10 Steps to Financial Projections for Canadian Businesses

Creating robust financial projections is crucial for any new business venture. These projections guide strategic decisions and attract potential investors. 

They offer a clear roadmap for your company’s financial future. Understanding these steps thoroughly will build a strong foundation. 

This guide outlines 10 essential steps for Canadian entrepreneurs.

Step 1: Understand Your Business Model Thoroughly

Begin by deeply understanding your specific business model. Clearly define how your company will generate revenue streams. Identify all the various products or services you will offer. Detail the pricing strategy for each of these offerings. 

Consider whether you will sell directly or through intermediaries. Will your revenue be subscription-based or transactional? Each revenue stream needs careful consideration.

Next, meticulously outline your entire cost structure. Categorize all expenses into fixed and variable costs. Fixed costs remain constant regardless of sales volume. Examples include rent, salaries, and insurance premiums. Variable costs fluctuate directly with production or sales. 

These might include raw materials or sales commissions. A clear understanding of both is absolutely vital. 

This foundational step informs all subsequent financial forecasts. Without this clarity, projections will lack accuracy. Invest significant time in this initial, critical assessment.

Step 2: Research Your Market and Industry Extensively

Thorough market and industry research is the next vital step. Gather comprehensive data on current market trends. Analyze the overall size and growth potential of your target market. 

Identify your primary competitors within this space. Understand their pricing strategies and market share. Look for gaps or unmet needs in the existing market. This research provides crucial external context.

Study industry benchmarks and historical performance data. This information helps validate your assumptions later on. Look at average profit margins for similar businesses. Research typical operating expenses in your sector. 

Understand any regulatory changes impacting your industry. Canadian market specifics should be a key focus. Industry reports and government statistics are excellent resources. 

This deep dive ensures your projections are realistic. It grounds your financial estimates in market realities.

Step 3: Project Your Sales Revenue Accurately

Projecting sales revenue is often the most challenging part. Start by estimating the number of units you expect to sell. Break this down by product or service offering. 

Consider your market research and competitive landscape here. Your initial sales might be modest and grow over time. Be conservative with your early sales estimates. Overly optimistic forecasts can lead to problems.

Next, apply your defined pricing strategy to these unit sales. Calculate the total revenue for each product line. Project this revenue monthly for the first year. 

Extend these projections quarterly for years two and three. Consider seasonal fluctuations that might impact sales. Factor in any planned marketing campaigns or promotions. 

These efforts could significantly boost your sales. Clearly state all assumptions made for these projections. This transparency is important for credibility.

Step 4: Estimate Your Cost of Goods Sold (COGS)

Calculating your Cost of Goods (COGS) is essential. COGS represents the direct costs attributable to producing the goods. These are the expenses directly tied to each unit sold. 

For a retail business, this is the purchase price of inventory. For a manufacturing business, it includes raw materials. It also covers direct labor and manufacturing overhead. Service businesses may have direct costs too.

Identify all components that make up your COGS. For products, list materials, labour and packaging. For services, consider direct labour and specific supplies. Calculate the per-unit cost for each product or service. 

Multiply this per-unit cost by your projected sales volume. This gives you your total COGS for each period. Ensure you account for any volume discounts. Changes in supplier prices also need consideration. Accurate COGS is vital for gross profit calculation.

Step 5: Forecast Your Operational Expenses Carefully

Forecasting operating expenses covers all indirect costs. These are the expenses not directly tied to production. They are necessary to run the business daily. Divide these expenses into fixed and variable categories. Fixed operating expenses remain constant monthly. 

Examples include rent, administrative salaries, and insurance. Software subscriptions also fall into this category. 

Variable operating expenses change with business activity. Marketing costs might increase with higher sales. Utility bills could fluctuate based on usage. Sales commissions are typically variable expenses. 

List every single operating expense you anticipate. Project these expenses monthly for the first year. Then extend them quarterly for subsequent years. 

Be sure to include an allowance for miscellaneous expenses. This ensures a comprehensive and realistic view.

Step 6: Develop a Capital Expenditure Plan

A capital expenditure plan details significant asset purchases. These are investments in assets with a long useful life. Examples include equipment, vehicles, or property. 

They are not expensed in the same way as operating costs. Instead, they are depreciated over their useful life. This plan ensures you account for major outlays. It shows how you will fund these large purchases.

Identify all necessary capital assets for your business. Research the estimated cost of each of these items. Determine when these assets will be acquired. Consider any future expansion plans requiring new assets. 

Factor in the cost of installation or setup. Research potential financing options for these expenditures. This could involve loans or equity investments. 

Include depreciation calculations in your financial statements. This plan impacts your balance sheet significantly.

Step 7: Create a Cash Flow Statement

The cash flow statement is arguably the most important projection. It tracks the actual movement of cash in and out. This statement shows your liquidity over time. It is broken into three main activities. 

These are operating, investing, and financing activities. A positive cash flow is essential for survival. Businesses can be profitable but still run out of cash.

Start with cash from operating activities. This includes cash received from sales. Subtract cash paid for COGS and operating expenses. Next, consider cash from investing activities. 

This includes cash spent on capital expenditures. Finally, look at cash from financing activities. This involves cash from loans or equity infusions. It also includes cash paid for loan repayments. 

Project this statement monthly for the first year. Then extend it quarterly for the next two years. Identify potential cash shortfalls early on.

Step 8: Build a Projected Income Statement

The projected income statement, or profit and loss statement, shows profitability. It summarizes revenues and expenses over a period. This statement reveals your gross profit. It also shows your operating income. 

Ultimately, it calculates your net income or loss. This is a key indicator of business success.

Begin with your projected sales revenue. Subtract your estimated Cost of Goods Sold (COGS). This calculation yields your gross profit. From gross profit, deduct all operating expenses. 

This result is your operating income. Factor in any interest expenses or income. Finally, subtract taxes payable in Canada. 

This provides your net income or loss. Project this statement monthly for year one. Then present it quarterly for years two and three.

Step 9: Prepare a Projected Balance Sheet

The projected balance sheet provides a snapshot of financial health. It presents your assets, liabilities, and equity. This statement adheres to the accounting equation. Assets equal liabilities plus owner’s equity. 

It shows what your business owns and owes. It also reflects the owner’s stake.

List all your projected assets. These include cash, accounts receivable, and inventory. Also include fixed assets like equipment and property. Next, list all your projected liabilities. 

This includes accounts payable, loans, and deferred revenue. Finally, calculate the owner’s equity. This includes initial investment and retained earnings. The balance sheet must always balance perfectly. 

Project this statement at the end of each projected period. It links the income statement and cash flow statement.

Step 10: Perform Sensitivity Analysis

Sensitivity analysis is a crucial final step. It involves testing the impact of changing key assumptions. This helps identify potential risks and opportunities. It shows how robust your projections truly are. 

What if sales are lower than expected? What if COGS increases significantly? These are questions that sensitivity analysis answers.

Vary one key assumption at a time. For example, reduce your projected sales by 10%. See how this impacts your net income and cash flow. 

Then, increase your COGS by 5% and observe the effects. Test different pricing scenarios or expense levels. This exercise highlights your business’s vulnerabilities. It allows you to develop contingency plans. 

Presenting a range of scenarios demonstrates thoroughness. This builds confidence with potential investors. It shows you have considered various outcomes.

Need expert help with your financial forecast? Book a consultation with Bizincs’s Canadian business advisors today.