. Additionally, using the various off-balance sheet options available, companies can more effectively manage their cash flow and asset structure, thus increasing efficiency and profitability.

The government may employ project finance to keep project liabilities and debt off the balance sheet, freeing up less budgetary headroom. The amount of money the government may spend above what it presently invests in public services like health, welfare, and education is known as the fiscal space. According to the argument, rapid economic growth will raise tax income from more people working and paying more taxes, giving the government more money to spend on public services.

Non-recourse financing is a primary option for project finance. It limits the amount of recourse lenders have in the event of a borrower’s inability to meet their financial obligations. While this type of financing can be attractive for borrowers with limited capital, it comes with significant risk for lenders. When granting non-recourse financing, lenders do not have the same rights to personal or business assets that traditional creditors are afforded, making it a risk venture.

The major benefits of non-recourse financing are:

• Interest payments can be deferred until income is generated from the project
• The amount of capital needed upfront is reduced
• The borrower has limited personal liability
• The debt can be structured in a way that suits the project
• The lender’s risk is limited

Non-recourse financing may be attractive to borrowers, but, as previously mentioned, it can be quite risky for lenders and require careful consideration before being approved. It is important to note that non-recourse loans must still be based on sufficiently strong cash flows and realistic projections in order to guarantee repayments. The special purpose vehicle’s cash flows must be sufficient to pay operating expenses and the debt’s capital repayment and interest obligations. Only any remaining money after operational costs and debt payments have been made can be utilized to pay dividends to the project’s sponsors because those two expenses take up the majority of cash flow.

An SPV or special purpose vehicle is a limited-purpose company set up to isolate and help project finance deals. It allows the project to move forward without liability on the parent company’s balance sheet. The SPV then can raise its financing for the project, separate from the parent company’s finances.

The special purpose vehicle is created for each separate transaction so that in case of a failure, any losses can be contained within that single entity. It also helps protect the parent company from potential financial risks and liabilities associated with the project.

The most common form of raising capital for an SPV is through securities such as bonds and shares, which are issued to investors in exchange for financing. The special purpose vehicle can also enter into various financial arrangements with other entities, such as banks or investment funds, providing additional financing. These arrangements are typically secured by tangible or intellectual property assets related to the project.

Financial Modeling – An Essential Aspect of Project Finance

Financial modeling is an essential aspect of project finance.  Financial modeling for project finance  involves creating a mathematical model of the project’s cash flows to determine the project’s financial feasibility.

Project finance involves financing long-term infrastructure, energy, or other large-scale projects where the repayment of debt and return on investment are primarily based on the project’s cash flow and assets. Financial modeling plays a crucial role in project finance by quantitatively analyzing feasibility, profitability, and risks.

Here are some reasons why project finance modeling is essential:

• Project Feasibility Assessment : Project finance modeling helps assess the feasibility of a project by analyzing its projected revenues, expenses, and cash flows over the project’s lifecycle. It allows stakeholders to evaluate the project’s financial viability and make informed decisions about its potential success.
• Capital Structure Optimization : Financial modeling enables the optimization of the project’s capital structure, including the mix of debt and equity financing. By simulating different scenarios and analyzing their impact on the project’s financial metrics like debt service coverage ratio, return on equity, and internal rate of return (IRR), financial modeling helps determine the optimal capital structure that minimizes the cost of capital while meeting the project’s financial requirements.
• Sensitivity Analysis & Risk Assessment : Project finance modeling allows for sensitivity analysis , which involves testing the impact of various variables and assumptions on the project’s financial performance. By modeling different scenarios and considering factors such as interest rate fluctuations, exchange rate risks, commodity price volatility, and regulatory changes, project stakeholders can assess the project’s resilience to different risk factors and develop risk mitigation strategies.
• Cash Flow Forecasting : Financial modeling helps forecast the project’s cash flows over its expected lifespan. It considers various revenue streams, operating costs, capital expenditures, debt service obligations, and tax implications. Accurate cash flow forecasting is crucial for determining the project’s ability to generate sufficient cash flow to repay debt obligations and provide returns to investors.
• Investment Decision-Making : Project finance modeling assists in making smart financial decisions by evaluating key financial metrics such as net present value (NPV), IRR, payback period, and profitability index. These metrics help project sponsors, lenders, and investors assess the project’s attractiveness and compare it with alternative investment opportunities.
• Financial Reporting & Compliance : Financial modeling aids in preparing financial statements, including income statements, balance sheets, and cash flow statements, which are essential for financial reporting and compliance purposes. It ensures that the project’s financial performance is accurately represented and meets the required accounting standards and regulatory requirements.

Project finance modeling is a critical tool in project finance, providing insights into the financial feasibility, risk assessment, capital structure optimization, and investment decision-making process. It allows stakeholders to evaluate the project’s financial viability, optimize its financial structure, and assess its ability to generate cash flows to meet debt obligations and investor expectations.

As more capital-intensive projects are developed, project finance will continue to be a popular financing approach. Project finance is an important tool for financing capital-intensive projects and can be used to structure investments through the use of a special-purpose vehicle. With proper understanding and consideration of the associated risks, project finance can be a major asset in any company’s long-term strategies. Additionally, as technology improves, financial modeling for project finance will become more sophisticated, making it easier to create accurate financial models . In conclusion, project finance is a unique financing approach that is used specifically for capital-intensive projects.

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Understanding Debt Sizing & Project Finance Ratios

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What Is Project Finance?

• How It Works

Off-Balance Sheet Projects

Nonrecourse project financing.

• Recourse vs. Nonrecourse Loans

Project Finance vs. Corporate Finance

The bottom line.

• Corporate Finance
• Corporate Debt

Project Finance: Definition, How It Works, and Types of Loans

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.

Project finance funds long-term infrastructure, industrial projects, and public services using a nonrecourse or limited-recourse financial structure . The debt and equity used to finance the project are repaid solely from the cash flow generated by the project itself.

In project finance, the loan structure relies primarily on the project's cash flow for repayment, with the project's assets, rights, and interests serving as secondary collateral. This approach is especially attractive to the private sector because companies can fund major projects off-balance sheet (OBS) , meaning the debt used to fund the project does not appear on the company's balance sheet and has no impact on its credit rating or borrowing capacity.

In the U.S., project financing offers businesses a way to secure funding for large-scale projects like infrastructure, telecommunications, and energy.

Key Takeaways

• Project finance is a method to fund large-scale, long-term infrastructure and capital-intensive projects, which often involve both public and private sector participation.
• Project financing often utilizes a nonrecourse or limited-recourse financial structure, which means repayment depends on the project's cash flow.
• A debtor with a nonrecourse loan can't be pursued for any additional payment beyond the seizure of the asset.
• Project debt is usually kept off the parent company's balance sheet by being held in a separate subsidiary.

How Project Finance Works

“Project finance” refers to financing long-term industrial and infrastructure projects, particularly in sectors like oil and gas, power generation, and transportation. It's also used to finance certain economic bodies like special purpose vehicles (SPVs) , which are created to manage a single project. The funding required for these projects is based entirely on the projected cash flows.

Some of the common sponsors of project finance include the following entities:

• Contractor sponsors : These sponsors provide subordinated or unsecured debt and/or equity and are crucial to the project's establishment and operation. 
• Financial sponsors : These include investors who are mainly focused on achieving a big return on their investment.
• Industrial sponsors : These are companies with a strategic interest in the project, as the project may align with their core business.
• Public sponsors : These sponsors include governments from various levels.

The project finance structure for a build, operate, and transfer (BOT) project includes multiple key elements. Project finance for BOT projects generally includes an SPV. The company’s sole activity is carrying out the project by subcontracting most aspects through construction and operations contracts. Since new-build projects don't generate revenue during the construction phase, debt service begins only in the operations phase.

This creates significant risks during the construction phase, as the only revenue stream might come from an offtake agreement or power purchase agreement. Because there's limited or no recourse to the project’s sponsors, company shareholders are typically liable up to the extent of their investment. This structure keeps the project off the balance sheets of both the sponsors and the government, minimizing financial risk.

Not all infrastructure investments are funded with project finance. Many companies issue traditional debt or equity to undertake such projects.

Project debt is typically held in a sufficient minority subsidiary and not consolidated on the respective shareholders' balance sheets. This reduces the project’s impact on the shareholders’ existing debt and debt capacity cost, and the shareholders are free to use their debt capacity for other investments.

Governments may also use project financing to keep project debt and liabilities off their balance sheets, so they take up less fiscal space. Fiscal space is the amount of money the government may spend beyond what it already invests in public services such as health, welfare, and education. Governments can create fiscal space by raising taxes, cutting lower-priority spending, or securing external grants, but they must do so carefully to ensure long-term economic sustainability. The theory is that strong economic growth will boost tax revenues, allowing the government to increase spending on public services.

When a company defaults on a loan, recourse financing gives lenders full claim to shareholders’ assets or cash flow. In contrast, project financing designates the project company as a limited liability SPV. If the project company defaults, the lenders’ recourse is thus limited primarily or entirely to the project’s assets, including completion and performance guarantees and bonds.

A key consideration in nonrecourse financing is whether there are circumstances under which lenders could access shareholders' assets. For example, if shareholders deliberately breach the terms of the agreement, the lender may have recourse to their assets.

Applicable law may restrict the extent to which shareholder liability may be limited. For example, liability for personal injury or death is typically not subject to elimination. Nonrecourse debt is characterized by high  capital expenditures (CapEx) , long loan periods, and uncertain revenue streams. Underwriting these loans requires financial modeling skills and sound knowledge of the underlying technical domain.

To reduce the risk of deficiency balances, lenders typically limit loan-to-value (LTV) ratios to 60% in nonrecourse loans . As a result, borrowers face stricter credit standards, and the loans carry higher interest rates than recourse loans, reflecting their greater risk.

Recourse Loans vs. Nonrecourse Loans

If two people purchase large assets, such as homes, and one has a recourse loan while the other has a nonrecourse loan, the financial institution's actions against each borrower will differ.

In both cases, the homes may be collateral , meaning they can be seized should either borrower default. To recoup costs when the borrowers default, the financial institutions can attempt to sell the homes and use the sale price to pay down the associated debt. However, if the homes are sold for less than the amount owed, the lender can pursue the borrower with a recourse loan for the remaining debt. In contrast, the borrower with the nonrecourse loan can't be held liable for any additional payment beyond the seizure of the property.

Project and corporate finance are important concepts in the world of financing. Both of these funding methods rely on debt and equity to help businesses reach their financing goals, but they are very distinct.

Project finance can be very capital-intensive and risky, and it relies on the project’s cash flow for repayment in the future. On the other hand, corporate finance focuses on boosting  shareholder value  through various strategies, such as capital investment and taxation. Unlike project financing, shareholders receive an ownership stake in the company with corporate financing.

Some of the key features of corporate financing include:

• A company’s capital structure, which is a company’s funding of its operations and growth.
• The distribution of dividends , which represent a portion of the profits generated by a company and paid to shareholders.
• The management of working capital , or money used to fund a company’s day-to-day operations.

What Is the Role of Project Finance?

Project finance is a way for companies to raise money to realize opportunities for growth. This type of funding is generally meant for large, long-term projects. It relies on the project’s cash flows to repay sponsors or investors.

What Are the Risks Associated With Project Finance?

Some risks associated with project finance include volume, financial, and operational risk. Volume risk can be attributed to supply or consumption changes, competition, or changes in output prices. Inflation, foreign exchange, and interest rates often lead to financial risk. A company’s operating performance often defines operational risk, the cost of raw materials, and maintenance, among others.

Why Do Firms Use Project Finance?

Project finance is a way for companies to fund long-term projects. This form of financing uses a nonrecourse or limited-recourse financial structure . Firms with weak balance sheets are more apt to use project finance to meet their funding needs rather than trying to raise capital on their own. This is especially true for smaller companies and startups that have large-scale projects on the horizon.

Project finance is a form of funding best suited for large, long-term projects like major infrastructure improvements or industrial developments. It relies on the project's estimated future cash flow for repayment with minimal recourse. This allows companies to take on bigger projects without negatively impacting their balance sheets.

Project finance may carry higher risks due to its reliance on future income streams. However, it also offers a way to fund businesses in sectors where traditional corporate finance may not work or even be an option.

International Trade Administration. " Project Financing ."

Internal Revenue Service. " Recourse vs. Nonrecourse Debt ."

African Legal Support Facility. " General Debt Financing Versus Project Financing ."

Cambridge University Press. " Financing PPP and the Fundamentals of Project Finance ."

International Monetary Fund. " Back to Basics. Fiscal Space: What It Is and How to Get It ."

KPMG. " Appropriate Risk Mitigation in Infrastructure Finance. "

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Project Financing Explained: Key Concepts and Benefits

Project financing is a pivotal method in the realms of major industrial and infrastructure projects worldwide. This financing structure, distinct from traditional methods of corporate finance, offers unique benefits and challenges. This article delves into the fundamental concepts, structures, and profound advantages of project financing. Whether you’re a business owner, financial analyst, or investor, understanding these aspects can provide critical insights into how projects can be realized through tailored financing solutions.

What is Project Financing?

Project financing involves securing funding for large projects through a financing structure where the repayment source is primarily the revenue generated by the project itself. This financial arrangement is typically non-recourse or limited recourse, which means that creditors have a claim on the project’s assets and cash flow as collateral, rather than on the broader assets or creditworthiness of the project sponsors.

Key Concepts in Project Financing

• Risk Allocation : One of the cornerstones of project financing is the precise allocation of risks among various stakeholders—lenders, investors, and other parties like government bodies. Effective risk allocation is crucial as it ensures that risks are borne by the parties best equipped to manage them, thereby enhancing the project’s viability and attractiveness to investors.
• Special Purpose Vehicles (SPVs) : Project financing usually involves the creation of a Special Purpose Vehicle (SPV), a legal entity created solely for executing the project. This isolates financial risk, making the project a separate entity from its sponsors and protecting them from direct liability.
• Contractual Framework : A robust network of contracts among various parties, including construction companies, service providers, suppliers, and off-takers, forms the backbone of any project financing structure. These contracts help distribute risks and define the responsibilities and expectations of all parties involved.
• Financial Modeling : An accurate and dynamic financial model is essential in project financing. This model predicts the project’s economic outcomes using various inputs like costs, schedules, interest rates, and revenue projections. It is vital for securing financing, as it demonstrates the project’s potential profitability and risk to investors.

Benefits of Project Financing

• Mitigation of Risk : By using non-recourse or limited recourse financing, project financing limits the financial risk to the sponsors. The focus is on the project’s assets and profitability rather than the sponsors’ overall financial status. This aspect is particularly appealing in sectors like mining, infrastructure, and energy, where projects involve substantial capital expenditures and risk.
• Leverage : Project financing allows sponsors to fund projects with relatively high levels of debt compared to equity. This can significantly enhance equity returns and spread the sponsors’ equity across multiple projects.
• Off-balance Sheet Financing : Since the SPV is a separate legal entity, its debts do not appear on the balance sheet of the parent company. This arrangement can improve the financial ratios of the sponsoring company, making it more attractive to investors and lenders.
• Project Expertise and Innovation : The intense scrutiny and detailed risk assessment required in arranging project financing encourage innovation and efficient project management. It necessitates thorough planning and assessment by experts, which can lead to more sustainable and technically sound projects.
• Economic Development : Project financing is often crucial in sectors like infrastructure, where projects provide essential services and stimulate economic growth. By enabling such projects, project financing supports long-term economic development and improvement in quality of life.

Project financing is a sophisticated financial tool that, when used effectively, can provide substantial benefits to all parties involved. It facilitates the development of large-scale projects while distributing risks and enhancing economic outcomes. Understanding its structure and benefits is essential for anyone involved in large project developments, offering a clear pathway to not just envision but realize ambitious projects.

People also ask

Project financing allows for the effective allocation of risks among stakeholders. Sponsors, lenders and other parties involved can share and manage risks based on their expertise and capacity. This risk-sharing mechanism enhances the overall appeal of the project and makes it more attractive to investors.

The project financing process consists of three stages: pre-financing, which includes risk assessment and feasibility checking, the financing stage involving raising capital and contract negotiations and the post-financing stage which focuses on project monitoring and loan repayment.

Project finance refers to the funding of long-term projects, such as public infrastructure or services, industrial projects, and others through a specific financial structure. Finances can consist of a mix of debt and equity. The cash flows from the project enable servicing of the debt and repayment of debt and equity.

The objective of using project financing to raise capital is to create a structure that is bank- able (of interest to investors) and to limit the stakeholders' risk by diverting some risks to par- ties that can better manage them.

Project finance is mainly used by private companies as it allows them to fund projects from off-balance sheet transactions (OBS). This term refers to assets or liabilities that don't appear on a company's balance sheet. These include leaseback agreements, operating leases, accounts receivable and more.

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Project Financial Management: Managing Project Financials

Whether you call it project financial management or project accounting, managing a project’s finances is essential to delivering a successful project. It’s more than just keeping up with costs. There’s a lot of planning, managing and tracking involved.

But what exactly is financial project management? We’ll get to that and define the various project financials before getting into the process of managing a project’s finances. Then, to help you get started, we’ll have a few free financial management templates you can download.

What Is Project Financial Management?

Project financial management is the process of controlling the financial aspect of a project, such as its cost, revenue and profit. To do this requires planning, estimating, budgeting, funding, managing project expenses and billing.

The budgeting part of project financial management is by far the most important aspect of this process. Being able to effectively manage the budget over the life cycle of the project and making sure that all the planned tasks are completed without having to overspend is critical to the successful delivery of the project.

The importance of project financial management cannot be underestimated. It will help manage the overall project better and positively impact business growth. That’s because it balances the investment in the project with the expected return on that investment.

Other benefits include helping track progress with financial metrics, identifying and prioritizing projects that have a higher return on investment and managing project scope and cost overruns. It can also be helpful with improving resource management capabilities by better allocating resources based on your business’s strategic goals.

Naturally, project management software facilitates these benefits. ProjectManager is award-winning project management software that can track costs in real time to help you with project financial management. Our real-time dashboards give project managers a high-level overview of project costs whenever they want them. Dashboards have easy-to-read graphs and charts that track five other project metrics, too. Plus, there’s no time-consuming setup required as with lightweight alternatives. Get started with ProjectManager today for free.

What Are Project Financials?

Project financials are the money related to the project you’re managing. By planning, managing and tracking project finances, project managers can help deliver a profitable project. Project financials center around controlling the following.

Project Costs

Project costs refer to the total funds that a project requires. This includes direct costs, such as fixed labor, materials and equipment, as well as indirect costs that include utilities and quality control , among other things.

Project Revenue

Project revenue is what a project is expected to earn. It’s estimated by looking at historical data, such as past performance and using that information to predict future performance. It can be represented by target revenue, which is what the project is expected to earn and actual billing, what you bill your customer. It can also include the estimate at the completion of project billing, which is actual billing and the remaining labor billing which is planned billable expenses plus flat fees for all unfinished activities.

Project Profit

Project profit is the total amount of money that the project earns after expenses. Net profit for a project is the gross profit minus operating expenses and taxes.

Project Funding Sources

Project funding sources can come from many different sources. For example, debt is when those funds are raised from lenders. Companies can also issue bonds and sell them for funding. Equity financing is when a developer raises private equity funds. They can also get loans to finance the project.

Project Cash Flows

Project cash flows refer to cash moving in and out of an organization and determine the project’s rate of return or value. This money can be used to fund the project.

How to Manage Project Financials

Whether you’re working on a large, expensive project or a smaller one, managing project finances is essential to delivering that project on time and within budget. Following these 11 steps will help you better manage your project financials.

1. Clearly Define the Scope of Your Project

Before you can zero in on the costs, you need to understand the scope of the project. That includes the project goals, deliverables, tasks, and, of course, costs. Create a scope statement to ensure that you cover all the bases, such as the project schedule, and align the project with stakeholder’s expectations.

2. Identify Project Risks

All projects are risky endeavors. Unexpected events can have a positive or negative impact on the project. Therefore, one must plan for risks by identifying what might happen and then create a plan of action if it does. It also helps to prioritize their risks, note the likelihood of them happening, and, if they do, their severity.

3. Do a Feasibility Study

A feasibility study is used to evaluate the project and determine if it’ll be successful and, therefore, worth initiating. Before you can manage finances you need to see if the project itself is worth the investment. The feasibility study will help you identify potential issues and allow for a better evaluation of the project’s viability.

4. Create a Resource Plan

If the project is feasible, then you’ll want to create a resource plan. Resources are anything you need to execute the project, from people to equipment and materials. In other words, everything that costs money in a project. Therefore, you must determine what those resources are and when they’re needed to allocate them accordingly based on your team’s capacity.

You can use our resource planning template to estimate all the resources that are needed to execute your project, their costs and the date when they’re needed, which is critical for estimating your project costs and making a budget.

5. Estimate the Cost of Project Resources

Not only must you make a resource plan, but estimate the cost of those resources. They will be the bulk of the expenses for the project. Use historical data, expert advice and anything else you can to create the most accurate estimate for the project resources as they will be a large part of the overall project budget.

6. Conduct a Cost-Benefit Analysis

Another tool to figure out if the project is worth the time and money is running a cost-benefit analysis. This tool helps to evaluate the costs of the project against the benefits, which can be financial or otherwise. This practical, data-driven approach will help make investment decisions that are more likely to get a return.

7. Estimate the Return on Investment of Your Project

Speaking of a return on investment, that’s another metric by which to measure the potential project before starting it. In other words, you’re going to evaluate the project from a solely financial perspective to see what its profitability will be.

8. Know The Break-Even Point of Your Project

The break-even point in a project is when the total cost and the total revenue are equal. This is helpful when making a financial decision about a project especially if you’re launching a new product as it predicts how many units must be sold, which helps determine if the project meets market demand.

9. Make a Project Budget

Now you’re ready to make a budget. This should be the most accurate estimate for your project’s costs. You’ve already defined the project’s scope, now you want to use a work breakdown structure to identify all deliverables and the tasks necessary to complete them. You’ll also use the research in making the resource plan, set aside a contingency fund to cover unexpected expenses and then create the budget.

10. Secure Funding

This budget will be used to help secure funding for the project. This means coming up with a proposal that outlines your objectives, methodology and the expected outcomes for the project. It should sway potential stakeholders to fund the project because it’ll give them a return on their investment.

11. Track Cost Variance as the Project Is Executed

To ensure that the stakeholders who fund the project get that return on their investment, you’ll need to track cost variance. This means, comparing the actual costs of executing the project against what you planned for in the budget. This allows project managers to see if they’re spending as planned and, if not, adjust the schedule or scope to get back on track.

More Project Financial Management Templates

Project management templates can help you manage project finances. ProjectManager’s website is an online hub for all things project management, including free project management templates for Excel and Word. We have free templates to help you with every phase of a project. Here are a few that can assist your project’s financial management.

Project Timesheet Template

This free project timesheet template allows you to keep track of the work hours your team members have spent on project tasks, their pay rate and their corresponding payment.

Project Estimate Template

Having accurate estimates is part of project financial management. Use our free project estimate template for Excel to help you create and keep to your budget. Our free template allows you to attach labor and materials costs to every task in your project.

How ProjectManager Helps Manage Project Finances

While our free templates can help you get started with your project financial management process, you’re going to need project management software to be able to track those costs as you execute the project. ProjectManager is award-winning project management software that is online so the data you get is in real time, which gives you the advantage of catching discrepancies in your actual costs compared to your planned costs quickly so you can respond quickly and get back on track. But that’s only one small part of how our tool helps you manage finances.

Monitor Labor Costs With Timesheets

Labor costs are often your most expensive. If your labor resources aren’t executing their tasks according to the project schedule, you’ll be racking up extra costs in no time. Being able to keep track of your labor costs is essential to staying on budget. Our secure timesheets streamline the payroll process but also give project managers a window into the team’s work. You can see what percentage of their tasks have been completed and if that aligns with where they should be in terms of the larger project plan.

Use Reports to Get More Detailed Information

While project managers can get a high-level overview of their project’s finances with the real-time dashboard, when they want more details they can toggle over to the reporting features. There they can easily general status reports or portfolio reports if they’re managing multiple projects. They can also general reports on timesheets to track labor costs, project variance and much more. All reports are customizable, which means they can be filtered to show only the data you want to see. Then they can be shared in various formats with stakeholders to keep them updated.

Delivering your project to a successful completion takes more than financial management. That’s why our software has risk management, task management and resource management features to ensure you have the control over your project that you need to bring it in on time and within budget.

ProjectManager is online project management software that connects teams no matter where they are, in the office, out in the field or anywhere in between. Share files, comment at the task level and more to foster better collaboration. Join teams from Avis, Nestle and Siemens who use our software to deliver successful projects. Get started with ProjectManager today for free.

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How to Prepare a Financial Plan for Startup Business (w/ example)

Financial Statements Template

Ajay Jagtap

• December 7, 2023
• 13 Min Read

If someone were to ask you about your business financials, could you give them a detailed answer?

Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.

Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.

A business plan’s financial plan section is no easy task—we get that.

But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.

Ready to get started? Let’s begin by discussing startup financial planning.

What is Startup Financial Planning?

Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.

Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.

Key Takeaways

• Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
• Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
• Preparing a financial plan is easier and faster when you use a financial planning tool.
• Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.

Why is Financial Planning Important to Your Startup?

Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.

A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.

It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .

Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.

Makes sense why financial planning is important to your startup or small business, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.

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Key Components of a Startup Financial Plan

Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.

Income Statement

An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.

Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.

Your income or P&L statement must list the following:

• Cost of goods or cost of sale
• Gross margin
• Operating expenses
• Revenue streams
• EBITDA (Earnings before interest, tax, depreciation , & amortization )

Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.

Cash flow Statement

A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.

This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.

Your cash flow projection consists of the following three components:

✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.

✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.

✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.

Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.

Balance Sheet

Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.

Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.

This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.

Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:

Here is what’s the core purpose of having a balance-sheet:

• Indicates the capital need of the business
• It helps to identify the allocation of resources
• It calculates the requirement of seed money you put up, and
• How much finance is required?

Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.

Break-even Analysis

Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.

For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.

Remember, anything you sell beyond the break-even point will result in profit.

You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.

• Fixed costs: fixed expenses that stay the same no matter what.
• Variable costs: expenses that fluctuate over time depending on production or sales.

A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.

Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup or small business.

How to Create a Financial Section of a Startup Business Plan?

1. determine your financial needs.

You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.

Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.

Assessing your current financial situation and health will help determine how much capital you need for your small business and help plan fundraising activities and outreach.

Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.

Having learned to determine financial needs, let’s head straight to setting financial goals.

2. Define Your Financial Goals

Setting realistic financial goals is fundamental in preparing an effective financial plan for your business plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.

Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.

However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.

Feeling overwhelmed? Just define your financial goals—you’ll be fine.

You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.

3. Choose the Right Financial Planning Tool

Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.

Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.

Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.

Create a Financial Plan with Upmetrics in no time

Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.

Start Forecasting

4. Make Assumptions Before Projecting Financials

Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.

You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.

You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.

After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.

5. Prepare Realistic Financial Projections

It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.

Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.

Following are the two key aspects of your financial projections:

Revenue Projections

In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.

It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.

The following are the key components of an accurate revenue projection report:

• Market analysis
• Sales forecast
• Pricing strategy
• Growth assumptions
• Seasonal variations

This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.

Expense Projections

Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.

Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.

These are the most common costs to consider while projecting expenses:

• Fixed costs
• Variable costs
• Employee costs or payroll expenses
• Operational expenses
• Marketing and advertising expenses
• Emergency fund

Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.

6. Consider “What if” Scenarios

After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.

Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.

Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.

7. Build a Visual Report

If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.

Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.

Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.

Here’s what Upmetrics’ dashboard looks like:

8. Monitor and Adjust Your Financial Plan

Even though it’s not a primary step in creating a good financial plan for your small business, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.

There are multiple ways to monitor your financial plan.

For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.

Consider making necessary adjustments if your assumptions are not resonating with actual numbers.

Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.

And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.

Startup Financial Plan Example

Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.

Important Assumptions

• The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
• The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
• The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
• Sales are cash basis – nonaccrual accounting
• Moderate ramp- up in staff over the 5 years forecast
• Barista salary in the forecast is $36,000 in 2023.
• In general, most cafes have an 85% gross profit margin
• In general, most cafes have a 3% net profit margin

Projected Balance Sheet

Projected Cash-Flow Statement

Projected Profit & Loss Statement

Break Even Analysis

Start Preparing Your Financial Plan

We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.

Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.

So what are you waiting for? Try Upmetrics and create your financial plan in a snap.

Build your Business Plan Faster

with step-by-step Guidance & AI Assistance.

Frequently Asked Questions

How often should i update my financial projections.

Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.

How do I estimate startup costs accurately?

You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.

What financial ratios should startups pay attention to?

Here’s a list of financial ratios every startup owner should keep an eye on:

• Net profit margin
• Current ratio
• Quick ratio
• Working capital
• Return on equity
• Debt-to-equity ratio
• Return on assets
• Debt-to-asset ratio

What are the 3 different scenarios in scenario analysis?

As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or small businesses often consider analyzing these three scenarios:

• base-case (expected) scenario
• Worst-case scenario
• best case scenario.

About the Author

Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more

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How To Create Financial Projections for Your Business Plan

Building a financial projection as you write out your business plan can help you forecast how much money your business will bring in.

Planning for the future, whether it’s with growth in mind or just staying the course, is central to being a business owner. Part of this planning effort is making financial projections of sales, expenses, and—if all goes well—profits.

Even if your business is a startup that has yet to open its doors, you can still make projections. Here’s how to prepare your business plan financial projections, so your company will thrive.

What are business plan financial projections?

Business plan financial projections are a company’s estimates, or forecasts, of its financial performance at some point in the future. For existing businesses, draw on historical data to detail how your company expects metrics like revenue, expenses, profit, and cash flow to change over time.

Companies can create financial projections for any span of time, but typically they’re for between one and five years. Many companies revisit and amend these projections at least annually. 

Creating financial projections is an important part of building a business plan . That’s because realistic estimates help company leaders set business goals, execute financial decisions, manage cash flow , identify areas for operational improvement, seek funding from investors, and more.

What are financial projections used for? 

Financial forecasting serves as a useful tool for key stakeholders, both within and outside of the business. They often are used for:

Business planning

Accurate financial projections can help a company establish growth targets and other goals . They’re also used to determine whether ideas like a new product line are financially feasible. Future financial estimates are helpful tools for business contingency planning, which involves considering the monetary impact of adverse events and worst-case scenarios. They also provide a benchmark: If revenue is falling short of projections, for example, the company may need changes to keep business operations on track.

Projections may reveal potential problems—say, unexpected operating expenses that exceed cash inflows. A negative cash flow projection may suggest the business needs to secure funding through outside investments or bank loans, increase sales, improve margins, or cut costs.

When potential investors consider putting their money into a venture, they want a return on that investment. Business projections are a key tool they will use to make that decision. The projections can figure in establishing the valuation of your business, equity stakes, plans for an exit, and more. Investors may also use your projections to ensure that the business is meeting goals and benchmarks.

Loans or lines of credit 

Lenders rely on financial projections to determine whether to extend a business loan to your company. They’ll want to see historical financial data like cash flow statements, your balance sheet , and other financial statements—but they’ll also look very closely at your multi-year financial projections. Good candidates can receive higher loan amounts with lower interest rates or more flexible payment plans.

Lenders may also use the estimated value of company assets to determine the collateral to secure the loan. Like investors, lenders typically refer to your projections over time to monitor progress and financial health.

What information is included in financial projections for a business?

Before sitting down to create projections, you’ll need to collect some data. Owners of an existing business can leverage three financial statements they likely already have: a balance sheet, an annual income statement , and a cash flow statement .

A new business, however, won’t have this historical data. So market research is crucial: Review competitors’ pricing strategies, scour research reports and market analysis , and scrutinize any other publicly available data that can help inform your projections. Beginning with conservative estimates and simple calculations can help you get started, and you can always add to the projections over time.

One business’s financial projections may be more detailed than another’s, but the forecasts typically rely on and include the following:

True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories:

Income statement

Projected income statements, also known as projected profit and loss statements (P&Ls), forecast the company’s revenue and expenses for a given period.

Generally, this is a table with several line items for each category. Sales projections can include the sales forecast for each individual product or service (many companies break this down by month). Expenses are a similar setup: List your expected costs by category, including recurring expenses such as salaries and rent, as well as variable expenses for raw materials and transportation.

This exercise will also provide you with a net income projection, which is the difference between your revenue and expenses, including any taxes or interest payments. That number is a forecast of your profit or loss, hence why this document is often called a P&L.

Balance sheet

A balance sheet shows a snapshot of your company’s financial position at a specific point in time. Three important elements are included as balance sheet items:

• Assets. Assets are any tangible item of value that the company currently has on hand or will in the future, like cash, inventory, equipment, and accounts receivable. Intangible assets include copyrights, trademarks, patents and other intellectual property .
• Liabilities. Liabilities are anything that the company owes, including taxes, wages, accounts payable, dividends, and unearned revenue, such as customer payments for goods you haven’t yet delivered.
• Shareholder equity. The shareholder equity figure is derived by subtracting total liabilities from total assets. It reflects how much money, or capital, the company would have left over if the business paid all its liabilities at once or liquidated (this figure can be a negative number if liabilities exceed assets). Equity in business is the amount of capital that the owners and any other shareholders have tied up in the company.

They’re called balance sheets because assets always equal liabilities plus shareholder equity. 

5 steps for creating financial projections for your business

• Identify the purpose and timeframe for your projections
• Collect relevant historical financial data and market analysis
• Forecast expenses
• Forecast sales
• Build financial projections

The following five steps can help you break down the process of developing financial projections for your company:

1. Identify the purpose and timeframe for your projections

The details of your projections may vary depending on their purpose. Are they for internal planning, pitching investors, or monitoring performance over time? Setting the time frame—monthly, quarterly, annually, or multi-year—will also inform the rest of the steps.

2. Collect relevant historical financial data and market analysis

If available, gather historical financial statements, including balance sheets, cash flow statements, and annual income statements. New companies without this historical data may have to rely on market research, analyst reports, and industry benchmarks—all things that established companies also should use to support their assumptions.

3. Forecast expenses

Identify future spending based on direct costs of producing your goods and services ( cost of goods sold, or COGS) as well as operating expenses, including any recurring and one-time costs. Factor in expected changes in expenses, because this can evolve based on business growth, time in the market, and the launch of new products.

4. Forecast sales

Project sales for each revenue stream, broken down by month. These projections may be based on historical data or market research, and they should account for anticipated or likely changes in market demand and pricing.

5. Build financial projections

Now that you have projected expenses and revenue, you can plug that information into Shopify’s cash flow calculator and cash flow statement template . This information can also be used to forecast your income statement. In turn, these steps inform your calculations on the balance sheet, on which you’ll also account for any assets and liabilities .

Business plan financial projections FAQ

What are the main components of a financial projection in a business plan.

Generally speaking, most financial forecasts include projections for income, balance sheet, and cash flow.

What’s the difference between financial projection and financial forecast?

These two terms are often used interchangeably. Depending on the context, a financial forecast may refer to a more formal and detailed document—one that might include analysis and context for several financial metrics in a more complex financial model.

Do I need accounting or planning software for financial projections?

Not necessarily. Depending on factors like the age and size of your business, you may be able to prepare financial projections using a simple spreadsheet program. Large complicated businesses, however, usually use accounting software and other types of advanced data-management systems.

What are some limitations of financial projections?

Projections are by nature based on human assumptions and, of course, humans can’t truly predict the future—even with the aid of computers and software programs. Financial projections are, at best, estimates based on the information available at the time—not ironclad guarantees of future performance.

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• Financial management

Financing plan: the complete Guide

The financial plan is an integral part of financial forecasting when starting a company – but it’s also much more. This accounting document is an excellent analytical support tool to help you first determine if your project is viable and then plan your finances throughout the life cycle of your business. How do you come up with this financial document and what data do you put in there? What is its role in your business plan as a whole? And how do you analyse it? The answers to all of these questions can be found in this article.

👉How to build a cash flow budget ?

What is a financial plan?

The financial plan is a financial document (a table) that shows your requirements and resources.

Requirements : these are aspects that a company needs to fund when starting up. Investments at the start-up stage are varied – for an online seller they may include a website, whereas for a shoe manufacturer they may include some machinery.

Resources : these are the means available to the company and can come from a variety of different sources, such as subsidies or grants, interest-free loans, other borrowings and so on.

Why should you draw up a financial plan?

The financial plan is first and foremost aimed directly at financiers. It is an accounting document that provides reassures to them by:

• Proving to them that your project is funded effectively and in a stable manner
• Allowing them to see and gauge the risks being taken by the project sponsor
• Giving them a comprehensive overview of the financing situation

Drawing up a financial plan also helps to answer practical – if not essential – questions, such as:

• Is this the right time to start my business ? If the plan reveals any financial instability, this is a warning sign of hypothetical bankruptcy
• Does the business model need to be revised ? If the finances highlight that there are risks or fragility, this is an indication that you should reduce your long-term requirements. This could mean renting equipment rather than purchasing it or thinking about obtaining additional funding

When looking at financing and establishing a project, whether it’s a start-up, a recovery or a development, there are two types of financial plan to consider: an initial financial plan and a long-term financial plan.

Initial financial plan

As the name suggests, an initial financial plan is used at the start of a project. In this scenario, the aim is to make an inventory of the long-term requirements that are imperative for starting up and all of the long-term resources used to finance these requirements.

You need to do two things to create your initial financial plan:

• First, calculate your project’s long-term requirements
• Then, allocate the resources necessary to subsidise these requirements

This type of financial plan helps you to ensure that the long-term requirements that are essential to launching the project can be funded from the financial resources committed.

Long-term forecast financial plan

This table is based on the initial financial plan and aggregates the new data relating to the development and growth of your business across a number of predefined years (a period of three years is the most common).

The following new data is added:

• Long-term financial resources : we will look at potential self-financing capabilities, possible reduction in working capital requirement (WCR) and contributions from capital stock or borrowed funds
• Long-term requirements : repayment of borrowed funds, increase in WCR, dividends and new or recent investments

With a long-term financial plan, you can ensure that your company’s financial structure is strengthened and will be successful for the period under review.

In contrast, if the situation is in decline, then you will need to rethink how your company will operate and consider what actions to take to prevent it from facing medium- or long-term financial difficulties.

The difference between the financial plan and the cash flow plan

The cash flow plan is one of the four main financial business plan tables, which are:

• An initial financial plan
• A forecast income statement
• A cash flow plan
• A three-year forecast

A cash flow plan is a table showing all planned cash inflows and cash outflows month by month during your company’s first year of operation.

The table of the financial plan, on the other hand, contains two columns: one that identifies your investment requirements, such as the WCR, and another that shows your financial resources (e.g. loans and personal savings).

The difference between your requirements and your resources indicates either a cash surplus or a shortfall.

Example of a financial plan

To help you get your financial plan right, here is a template table that you can use to get started.

The above example of an initial financial plan shows that the financial resources exceed the total requirements to be financed. In this situation, the company enjoys some flexibility to compensate for the incalculable aspects of its project.

Frame of reference for the initial financial plan and useful tips

When you first draw up an initial financial plan, you should aim to obtain sufficient financial resources to at least balance your plan, i.e. so that the total requirements are equal to the total resources.

Adding a cash flow row provides a useful indicator as it gives you an idea of how much leeway you have in case you need to deal with any unexpected eventualities.

When putting your project financing in place, you should also consider the difference between financing from your own funds (capital contributions, contributions from partners) and from borrowed funds. It is usually recommended that at least 30% of your project’s activities be funded using your own funds.

How do you draw up a financial plan?

1. budget your start-up costs.

• You will incur a number of costs before your business even starts operating and these current expenses can include:
• Carrying out a market study

Putting together a financial plan with help from a chartered accountant

• All transport costs incurred when meeting with your partners, e.g. clients, suppliers etc.
• C__ommunication and marketing__ expenses, e.g. creating a website
• Filing a trademark or patent , acquiring licenses etc.
• Registration fees , solicitor/notary fees etc.

2. Identify and evaluate all investments

To do this, you have to list all of your direct and indirect costs.

Direct costs : these include remuneration for in-house staff (and remuneration for external staff, if you use consultants or contractors) and the costs of purchasing and/or renting equipment (rooms and computers, but also project-related supplies).

Indirect costs : these are all of your operating expenses, such as for heating and communications, and management costs, such as salaries for inter-departmental supporting functions (marketing, accounting, administrative)

3. Calculate your working capital requirement

A key component of the financial plan, the working capital requirement (WCR) must be estimated when you start operating.

The initial WCR is calculated as follows:

4. Determine contributions

The intention here is to gather information on all of your internal financing solutions; there are three types:

Cash contributions : these are contributions from partners or shareholders in your company. In return, these contributors receive equity from the company. These contributions are incredibly useful when starting up a project as these funds benefit your company and are not intended to be repaid

Contributions in kind : these refer to all non-financial contributions and can include material assets such as computers, cars and property. Your company benefits from material assets as it enables you to commence operations without spending any money

Partner current account contributions : this solution gives partners and shareholders another way of contributing liquidity to your company . More specifically, this option is a loan granted by a partner to your company to finance its business

5. Look into all the financing options available to your company

Assessing your external financing requirements is another important step in putting together a financial plan.

When a new entrepreneur has exhausted their personal financing solutions, they can turn to a financial institution for a bank loan. You can also make use of national or local institutional aid facilities – they can even open up avenues for tax exemptions and tax credit. Alternatively, you can also reach out to investment professionals, such as business angels, or explore crowdfunding solutions.

6. Balance your financial plan and analyse its coherence

In terms of the overall quantity of resources, the balance of your initial financial plan will be either negative, balanced out or positive.

• Negative financial plan balance : this indicates that the total requirements are greater than the total resources. In this case, new funding must be sought
• Balanced financial plan : the total requirements are equal to the total resources. All the requirements needed to start your business are covered but you don’t have a safety net
• Positive financial plan balance : the total requirements are less than the total resources. All of the requirements needed to kick off your project are covered and you also have some room for manoeuvre

Define financial plan requirements

The requirements set out in your financial plan are broken down into several categories.

Establishment costs

These costs correspond to cash outflows relating to the creation of your company, such as fees for formalities (e.g. registration, advertising), solicitors’ fees for drafting legal statutes, Companies House registration fees, tax or accounting advice costs and so on. Establishment costs are shown in the assets section of your balance sheet, under intangible assets.

Intangible assets, tangible assets and financial assets

These relate to all permanent acquisitions that make up your company’s assets . An acquisition is considered to be an asset if its unit price exceeds €500 (excluding tax).

• Intangible assets : these are all non-physical assets that are used solely for your company’s purposes over the long term (e.g. brand, patent, license, software, client database etc.)
• Tangible assets : these relate to physical assets that will be used over several accounting years. Some of the most frequent examples are land, computer equipment, furniture, machinery, vans and so on. These assets are used for your company’s activities (e.g. production, rental to third parties, supply of goods and services)
• Financial assets : in accounting, these are long-term assets of a financial nature that your company possesses. These frequently include equity shares, financial claims, loans granted to third parties and even safekeeping accounts and bonds

Working capital requirement (WCR)

This refers to an amount of money that is financed to ensure that your company can operate under favourable conditions. WCR needs to be estimated when you launch your business. In fact, you will know your company’s short-term financing requirements (stocks, VAT etc.) from the very beginning.

Start-up cash flow

As the name suggests, the start-up cash flow covers the first expenses that your company is exposed to – even before it receives any income.

So, how do you calculate your initial cash flow requirement?

To calculate your initial cash flow requirement, you need to anticipate certain events that may affect your cash flow in the months following the launch of your business. A cash flow plan is one of the most effective ways of doing this. This table will allow you not only to monitor but to anticipate all cash inflows and outflows. This financial table will provide you with a concrete monthly cash balance . If this balance is negative, this indicates that the initial cash flow estimate is insufficient and fragile. In this way, it’s used as a tool for forecasting financial risks.

You have several options for funding your start-up cash flow:

Personal contributions

• Cash flow financing
• Other funding options

Define financial plan resources

In order to be able to meet all of your initial requirements and your working capital requirement, you have to set out your financial resources.

These assets are made up entirely from contributions made by the founder of the company and their potential partners. These contributions can be obtained in different ways, such as crowdfunding or personal bank loans. When starting a business, the business generated is often not sufficient to create the cash flow needed to finance the operating cycle. All of these resources take care of this.

This refers to the different types of loan taken out by your company. Most of the time, they are requested from banks or credit institutions and can include business start-up loans or interest-free loans. All of these elements must be included in your financial plan.

Self-financing capacity

Self-financing capacity is an important indicator within your financial plan that must be calculated and included regardless of the size of your project and whether or not your company is applying for a loan. In concrete terms, self-financing capacity refers to the resources that are freed up by your company and are potentially cashable. These resources come from operational activities. Essentially, they are used to pay the shareholders, pay suppliers, pay taxes and, most importantly, to make ongoing investments.

Focus on the three-year financial plan

The three-year financial plan is an accounting table that is made up of two main parts, just like the initial financial plan:

• Resources (projected income)
• Requirements (how this income is used)

The purpose of the plan is to identify whether the company has a financing shortfall or a financing excess over the next three years. Gathering this information is particularly useful because when it highlights a need for financing, you know that you need to seek new financing from investors or banks. If you have a surplus, you can decide to make new investments to support your growth.

As discussed previously, the initial financial plan is a basic tool. Beyond that, all events relating to the years being budgeted must be included.

The key elements to include are :

• New investments made
• New capital contributions or partner current account contributions
• Borrowed funds
• Dividend distributions
• Variance in the working capital requirement
• Capacity for or lack of self-financing

The financial ratios of the financial plan

In accounting, ratios allow you to gain an overall picture of your company’s financial health. There are a number of ratios and we have listed a few below:

Debt capacity

When you are managing a business start-up or business development project, there is one parameter to take into account – your debt capacity. It’s impossible to borrow all of the financing you require, so you have to estimate your borrowing capacity. When you borrow, the bank usually funds up to 70% of your project budget, with the remaining 30% coming from personal contributions.

Repayment capacity

This indicator tells you how many years it will take to repay your loans. Repayment capacity is calculated as follows:

You need to know that your company’s capacity for repaying your liabilities is not the only variable that the bank will be scrutinising. Other parameters, such as the net debt ratio or gearing ratio, are analysed too. The debt ratio measures the level of a company’s debt in relation to its own capital. Credit institutions pay considerable attention to this ratio as it indicates your repayment capacity. In other words, it measures your credit rating.

The debt ratio is calculated as follows:

Analyse your financial plan

The aim of this comparative review is to ensure that the initial requirements related to the launch of your activity have been covered and that your structure remains stable and healthy across all of the budgeted years.

Don’t forget that for your company’s financing to be sustainable and viable, the sum of the requirements must be equal to or less than the sum of the resources.

Ideally, the total amount of resources should be higher, as this leaves room for manoeuvre in the event of unforeseen circumstances.

When requirements are too high When requirements are high and threaten to upset the balance, the first thing you need to do is consider other sources of external financing. If this happens, be careful not to destabilise personal contributions and borrowed funds. Doing this will actually impact your repayment capacity.

Essentially, you should use this financial table for forecasting purposes, incorporating variances in the working capital requirement and dividends over several accounting years. In doing so, your initial financial plan will grow into a fully-fledged forecast.

The financial plan is useful in many ways: it assesses your project budget, it helps you to identify financial partners and it helps you know if bank financing is an option. It is undoubtedly a vital tool from the moment it is first created and can be used by any company, whether it’s a very small business (VSB) , small and medium-sized enterprise (SME) or large company .

Do you need to better anticipate your cash flow? Agicap makes it easy for you to manage your company’s cash flow. Give it a go!

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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Business Plan Example and Template

Learn how to create a business plan

What is a Business Plan?

A business plan is a document that contains the operational and financial plan of a business, and details how its objectives will be achieved. It serves as a road map for the business and can be used when pitching investors or financial institutions for debt or equity financing .

A business plan should follow a standard format and contain all the important business plan elements. Typically, it should present whatever information an investor or financial institution expects to see before providing financing to a business.

Contents of a Business Plan

A business plan should be structured in a way that it contains all the important information that investors are looking for. Here are the main sections of a business plan:

1. Title Page

The title page captures the legal information of the business, which includes the registered business name, physical address, phone number, email address, date, and the company logo.

2. Executive Summary

The executive summary is the most important section because it is the first section that investors and bankers see when they open the business plan. It provides a summary of the entire business plan. It should be written last to ensure that you don’t leave any details out. It must be short and to the point, and it should capture the reader’s attention. The executive summary should not exceed two pages.

3. Industry Overview

The industry overview section provides information about the specific industry that the business operates in. Some of the information provided in this section includes major competitors, industry trends, and estimated revenues. It also shows the company’s position in the industry and how it will compete in the market against other major players.

4. Market Analysis and Competition

The market analysis section details the target market for the company’s product offerings. This section confirms that the company understands the market and that it has already analyzed the existing market to determine that there is adequate demand to support its proposed business model.

Market analysis includes information about the target market’s demographics , geographical location, consumer behavior, and market needs. The company can present numbers and sources to give an overview of the target market size.

A business can choose to consolidate the market analysis and competition analysis into one section or present them as two separate sections.

5. Sales and Marketing Plan

The sales and marketing plan details how the company plans to sell its products to the target market. It attempts to present the business’s unique selling proposition and the channels it will use to sell its goods and services. It details the company’s advertising and promotion activities, pricing strategy, sales and distribution methods, and after-sales support.

6. Management Plan

The management plan provides an outline of the company’s legal structure, its management team, and internal and external human resource requirements. It should list the number of employees that will be needed and the remuneration to be paid to each of the employees.

Any external professionals, such as lawyers, valuers, architects, and consultants, that the company will need should also be included. If the company intends to use the business plan to source funding from investors, it should list the members of the executive team, as well as the members of the advisory board.

7. Operating Plan

The operating plan provides an overview of the company’s physical requirements, such as office space, machinery, labor, supplies, and inventory . For a business that requires custom warehouses and specialized equipment, the operating plan will be more detailed, as compared to, say, a home-based consulting business. If the business plan is for a manufacturing company, it will include information on raw material requirements and the supply chain.

8. Financial Plan

The financial plan is an important section that will often determine whether the business will obtain required financing from financial institutions, investors, or venture capitalists. It should demonstrate that the proposed business is viable and will return enough revenues to be able to meet its financial obligations. Some of the information contained in the financial plan includes a projected income statement , balance sheet, and cash flow.

9. Appendices and Exhibits

The appendices and exhibits part is the last section of a business plan. It includes any additional information that banks and investors may be interested in or that adds credibility to the business. Some of the information that may be included in the appendices section includes office/building plans, detailed market research , products/services offering information, marketing brochures, and credit histories of the promoters.

Business Plan Template

Here is a basic template that any business can use when developing its business plan:

Section 1: Executive Summary

• Present the company’s mission.
• Describe the company’s product and/or service offerings.
• Give a summary of the target market and its demographics.
• Summarize the industry competition and how the company will capture a share of the available market.
• Give a summary of the operational plan, such as inventory, office and labor, and equipment requirements.

Section 2: Industry Overview

• Describe the company’s position in the industry.
• Describe the existing competition and the major players in the industry.
• Provide information about the industry that the business will operate in, estimated revenues, industry trends, government influences, as well as the demographics of the target market.

Section 3: Market Analysis and Competition

• Define your target market, their needs, and their geographical location.
• Describe the size of the market, the units of the company’s products that potential customers may buy, and the market changes that may occur due to overall economic changes.
• Give an overview of the estimated sales volume vis-à-vis what competitors sell.
• Give a plan on how the company plans to combat the existing competition to gain and retain market share.

Section 4: Sales and Marketing Plan

• Describe the products that the company will offer for sale and its unique selling proposition.
• List the different advertising platforms that the business will use to get its message to customers.
• Describe how the business plans to price its products in a way that allows it to make a profit.
• Give details on how the company’s products will be distributed to the target market and the shipping method.

Section 5: Management Plan

• Describe the organizational structure of the company.
• List the owners of the company and their ownership percentages.
• List the key executives, their roles, and remuneration.
• List any internal and external professionals that the company plans to hire, and how they will be compensated.
• Include a list of the members of the advisory board, if available.

Section 6: Operating Plan

• Describe the location of the business, including office and warehouse requirements.
• Describe the labor requirement of the company. Outline the number of staff that the company needs, their roles, skills training needed, and employee tenures (full-time or part-time).
• Describe the manufacturing process, and the time it will take to produce one unit of a product.
• Describe the equipment and machinery requirements, and if the company will lease or purchase equipment and machinery, and the related costs that the company estimates it will incur.
• Provide a list of raw material requirements, how they will be sourced, and the main suppliers that will supply the required inputs.

Section 7: Financial Plan

• Describe the financial projections of the company, by including the projected income statement, projected cash flow statement, and the balance sheet projection.

Section 8: Appendices and Exhibits

• Quotes of building and machinery leases
• Proposed office and warehouse plan
• Market research and a summary of the target market
• Credit information of the owners
• List of product and/or services

Related Readings

Thank you for reading CFI’s guide to Business Plans. To keep learning and advancing your career, the following CFI resources will be helpful:

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• Three Financial Statements
• Business Model Canvas Examples
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How to Create a Project Financial Plan

Last Updated: May 23, 2024 Approved

This article was co-authored by Michael R. Lewis . Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin. wikiHow marks an article as reader-approved once it receives enough positive feedback. In this case, 87% of readers who voted found the article helpful, earning it our reader-approved status. This article has been viewed 80,908 times.

Before embarking on a major project, a financial plan is a requirement. A project financial plan — also known as a project budget — identifies all of the costs associated with a project. These costs are then tailored to fit within the financial resources available for a particular project. Once complete, the project financial plan provides an outline of what can be spent on each area of the project to ensure it remains on budget. A financial plan does not need to be complex, but there are a few key things to know before creating one.

Preparing to Create Your Financial Plan

• For example, assume you own a construction business, and a large organization approaches you to see if you can enlarge their parking lot. They may tell you that they have $500,000 to allocate to the project, at which point you need to decide if you can do it or not. [1] X Research source
• In the top-down situation, you would need to create a budget that costs less than $500,000.

• If a customer approaches you to re-build a parking lot, and asks for a quote, you could use a bottom-up approach. You would consider everything that is necessary for the project, and then determine the total cost.
• In this case, you determine the cost of the project by figuring out what every piece will cost and then calculating a total. In the top-down approach, the cost is determined by available resources, and you must work within those limits.

• The advantage of the top-down approach is that it ensures a project is completed within available resources. If your organization has $1 million to spend on projects for a year, you can state that the new parking lot construction project must be done for under $500,000. These limitations can lead to efficiencies and the reduction of waste.
• This approach is useful if you have limited resources. Similarly, if you are running a project, it allows you to dictate to all the parties involved how much they are allowed to spend. This can keep costs down because each party will not be creating their own budgets.
• The bottom-up approach is useful because it can be very accurate. Without any immediate limit, you, or your employees can cost the project based on what the project needs. If you are constructing a new parking lot, you may task each member of your team to come up with the budget they need. The major con is this approach can lead to run-ups in cost.

• For example, assume you have been approached to construct a parking lot for a large organization, and they have allowed you to cost the project (or provide an estimate). Your first step will be to discuss with them what their needs are, and what their timelines are.
• They may say they need a new lot with 100 spaces be constructed within three months. You may then survey the site to realize that you will need to cut down trees, blast rock, and then construct the new lot.
• From this, you can determine you will need planners to design the lot, people to blast and cut down trees, and construction workers to build the lot.

Creating your Project Financial Plan

• If you are constructing a parking lot, you will need laborers to do the work, and contractors to assist/plan the project. You will need materials (like asphalt, wood, paint), and you will need equipment (tractors, jackhammers, etc).
• If you know the timeline for the project, this helps in scheduling resources and expenses. For example, if the project is three months, you know you may need to pay labor for three full months, as well as rent any equipment for that period.
• You can determine costs by consulting with your team and contacting suppliers. If it is a large project, you can ask your construction foreman what specifically he needs in terms of labor, material, and equipment. You can then contact suppliers for quotes and choose the most appropriate quote.
• You will also need to determine any legal or owner-established limits. For instance, what is the legal minimum wage, and what is the minimum wage you will offer for the different types of work? What are the legal requirements when it comes to scheduling, and are there any additional rules you wish to establish (such as no weekend access to the site)?

• Make sure to put a number to each indirect cost. If you need to estimate, always assume it will be on the higher end rather than on the lower end.
• To determine costs, consider how long you will need the good/service, and what its price is. For example, if you need to set up internet at the work site, you know you may need three months of internet at $100 per month.

• How much you choose to add depends on how accurate you think your budget is. If many aspects of your budget needed to be estimated and could not be confirmed, consider adding 5 – 10% as a reserve.

• The expenditure column would list the name of the expenditure. For example, Tractor Rental, or Construction Laborers.
• The cost would indicate how much the expenditure cost.
• The running total would indicate the total cost up to that particular point. For example, if the first row had a cost of $10, and the second row had a cost of $10, the running total in the second row would be $20.
• Notes would include any special things to remember about the expense.
• While you can consider labor as one category, it is generally better to break labor down by the tasks performed and the wages paid. For example, a welder or the foreman of a crew is usually paid more than a laborer. So you may wish to group the construction laborers together in one expenditure category, plus categories for the foreman, specialists (this could include the welder), consultants, etc.

Expert Q&A

You might also like.

• ↑ http://business.tutsplus.com/articles/6-budget-planning-steps-to-professional-project-estimates--fsw-38700
• ↑ https://www.projectsmart.co.uk/creating-a-project-budget-what-you-need-to-know.php
• ↑ http://www.liquidplanner.com/blog/7-ways-create-budget-project/

About this article

Before creating your project financial plan, calculate the essential costs you’ll need to pay to complete the project, otherwise known as core costs. Core costs can be things like labor, equipment, or materials you’ll need to succeed. You should also calculate any non-core costs like travel expenses or legal advice, to ensure there are no forgotten expenses that could send you over budget. Finally, open a 4-column table on Microsoft Excel to record your plan. The four columns, from left to right, should represent: Expenditure, Cost, Running Total, and Notes. Read on to learn how to use the top-down approach to budgeting. Did this summary help you? Yes No

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Free Financial Projection and Forecasting Templates

By Andy Marker | January 3, 2024

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We’ve collected the top free financial projection and forecasting templates. These templates enable business owners, CFOs, accountants, and financial analysts to plan future growth, manage cash flow, attract investors, and make informed decisions.  On this page, you'll find many helpful, free, customizable financial projection and forecasting templates, including a  1 2-month financial projection template , a  startup financial projection template , a  3-year financial projection template , and a  small business financial forecast template , among others. You’ll also find details on the  elements in a financial projection template ,  types of financial projection and forecasting templates , and  related financial templates .

Simple Financial Projection Template

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Small business owners and new entrepreneurs are the ideal users for this simple financial projection template. Just input your expected revenues and expenses. This template stands out due to its ease of use and focus on basic, straightforward financial planning, making it perfect for small-scale or early-stage businesses. Available with or without sample text, this tool offers clear financial oversight, better budget management, and informed decision-making regarding future business growth. 

Looking for help with your business plan? Check out these  free financial templates for a business plan to streamline the process of organizing your business's financial information and presenting it effectively to stakeholders.

Financial Forecast Template

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This template is perfect for businesses that require a detailed and all-encompassing forecast. Users can input various financial data, such as projected revenues, costs, and market trends, to generate a complete financial outlook. Available with or without example text, this template gives you a deeper understanding of your business's financial trajectory, aiding in strategic decision-making and long-term financial stability. 

These  free cash-flow forecast templates help you predict your business’s future cash inflows and outflows, allowing you to manage liquidity and optimize financial planning.

12-Month Financial Projection Template

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Use this 12-month financial projection template for better cash-flow management, more accurate budgeting, and enhanced readiness for short-term financial challenges and opportunities. Input estimated monthly revenues and expenses, tracking financial performance over the course of a year. Available with or without sample text, this template is ideal for business owners who need to focus on short-term financial planning. This tool allows you to respond quickly to market shifts and plan effectively for the business's crucial first year. 

Download  free sales forecasting templates to help your business predict future sales, enabling better inventory management, resource planning, and decision-making.

Startup Financial Projection Template

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This dynamic startup financial projection template is ideal for startup founders and entrepreneurs, as it's designed specifically for the unique needs of startups. Available with or without example text, this template focuses on clearly outlining a startup's initial financial trajectory, an essential component for attracting investors. Users can input projected revenues, startup costs, and funding sources to create a comprehensive financial forecast.

3-Year Financial Projection Template

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This three-year financial projection template is particularly useful for business strategists and financial planners who are looking for a medium-term financial planning tool. Input data such as projected revenues, expenses, and growth rates for the next three years. Available with or without sample text, this template lets you anticipate financial challenges and opportunities in the medium term, aiding in strategic decision-making and ensuring sustained business growth.

5-Year Financial Forecasting Template

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CFOs and long-term business planners can use this five-year financial forecasting template to get a clear, long-range financial vision. Available with or without example text, this template allows you to plan strategically and invest wisely, preparing your business for future market developments and opportunities. This unique tool offers an extensive outlook for your business’s financial strategy. Simply input detailed financial data spanning five years, including revenue projections, investment plans, and expected market growth. Visually engaging bar charts of key metrics help turn data into engaging narratives.

Small Business Financial Forecast Template

Download a Sample Small Business Financial Forecast Template for 

Download a Blank Small Business Financial Forecast Template for 

Excel | Google Sheets 

The small business financial forecast template is tailored specifically for the scale and specific requirements of small enterprises. Business owners and financial managers can simply input data such as projected sales or expenses. Available with or without sample text, this tool offers the ability to do the following: envision straightforward financial planning; anticipate future financial needs and challenges; make informed decisions; and steer the business toward steady growth.

Elements in a Financial Projection Template

The elements in a financial projection template include future sales, costs, profits, and cash flow. This template illustrates expected receivables, payables, and break-even dates. This tool helps you plan for your business's financial future and growth.   

Here are the standard elements in a financial projection template:   

• Revenue Projection: This estimates future income from various sources over a specific period.
• Expense Forecast: This predicts future costs, including both fixed and variable expenses.
• Profit and Loss Forecast:  This projects the profit or loss by subtracting projected expenses from projected revenues.
• Cash-Flow Projection: This assesses the inflows and outflows of cash, indicating liquidity over time.
• Balance Sheet Projection: This predicts the future financial position, showing assets, liabilities, and equity.
• Break-Even Analysis: This calculates the point at which total revenues equal total costs.
• Capital Expenditure Forecast: This estimates future spending on fixed assets such as equipment or property.
• Debt Repayment Plan: This outlines the schedule for paying back any borrowed funds.
• Sales Forecast:  This predicts future sales volume, often broken down by product or service.
• Gross Margin Analysis:  This looks at the difference between revenue and cost of goods sold.

Types of Financial Projection and Forecasting Templates

There are many types of financial projection and forecasting templates: basic templates for small businesses; detailed ones for big companies; special ones for startup businesses; and others. There are also sales forecasts, cash-flow estimates, and profit and loss projections. 

In addition, financial projection and forecasting templates include long-term planning templates, break-even analyses, budget forecasts, and templates made for specific industries such as retail or manufacturing. 

Each template serves different financial planning needs. Determine which one best suits your requirements based on the scale of your business, the complexity of its financial structure, and the specific department that you want to analyze.

Here's a list of the top types of financial projection and forecasting templates:  

• Basic Financial Projection Template: Ideal for small businesses or startups, this template provides a straightforward approach to forecasting revenue, expenses, and cash flow.
• Detailed Financial Projection Template: Best for larger businesses or those with complex financial structures, this template offers in-depth projections, including balance sheets, income statements, and cash-flow statements.
• Startup Financial Projection Template: Tailored for startups, this template focuses on funding requirements and early-stage revenue forecasts, both crucial for attracting investors and planning initial operations. 
• Sales Forecasting Template:  Used by sales and marketing teams to predict future sales, this template helps you set targets and plan marketing strategies. 
• Cash-Flow Forecast Template: Essential for financial managers who need to monitor the liquidity of the business, this template projects cash inflows and outflows over a period. 
• Profit and Loss Forecast Template (P&L):  Useful for business owners and financial officers who need to anticipate profit margins, this template enables you to forecast revenues and expenses.  
• Three-Year / Five-Year Financial Projection Template: Suitable for long-term business planning, these templates provide a broader view of your company’s financial future, improving your development strategy and investor presentations. 
• Break-Even Analysis Template:  Used by business strategists and financial analysts, this template helps you determine when your business will become profitable. 
• Budget Forecasting Template:  Designed for budget managers, this template uses historical financial data to help you plan your future spending. 
• Sector-Specific Financial Projection Template:  Designed for specific industries (such as retail or manufacturing), these templates take into account industry-specific factors and benchmarks.

Related Financial Templates

Check out this list of free financial templates related to financial projections and forecasting. You'll find templates for budgeting, tracking profits and losses, planning your finances, and more. These tools help keep your company’s money matters organized and clear.

Free Project Budget Templates

Use one of these  project budget templates to maintain control over project finances, ensuring costs stay aligned with the allocated budget and improving overall financial management.

Free Monthly Budget Templates

Use one of these  monthly budget templates to effectively track and manage your business’s income and expenses, helping you plan financially and save money.

Free Expense Report Templates

Use one of these  expense report templates to systematically track and document all business-related expenditures, ensuring accurate reimbursement and efficient financial record-keeping.

Free Balance Sheet Templates

Use one of these  balance sheet templates to summarize your company's financial position at a given time.

Free Cash-Flow Forecast Templates

Use one of these  cash-flow forecast templates to predict future cash inflows and outflows, helping you manage liquidity and make informed financial decisions.

Free Cash-Flow Statement Templates

Use one of these  cash-flow statement templates to track the movement of cash in and out of your business, so you can assess your company’s level of liquidity and financial stability.

Free Discounted Cash-Flow (DCF) Templates

Use one of these  discounted cash-flow (DCF) templates to evaluate the profitability of investments or projects by calculating their present value based on future cash flows.

Free Financial Dashboard Templates

Use one of these  financial dashboard templates to get an at-a-glance view of key financial metrics, so you can make decisions quickly and manage finances effectively.

Related Customer Stories

Free financial planning templates.

Use one of these  financial planning templates to strategically organize and forecast future finances, helping you set realistic financial goals and ensure long-term business growth.

Free Profit and Loss (P&L) Templates

Use one of these  profit and loss (P&L) templates to systematically track income and expenses, giving you a clear picture of your company's profitability over a specific period.

Free Billing and Invoice Templates

Use one of these  billing and invoice templates to streamline the invoicing process and ensure that you bill clients accurately and professionally for services or products.

Plan and Manage Your Company’s Financial Future with Financial Projection and Forecasting Templates from Smartsheet

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• Building Your Business

How To Create Financial Projections for Your Business

Learn how to anticipate your business’s financial performance

• Understanding Financial Projections & Forecasting

Why Forecasting Is Critical for Your Business

Key financial statements for forecasting, how to create your financial projections, frequently asked questions (faqs).

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Just like a weather forecast lets you know that wearing closed-toe shoes will be important for that afternoon downpour later, a good financial forecast allows you to better anticipate financial highs and lows for your business.

Neglecting to compile financial projections for your business may signal to investors that you’re unprepared for the future, which may cause you to lose out on funding opportunities.

Read on to learn more about financial projections, how to compile and use them in a business plan, and why they can be crucial for every business owner.

Key Takeaways

• Financial forecasting is a projection of your business's future revenues and expenses based on comparative data analysis, industry research, and more.
• Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts, which can be attractive to investors.
• Some of the key components to include in a financial projection include a sales projection, break-even analysis, and pro forma balance sheet and income statement.
• A financial projection can not only attract investors, but helps business owners anticipate fixed costs, find a break-even point, and prepare for the unexpected.

Understanding Financial Projections and Forecasting

Financial forecasting is an educated estimate of future revenues and expenses that involves comparative analysis to get a snapshot of what could happen in your business’s future.

This process helps in making predictions about future business performance based on current financial information, industry trends, and economic conditions. Financial forecasting also helps businesses make decisions about investments, financing sources, inventory management, cost control strategies, and even whether to move into another market.

Developing both short- and mid-term projections is usually necessary to help you determine immediate production and personnel needs as well as future resource requirements for raw materials, equipment, and machinery.

Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts. They can also be used to make informed decisions about the business’s plans. Creating an accurate, adaptive financial projection for your business offers many benefits, including:

• Attracting investors and convincing them to fund your business
• Anticipating problems before they arise
• Visualizing your small-business objectives and budgets
• Demonstrating how you will repay small-business loans
• Planning for more significant business expenses
• Showing business growth potential
• Helping with proper pricing and production planning

Financial forecasting is essentially predicting the revenue and expenses for a business venture. Whether your business is new or established, forecasting can play a vital role in helping you plan for the future and budget your funds.

Creating financial projections may be a necessary exercise for many businesses, particularly those that do not have sufficient cash flow or need to rely on customer credit to maintain operations. Compiling financial information, knowing your market, and understanding what your potential investors are looking for can enable you to make intelligent decisions about your assets and resources.

The income statement, balance sheet, and statement of cash flow are three key financial reports needed for forecasting that can also provide analysts with crucial information about a business's financial health. Here is a closer look at each.

Income Statement

An income statement, also known as a profit and loss statement or P&L, is a financial document that provides an overview of an organization's revenues, expenses, and net income.

Balance Sheet

The balance sheet is a snapshot of the business's assets and liabilities at a certain point in time. Sometimes referred to as the “financial portrait” of a business, the balance sheet provides an overview of how much money the business has, what it owes, and its net worth.

The assets side of the balance sheet includes what the business owns as well as future ownership items. The other side of the sheet includes liabilities and equity, which represent what it owes or what others owe to the business.

A balance sheet that shows hypothetical calculations and future financial projections is also referred to as a “pro forma” balance sheet.

Cash Flow Statement

A cash flow statement monitors the business’s inflows and outflows—both cash and non-cash. Cash flow is the business’s projected earnings before interest, taxes, depreciation, and amortization ( EBITDA ) minus capital investments.

Here's how to compile your financial projections and fit the results into the three above statements.

A financial projections spreadsheet for your business should include these metrics and figures:

• Sales forecast
• Balance sheet
• Operating expenses
• Payroll expenses (if applicable)
• Amortization and depreciation
• Cash flow statement
• Income statement
• Cost of goods sold (COGS)
• Break-even analysis

Here are key steps to account for creating your financial projections.

Projecting Sales

The first step for a financial forecast starts with projecting your business’s sales, which are typically derived from past revenue as well as industry research. These projections allow businesses to understand what their risks are and how much they will need in terms of staffing, resources, and funding.

Sales forecasts also enable businesses to decide on important levels such as product variety, price points, and inventory capacity.

Income Statement Calculations

A projected income statement shows how much you expect in revenue and profit—as well as your estimated expenses and losses—over a specific time in the future. Like a standard income statement, elements on a projection include revenue, COGS, and expenses that you’ll calculate to determine figures such as the business’s gross profit margin and net income.

If you’re developing a hypothetical, or pro forma, income statement, you can use historical data from previous years’ income statements. You can also do a comparative analysis of two different income statement periods to come up with your figures.

Anticipate Fixed Costs

Fixed business costs are expenses that do not change based on the number of products sold. The best way to anticipate fixed business costs is to research your industry and prepare a budget using actual numbers from competitors in the industry. Anticipating fixed costs ensures your business doesn’t overpay for its needs and balances out its variable costs. A few examples of fixed business costs include:

• Rent or mortgage payments
• Operating expenses (also called selling, general and administrative expenses or SG&A)
• Utility bills
• Insurance premiums

Unfortunately, it might not be possible to predict accurately how much your fixed costs will change in a year due to variables such as inflation, property, and interest rates. It’s best to slightly overestimate fixed costs just in case you need to account for these potential fluctuations.

Find Your Break-Even Point

The break-even point (BEP) is the number at which a business has the same expenses as its revenue. In other words, it occurs when your operations generate enough revenue to cover all of your business’s costs and expenses. The BEP will differ depending on the type of business, market conditions, and other factors.

To find this number, you need to determine two things: your fixed costs and variable costs. Once you have these figures, you can find your BEP using this formula:

Break-even point = fixed expenses ➗ 1 – (variable expenses ➗ sales)

The BEP is an essential consideration for any projection because it is the point at which total revenue from a project equals total cost. This makes it the point of either profit or loss.

Plan for the Unexpected

It is necessary to have the proper financial safeguards in place to prepare for any unanticipated costs. A sudden vehicle repair, a leaky roof, or broken equipment can quickly derail your budget if you aren't prepared. Cash management is a financial management plan that ensures a business has enough cash on hand to maintain operations and meet short-term obligations.

To maintain cash reserves, you can apply for overdraft protection or an overdraft line of credit. Overdraft protection can be set up by a bank or credit card business and provides short-term loans if the account balance falls below zero. On the other hand, a line of credit is an agreement with a lending institution in which they provide you with an unsecured loan at any time until your balance reaches zero again.

How do you make financial projections for startups?

Financial projections for startups can be hard to complete. Historical financial data may not be available. Find someone with financial projections experience to give insight on risks and outcomes.

Consider business forecasting, too, which incorporates assumptions about the exponential growth of your business.

Startups can also benefit from using EBITDA to get a better look at potential cash flow.

What are the benefits associated with forecasting business finances?

Forecasting can be beneficial for businesses in many ways, including:

• Providing better understanding of your business cash flow
• Easing the process of planning and budgeting for the future based on income
• Improving decision-making
• Providing valuable insight into what's in their future
• Making decisions on how to best allocate resources for success

How many years should your financial forecast be?

Your financial forecast should either be projected over a specific time period or projected into perpetuity. There are various methods for determining how long a financial forecasting projection should go out, but many businesses use one to five years as a standard timeframe.

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How to Write a Financial Plan for a Business Plan

Noah Parsons

4 min. read

Updated July 11, 2024

Creating a financial plan for a business plan is often the most intimidating part for small business owners.

It’s also one of the most vital. Businesses with well-structured and accurate financial statements are more prepared to pitch to investors, receive funding, and achieve long-term success.

Thankfully, you don’t need an accounting degree to successfully create your budget and forecasts.

Here is everything you need to include in your business plan’s financial plan, along with optional performance metrics, funding specifics, mistakes to avoid , and free templates.

• Key components of a financial plan in business plans

A sound financial plan for a business plan is made up of six key components that help you easily track and forecast your business financials. They include your:

Sales forecast

What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.

Subscription sales forecast

While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.

Expense budget

Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.

How to forecast personnel costs

How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.

Profit and loss forecast

Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.

Cash flow forecast

Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.

Balance sheet

Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.

What to include if you plan to pursue funding

Do you plan to pursue any form of funding or financing? If the answer is yes, you’ll need to include a few additional pieces of information as part of your business plan’s financial plan example.

Highlight any risks and assumptions

Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.

Plan your exit strategy

Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.

• Financial ratios and metrics

With your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios.

While including these metrics in your financial plan for a business plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall financial situation.

Key financial terms you should know

It’s not hard. Anybody who can run a business can understand these key financial terms. And every business owner and entrepreneur should know them.

Common business ratios

Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.

Break-even analysis

Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.

How to calculate ROI

How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).

• How to improve your financial plan

Your financial statements are the core part of your business plan’s financial plan that you’ll revisit most often. Instead of worrying about getting it perfect the first time, check out the following resources to learn how to improve your projections over time.

Common mistakes with business forecasts

I was glad to be asked about common mistakes with startup financial projections. I read about 100 business plans per year, and I have this list of mistakes.

How to improve your financial projections

Learn how to improve your business financial projections by following these five basic guidelines.

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Download and use these free financial templates and calculators to easily create your own financial plan.

Sales forecast template

Download a free detailed sales forecast spreadsheet, with built-in formulas, to easily estimate your first full year of monthly sales.

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Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

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How To Write A Business Plan (2024 Guide)

Updated: Apr 17, 2024, 11:59am

Table of Contents

Brainstorm an executive summary, create a company description, brainstorm your business goals, describe your services or products, conduct market research, create financial plans, bottom line, frequently asked questions.

Every business starts with a vision, which is distilled and communicated through a business plan. In addition to your high-level hopes and dreams, a strong business plan outlines short-term and long-term goals, budget and whatever else you might need to get started. In this guide, we’ll walk you through how to write a business plan that you can stick to and help guide your operations as you get started.

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Drafting the Summary

An executive summary is an extremely important first step in your business. You have to be able to put the basic facts of your business in an elevator pitch-style sentence to grab investors’ attention and keep their interest. This should communicate your business’s name, what the products or services you’re selling are and what marketplace you’re entering.

Ask for Help

When drafting the executive summary, you should have a few different options. Enlist a few thought partners to review your executive summary possibilities to determine which one is best.

After you have the executive summary in place, you can work on the company description, which contains more specific information. In the description, you’ll need to include your business’s registered name , your business address and any key employees involved in the business. 

The business description should also include the structure of your business, such as sole proprietorship , limited liability company (LLC) , partnership or corporation. This is the time to specify how much of an ownership stake everyone has in the company. Finally, include a section that outlines the history of the company and how it has evolved over time.

Wherever you are on the business journey, you return to your goals and assess where you are in meeting your in-progress targets and setting new goals to work toward.

Numbers-based Goals

Goals can cover a variety of sections of your business. Financial and profit goals are a given for when you’re establishing your business, but there are other goals to take into account as well with regard to brand awareness and growth. For example, you might want to hit a certain number of followers across social channels or raise your engagement rates.

Another goal could be to attract new investors or find grants if you’re a nonprofit business. If you’re looking to grow, you’ll want to set revenue targets to make that happen as well.

Intangible Goals

Goals unrelated to traceable numbers are important as well. These can include seeing your business’s advertisement reach the general public or receiving a terrific client review. These goals are important for the direction you take your business and the direction you want it to go in the future.

The business plan should have a section that explains the services or products that you’re offering. This is the part where you can also describe how they fit in the current market or are providing something necessary or entirely new. If you have any patents or trademarks, this is where you can include those too.

If you have any visual aids, they should be included here as well. This would also be a good place to include pricing strategy and explain your materials.

This is the part of the business plan where you can explain your expertise and different approach in greater depth. Show how what you’re offering is vital to the market and fills an important gap.

You can also situate your business in your industry and compare it to other ones and how you have a competitive advantage in the marketplace.

Other than financial goals, you want to have a budget and set your planned weekly, monthly and annual spending. There are several different costs to consider, such as operational costs.

Business Operations Costs

Rent for your business is the first big cost to factor into your budget. If your business is remote, the cost that replaces rent will be the software that maintains your virtual operations.

Marketing and sales costs should be next on your list. Devoting money to making sure people know about your business is as important as making sure it functions.

Other Costs

Although you can’t anticipate disasters, there are likely to be unanticipated costs that come up at some point in your business’s existence. It’s important to factor these possible costs into your financial plans so you’re not caught totally unaware.

Business plans are important for businesses of all sizes so that you can define where your business is and where you want it to go. Growing your business requires a vision, and giving yourself a roadmap in the form of a business plan will set you up for success.

How do I write a simple business plan?

When you’re working on a business plan, make sure you have as much information as possible so that you can simplify it to the most relevant information. A simple business plan still needs all of the parts included in this article, but you can be very clear and direct.

What are some common mistakes in a business plan?

The most common mistakes in a business plan are common writing issues like grammar errors or misspellings. It’s important to be clear in your sentence structure and proofread your business plan before sending it to any investors or partners.

What basic items should be included in a business plan?

When writing out a business plan, you want to make sure that you cover everything related to your concept for the business,  an analysis of the industry―including potential customers and an overview of the market for your goods or services―how you plan to execute your vision for the business, how you plan to grow the business if it becomes successful and all financial data around the business, including current cash on hand, potential investors and budget plans for the next few years.

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Julia is a writer in New York and started covering tech and business during the pandemic. She also covers books and the publishing industry.

• Project Management

Project Financials: Definition, Process, Examples & Benefits

Home Blog Project Management Project Financials: Definition, Process, Examples & Benefits

The financial analysis of the life cycle of a project is called Project Financing. This involves a cost-benefit analysis to determine if the benefits of the project exceed the cost incurred to complete the project. The analysis is done by forecasting the future cash flows of the project and not the balance sheet of the sponsors.

Project financing is more complicated than other alternative sources of financing, but it helps a project sponsor take on risky projects without risking the assets owned by the sponsor and impacting the sponsor’s balance sheet. You can learn more about project financing with the easiest Project Management certifications and levelling up your knowledge.

What is Project Financial in Project Management?

Project Financing in Project Management is defined as an approach of raising long term funds for projects such as infrastructure or services, capital or financial projects. The funding can either be raised by surrendering a part of equity or by raising funds through debt. The structure of the financing is dependent on the projected cash flows of the project and is independent of the balance sheets of the performing organization.

The sponsors (or investors) of these projects are large corporations that have a high-risk tolerance. The sponsors can be either from the same industry or a government or public company.

This type of financing is used in large scale industrial or infrastructural projects wherein construction is involved. These projects require upfront capital investment, and they generate cash flow only when a phase of the project is completed. In case of a failure in complying to the loan terms, the lender can take over the project assets and operations.

The process of raising project financials through an off-balance sheet approach is called project financials. What are project financials: The amount of funds allotted for a project is called project financials. In other words, the total amount of funds you can use to successfully deliver your project is referred to as project financials.

Structure of Project Finance

In order to protect the assets of the performing organization, a Special Purpose Vehicle (or Identity) is created for overseeing the project. The funds for this project or the project financials are directed to this entity. The key features of this approach are off-balance sheet recording and non-recourse financing.

1. What are Project Financials  

The amount of funds allotted for a project is called project financials. In other words, the total amount of funds you can use to successfully deliver your project is referred to as project financials.

2. Off-balance Sheet Recording  

The debt and liability associated with these projects are not recorded on the balance sheet of the performing organization. They are recorded as a SPV subsidiary.

The provision of not mentioning debts on the balance sheets is lucrative for the performing organization as they can raise huge fundings for their projects without impacting their financials.

3. Non-recourse Financing  

This means that in case of a project failure or loan default, the sponsors will have entitlement only on the assets held by the SPV and not the performing organizations assets. Since the risk is high for sponsors, the interest rates for financing the project are comparatively high.

Key Features of Project Financing

1. Capital Intensive Projects: Project financing is ideal for projects that require high capital investment in terms of equity and debt. These types of projects are usually located in developing countries as these projects are taken up for economic development of a country.

2. Risk Management: For the performing organization this is a good financing option as they can transfer the liability and risk to the SPV, by protecting their assets and maintaining the balance sheet. For the lenders or sponsors, they enjoy high margins due to higher rates of interest for assuming the higher risk of the projects.

3. Large Number of Parties Involved: This structure allows to accommodate and involve various parties involved in these projects.

4. Loan Repayment: The excess cash flow generated by the project at the end of each phase, is used to pay off the outstanding loan. This gradual pays off of the loan amount is a relief to the lending organization as part of the debt is paid off gradually.

Main Purpose of Project Financing

In other words, why should a company opt for Project financing, when there are other traditional ways of raising funds, such as corporate finance.

In traditional or corporate finance method, the sponsors (performing organization) raise funds on the basis of their balance sheets. That means the sponsor needs to show to the lenders that they have sufficient assets, or capital to pay off the loan amount in case of default.

In project finance, the funds are not raised on the basis of balance sheet of the sponsor, but on the future cashflows of the project as the loan amount is paid off using the cash flows of the project.

Project financing greatly minimizes the risk of the sponsoring company as the assets of the company cannot be sold to pay off the loan in case of default.

The differences in between corporate finance and project finance is summarized below:

Stages of Project Financing

There are three stages of project financing:

1. Pre-Financing Stage

• Project Plan Identification: this involves identifying the strategic plan for the project and assessing whether the project is profitable or not. Keeping in mind the risk accepted by lender, this step is performed by the lender for an unbiased result.
• Risk Management:  Before the lender invests in the project, it is important to identify the associated risks and also ways to mitigate the risks, if possible.
• Project Feasibility Assessment: Since the loan payoff is dependent on the cash flow generated by the project, it is important to assess if the project can provide sufficient cash flows and is profitable in the long run.

2. Financing Stage

• Financial Arrangements: In order to raise funds for the project, the performing organization needs to acquire loan or give up equity to a financial organization that is willing to invest in the project.
• Negotiation:  This is the stage where the loan amount and rate of interest/ valuation are negotiated.
• Documentation: In this stage, the loan terms and agreements are accepted by all parties and are sealed by official documents. All the necessary documentation is completed in this stage.
• Payment: In this stage the lender transfers funds to the performing organization to begin the project operational work.

3. Post-Financing Stage

• Project Monitoring: It is important to monitor the project timely and let the stakeholders know how the project is progressing. It is the project manager’s job to ensure the project is completed on time.
• Project Closure: Once the project is delivered successfully and all the related agreements have been honored, the project is closed officially.
• Repayment: In this stage the project is officially closed, and the cash flow generated from the project is carefully evaluated as the loan is to be paid off from the excess cash flow generated.

Five Basic Steps to Finance Your Project

To adopt project finance process as a means to fund the project, the following steps should be followed:

Step 1: Identify Potential Opportunities

The first step is to identify and evaluate the potential projects that are profitable in future. Once these projects are shortlisted, the management must choose one project that the organization will go ahead with.

Step 2: Estimating Cost

In this stage, the implementation and operating costs associated with the project are projected. In this stage, the feasibility of the project is evaluated, and a decision is made based on the feasibility and returns of the project. This is the stage where potential threats are identified, and their estimated costs are also considered.

Step 3: Identify Technology

In this stage, a study is conducted to assess the kind of technology that is required to successfully deliver the project. Once the technology is identified, the next step is to estimate how much acquiring the technology will cost and how to acquire the technology.

Step 4: Identify Source of Funding

Once the cost to be incurred is estimated, the next step is to identify sources of project finance. In other words, potential lenders are identified, approached and briefed about the project and the cost associated.

Step 5: Implementation

Once a suitable lender is identified and has expressed a desire in collaborating for the project, the legal documents are signed and the funds for the project are delivered. The operational work for the project begins and strategic plans for monitoring the cost and future cash flows are implemented.

Types of Sponsors of Project Finance

There are 4 types of project finance sponsors that we usually come across. They are explained below in brief:

• Industrial Sponsors: These sponsors are directly related to the business of the performing organization. They are huge organizations in a similar industry and have the funds and risk tolerance to fund project.
• Public Sponsors:  These sponsors are government bodies and corporations. The main goal over here is public service and economic development.
• Contractual Sponsor: They help in building, developing or managing a project. They are the sponsors that get the work done in a project.
• Financial Sponsors: These sponsors are in the business of lending and are looking for high profits and substantial rate of return by accepting high risk projects.

Sources of Project Financial

Even though there are numerous sources of raising funds, they can be roughly categorized into three categories that are mentioned below:

1. Debt: Debt that is raised through Investment banks is referred as Private debt and has a cheaper capital cost. This is because debt holders are paid on a priority basis. Debt raised by the Government is referred as public debt and has a higher capital cost.

2. Equity: This source of funding involves giving up a part of ownership of the project to various sponsors in exchange of funds. One of the advantages of this source is, these funds do not need to be repaid unlike debt financing.

3. Loan: This can be categorized into secured and unsecured loan. Under secured loan, the assets of the project are held as collateral against the loan. Under unsecured loan, no assets are backing the loan amount and the loan is offered based on the credit worthiness of the project or organization.

Project Financials Examples

Liquid Gold Pvt Ltd. is an old producing company with over 30 years of experience in the industry along with some stock holdings and assets. Ajit, the CEO of the company, wants to work on a project through project financing.

Since the project he is undertaking involves a lot of risks, he decides to establish another firm for this project, Liquid Gold Oil and Energy Pvt. Ltd. This company will be completely owned by the parent company Liquid Gold Pvt. Ltd. and will manage the operational business of the new firm.

When lenders provide funding, they will fund the new form Liquid Gold Oil and Energy Pvt. Ltd. As a result of this, in case the new company defaults on their payments, Liquid Gold Oil and Energy Pvt. Ltd. will be insolvent but the parent company Liquid Gold Pvt Ltd. will not be liable to pay this debt.

How to Maximize the Impact of Project Financing?

In order to exploit the benefits of the Project Financing, there are some important points to note while implementing this approach of raising funds.

1. A Robust Project Management System

In order to avoid cost overruns, schedule delays and manage the cash cycles, the sponsor organization must have a sound project management system, along with efficient project managers. In order to be a professional project manager, you need to acquire relevant education and training in the area. To learn more about the PM certifications, refer to KnowledgeHut’s Project Management.

2. Right Project Financial Metrics

It is important to streamline and select the right financial metrics in order to monitor the cashflows of the project. A project manager should focus on key metrics that impact a project and should attempt to make decision making easy. The project financials should be carefully studied taking all the relevant information for review. It is also important to regularly conduct a financial analysis of the project to ensure the project is on track.

3. Rate of Investment (ROI)

The project managers should focus on increasing the ROI for the sponsors and creditors of the project. Since the loan is paid off using cashflows of the project, at the end of the project it is important to ensure the sponsor gets sufficient returns for taking up the project.

The two most popular certifications for project financing are the PMP certification by PMI and the PRINCE 2 Accredited training . Taking these certifications will help you ace the exam in the first go.

Benefits of Project Financials

1. Better Debt Management: With project financing, the performing or parent company can raise more funding for the project, irrespective of the financial capability of the parent company. The funding is solely dependent on the probability and cash flows of the project.

2. Better Risk Management:  The parent company’s assets are protected irrespective of the project success or failure. This enables a firm to be motivated to take up risky projects that are for the economic growth of a country or city. If multiple members are involved, the risk is shared with all the members, and this reduces each member’s exposure.

3. Allows Parent Company to Raise More Funds: Since the balance sheet of the parent company does not include the loan from project financing, the parent company can raise funds for other projects or operations using their balance sheet.

Drawbacks of Project Financing

1. Complex Documentation: Project financing involves lengthy processes and documentation that can make the process difficult to understand and prone to irregularities.

2. Expensive: The higher rates of interest on the loan amount, the due diligence and requirement of qualified professionals, makes this process more expensive than other approaches.

3. Shared Control: The lenders exercise more control on project decisions, which may be a source of conflict for the parent company and the lenders.

The project financial approach is one that can be adopted to fund long-term, large-scale projects which are repaid through the cash flows generated by the project.

This approach offers various benefits and is really useful for developing countries. It provides incentives to companies to take on risky projects that can help in the economic development of a country or society. In case you want to learn more about project financing, enrol in the KnowledgeHut's Project Management certificate course to take a leap in your career.

The off-balance financing protects the assets of the parent company and enables them to take on risky projects. This also eases the process of raising funds for small or fairly new companies, as the large loans are not provided on their creditworthiness, but on the potential of the project.

This approach is also beneficial for the lenders as they enjoy high rates of interest on these loans and since the loan is paid off through cash flows, the loan is repaid sooner than most loans.

Frequently Asked Questions

The project financing approach benefits both the project sponsor and the lenders. For the project sponsor it provides off balance sheet funding and risk diversification. The Lenders enjoy a higher interest rate for the funds lent.

Finances are the core of every project as the budget for the project decides whether the project was beneficial or not. Each project plan and approach is based on the budget of the project. As much as it is important to control the budget, it is equally important to choose the right sources of funds.

Project Finance can be used for large scale Public Infrastructure projects such as airports, roads, trains and railway tracks, metros or Energy projects like power generation, wind energy conservation, solar energy transmission etc.

It can also be used for Telecommunication infrastructure, Social Infrastructure, Construction or Manufacturing.

Kevin D.Davis

Kevin D. Davis is a seasoned and results-driven Program/Project Management Professional with a Master's Certificate in Advanced Project Management. With expertise in leading multi-million dollar projects, strategic planning, and sales operations, Kevin excels in maximizing solutions and building business cases. He possesses a deep understanding of methodologies such as PMBOK, Lean Six Sigma, and TQM to achieve business/technology alignment. With over 100 instructional training sessions and extensive experience as a PMP Exam Prep Instructor at KnowledgeHut, Kevin has a proven track record in project management training and consulting. His expertise has helped in driving successful project outcomes and fostering organizational growth.

Avail your free 1:1 mentorship session.

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Enterprise Project Performance

Project finance: definition, structure, and alternatives.

Getting the most out of every dollar your enterprise invests is a critical component of project and business success. From identifying how best to spend available funds with capital budgeting to centralizing and organizing financial information, there are many key considerations when it comes to project finance. One of the most basic, and most important, is where to obtain the funds required by a project.

If your organization doesn’t have the cash flow necessary to finance a project directly, and typical financing methods aren’t a great fit, relying on a project’s own projected revenue streams to secure financing may be the answer. This article explains how project financing works, how it compares to other financing methods — like corporate finance — and how to decide whether project finance is the right fit for a particular business initiative.

What is project finance?

Project finance is an approach to funding major projects through a group of investment partners, who are repaid based on the cash flow generated by the project. The investors in a project finance arrangement are known as sponsors, and often include financial institutions with a high tolerance for risk. Sponsors may also include organizations in the same industry, a contractor interested in the project, and government or other public entities.

Project finance is most often used to fund large-scale industrial or infrastructure projects that involve a construction phase, such as building a transportation system addition or a power generation facility. Projects like these require significant upfront capital, and they do not generate a return until the construction phase is complete. They are also relatively high risk , as unforeseen problems during the construction phase can lead to project failure. Project finance is a good fit for initiatives like these because it provides access to a significant amount of cash to cover initial expenses.

The structure of project finance

Project financing directs funds to an entity called a special project vehicle, or SPV, that oversees the project until it is completed. This structure gives project financing two characteristics — off-balance sheet recording of liabilities and non-recourse financing — that differentiate it from other financing methods. An SPV differs from a joint venture, which doesn’t always involve establishing a new legal entity and, consequently, these two advantages.

Off-balance sheet liabilities

Debts and obligations associated with project finance arrangements are not recorded directly on the balance sheets of the businesses that sponsor the project. Instead, they are held by the subsidiary SPV. The debts may be mentioned in balance sheet notes or discussed by business executives, but they do not impact standard balance sheet calculations, such as a business’s total assets or liabilities.

The ability to keep debts off formal balance sheets is an attractive benefit of project finance. It means that organizations can undertake major projects without directly overloading themselves with debt. Neither do they run the risk that a sudden increase in balance sheet liabilities will harm their credit ratings or ability to obtain loans.

Non-recourse financing

Project finance is classified as a non-recourse type of financial structure. This means that in the event of default on the loans secured to fund the project, sponsors generally have recourse only to assets held by the SPV, rather than the parent company. The interest rates for non-recourse financing are typically higher to reflect the greater risk assumed by lenders.

Project finance vs. corporate finance

Corporate finance involves loans that businesses obtain directly and count as liabilities on their balance sheets. It’s one of the major alternatives to project finance and comes with its own advantages and drawbacks. As a recourse form of financing, creditors can demand repayment based on any asset or revenue source of the organization, even if it’s unrelated to the initiative that the business sought to fund via corporate finance.

For example, say your company chose to use corporate financing to pay for a fleet of new trucks by obtaining a loan from a corporate bank to fund the purchase. If your organization failed to meet its repayment obligations on the loan, the bank could seize both the trucks and any other assets you own. This means that project finance carries lower risks for businesses seeking to fund a project. However, as noted above, costs associated with lending are typically greater due to the proportionately high risk sponsors take on.

Who can benefit from project financing?

As noted above, project financing is a good fit for initiatives that require a significant upfront investment but won’t generate an immediate revenue stream and, by extension, ROI. Large-scale projects in the energy, infrastructure, and real estate development industries — among others — are all potential fits for project financing.

To decide whether an initiative can benefit from project financing, consider these factors:

• How much risk does the project pose? If the project’s failure could place your entire business at risk, funding it through project finance is a smart way to limit your risk.
• How much capital does the project require? If the project requires more capital than you could reasonably expect to obtain through other financing methods, project finance could be a solution.
• How long will the project take? For projects that won’t produce revenue for years while they’re underway, project finance allows your company to obtain the necessary financing without loading its balance sheet with liabilities.

Project financing isn’t the right fit for every initiative. But it offers a solution when project risk or the amount of capital required would otherwise prevent a project from moving forward.

Other project funding sources

Project and corporate finance aren’t the only funding sources available, of course, and your company should carefully evaluate every potential avenue for financing a project. Here are some of the most common:

• Cashflow. If your company has sufficient net revenue from its business operations, it may be able to fund a new project using that revenue, without relying on any type of financing.
• Savings. Your business can also leverage positive cash flows by saving the money, then using it to fund a project once it has sufficient funds on hand. The downside to this approach is that it can take years to save up enough cash, and the project opportunity may no longer be available.
• Partnerships. Partnering with other businesses that share the costs and liabilities necessary to complete a project is another potential option. This may be particularly appealing if it offers vertical or horizontal integrations that will boost project efficiency.
• Selling equity. You can obtain capital by selling equity in your company to investors . As ownership shares are not loans, they don’t expose you to the liability risks of project finance. This method does give external parties a significant say in your company’s affairs, although it will dilute ownership to a lesser extent for large enterprises.
• Issuing Bonds. Also referred to “debt financing,” a project can be funded by selling bonds to investors. These can be corporate bonds or those issued by municipalities in the public sector. These organizations will receive a credit rating that determines how much interest they need to pay the investors and is a measure of how risky the investment is perceived to be. 
• Crowd-funding. Seeking financing from a large number of small-time investors — an approach known as crowd-funding — may provide enough money to fund projects in certain cases, although you’re unlikely to obtain the large sums needed for capital projects this way.
• Public-private partnerships. Private organizations often partner with government entities to complete large-scale endeavors like public infrastructure projects. The private entity provides much or all of the initial investment and makes it back by operating the investment after construction is complete. This isn’t the only way public entities help fund projects, of course — tax initiatives and federal, state, and local grants are just a couple additional avenues companies can explore to obtain public financing.

In general, employing these approaches makes the most sense when project funding needs are smaller-scale or for businesses that have very healthy cash flow and low liabilities. Organizations can also use a mix of these financing methods to fully fund projects when one is insufficient.

How to maximize the impact of project financing

Managing funds is just as important as securing them when it comes to completing projects successfully. Your company must develop accurate budgets , establish contingency funds to account for potential risks , and control costs , all while tracking how funds are allocated and actually utilized.

EcoSys™ is an enterprise project performance (EPP) solution that offers all the features your organization needs for fund management and beyond. You can use EcoSys to organize and manage hundreds of different fund sources, produce cash flow forecasts, and align funds with resource plans and project schedules. It also integrates with all your organization’s key project management and project portfolio management (PPM) processes, so team members can use the same platform for everything from project planning to change management.

Contact Hexagon today to learn how EcoSys can help your organization make the most of its financial resources.  

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