Business Plan Financial Projections: How to Create 3-Year Forecasts

Why Financial Projections Are the Make-or-Break Section

You can write compelling prose about your market opportunity and team, but the financial projections are where lenders and investors make their decision. According to SCORE, 82% of businesses that fail cite cash flow problems — and those problems are usually visible in poorly constructed (or nonexistent) financial projections.

The good news: you don't need a finance degree. You need a logical framework and realistic assumptions.

Start With Your Revenue Model

Everything flows from how you make money. Define your revenue model first:

• SaaS/Subscription: Price per user x number of users x retention rate
• E-commerce: Average order value x number of orders x repeat purchase rate
• Service business: Hourly/project rate x billable hours/projects x number of clients
• Physical product: Unit price x units sold - COGS per unit

Be specific. "We'll have 1,000 customers by Year 2" means nothing without showing how you get there. Build a bottom-up model: marketing spend → leads → conversion rate → customers → revenue.

Building the Income Statement (P&L)

Your projected income statement should show monthly figures for Year 1 and quarterly for Years 2-3. Here's the structure:

Revenue

Break out each revenue stream separately. If you have a $49/month plan and a $99/month plan, show both with separate customer counts. Show your assumptions clearly: "We assume 3% monthly churn and 15% month-over-month growth in new signups for Year 1."

Cost of Goods Sold (COGS)

For SaaS: hosting, API costs, payment processing fees (typically 2.9% + $0.30 for Stripe). For physical products: materials, manufacturing, shipping. COGS should scale with revenue — if it doesn't, explain why.

Operating Expenses

Break these into categories:

• Salaries & wages — Your biggest expense. List each role, start date, and salary
• Marketing & advertising — Tied to your customer acquisition plan
• Rent & utilities — Include if you have physical space
• Software & tools — Development tools, analytics, CRM, etc.
• Professional services — Legal, accounting, consulting
• Insurance — General liability, E&O, cyber liability as applicable

Cash Flow Projections

The income statement shows profitability. Cash flow shows whether you can pay your bills. They're different because of timing: you might book revenue in January but not collect payment until March. Key elements:

• Cash from operations — Revenue collected minus expenses paid (account for payment terms)
• Cash from investing — Equipment purchases, security deposits
• Cash from financing — Loan proceeds, equity investment, loan payments

SBA lenders care deeply about cash flow because it directly shows your ability to make loan payments.

Break-Even Analysis

Every business plan needs a clear break-even point. This is where total revenue equals total costs (fixed + variable). Calculate it two ways:

• Time-based: "We break even in Month 14" — Plot cumulative revenue vs. cumulative costs
• Unit-based: "We break even at 850 customers" — Fixed costs ÷ (price per unit - variable cost per unit)

Common Projection Mistakes

• Hockey stick revenue — Flat, flat, flat, then sudden explosion. Lenders and investors see this as wishful thinking
• Forgetting about taxes — Include estimated tax provisions (typically 20-25% for a profitable business)
• Understating marketing costs — Customer acquisition cost is almost always higher than you think. Research industry benchmarks
• No sensitivity analysis — Show what happens if revenue comes in 20% lower than projected. This builds credibility
• Ignoring seasonality — If your business has seasonal patterns, your monthly projections should reflect them

Making Your Projections Credible

The single most important thing: show your assumptions. Don't just write "$500,000 in Year 1 revenue." Write "250 customers at $2,000 average annual value, based on converting 5% of 5,000 leads generated through $50,000 in Google Ads spend at $10 CPC." This lets readers evaluate whether your assumptions are reasonable — which is what they're really judging.

Financial projections are time-consuming to build from scratch, but they're the section of your business plan that matters most. Getting them right can be the difference between a funded business and a rejected application.