Projected Financials & Financial Modelling — For Banks, Investors & Business Planning

Whether you're applying for a bank loan, pitching to investors, planning a new venture, or preparing for a licensing or franchise arrangement, projected financials are one of the most important documents you will need. Done well, they demonstrate your understanding of your business economics, convince lenders and investors of viability, and serve as a roadmap for your own decision-making. Done poorly, they undermine credibility and lead to rejection. This guide explains how to build credible financial projections.

1. What are Projected Financials?

Projected financials (also called pro-forma financial statements or financial projections) are forward-looking estimates of a business's financial performance — typically for 3–5 years. They include:

• Projected Profit & Loss Statement (P&L): Revenue, gross margin, operating expenses, EBITDA, depreciation, interest, and net profit
• Projected Balance Sheet: Assets (fixed + current), liabilities (loans + payables), and net worth — shows financial position year by year
• Projected Cash Flow Statement: Operating cash flow, investing cash flow, financing cash flow — the actual cash position of the business
• Financial Ratios: DSCR (Debt Service Coverage Ratio), Current Ratio, Debt-to-Equity, Return on Equity, Break-even analysis

The key difference from historical financials: projections are built on assumptions about the future — revenue growth, cost structure, capital investment, and funding. The quality of projections depends entirely on the quality of the assumptions.

2. Components of a Financial Projection

• Revenue Model: How do you make money? Volume × Price per unit, or number of clients × average revenue per client, or subscription model with churn rate — whatever is appropriate for your business
• Cost of Goods Sold (COGS) / Direct Costs: Raw materials, manufacturing costs, purchase cost of goods — typically expressed as % of revenue or per-unit cost
• Gross Margin: Revenue minus COGS — target gross margins vary widely by industry (e.g., trading: 10–20%, manufacturing: 25–45%, SaaS: 60–80%)
• Operating Expenses (OPEX): Salaries and wages, rent, utilities, marketing, logistics, professional fees, insurance — typically grow more slowly than revenue (operating leverage)
• Capital Expenditure (CAPEX): New machines, vehicles, IT equipment — depreciated over useful life
• Working Capital: Inventory holding days, debtor days, creditor days — determines cash tied up in operations
• Debt Schedule: Loans drawn, interest, and principal repayments — shows cash outflow for debt servicing

3. Building Realistic Assumptions

The most common failure in financial projections is unrealistic assumptions — especially revenue. Here's how to build credible ones:

• Base on historical performance: Start with last 2–3 years of actual revenue and growth rate — projections should be reasonable extrapolations
• Capacity-constrained growth: Revenue growth is constrained by capacity — how many orders can you process per day with your current team and equipment?
• Market-based pricing: Use actual market prices, not aspirational prices
• Industry benchmarks: Gross margins, debtor days, and OPEX ratios should be comparable to industry peers
• Conservative bias: It's better to under-promise and over-deliver — banks and investors penalise over-optimistic projections that don't materialise
• Sensitivity analysis: Show what happens if revenue is 10–20% lower than projected — reassures the lender/investor that the business can still service debt

4. What Banks Look For in Financial Projections

• DSCR > 1.25: Net Cash Accrual (Profit after tax + Depreciation) must comfortably cover debt repayment (principal + interest) — minimum 1.25x
• Consistency with historical performance: Revenue projections must be in line with past growth — sudden jumps without explanation raise red flags
• Current Ratio > 1.33: Current assets must be at least 1.33x current liabilities throughout the projection period
• Positive cash flow: Operating cash flow must be positive in years 2–3 at latest
• Breakeven analysis: Shows at what revenue level the business covers all fixed and variable costs

5. What Investors Look For in a Financial Model

• TAM/SAM/SOM analysis: Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market — how much of the market can you realistically capture?
• Unit Economics: Revenue per customer, Cost to Acquire Customer (CAC), Lifetime Value (LTV), LTV:CAC ratio — must be positive and improving
• Path to profitability: When does the company turn EBITDA-positive? Cash flow positive? Investors want to see a clear, credible path.
• Funding requirements: How much are you raising? What will it be used for? How many months of runway does it provide? What milestones will be achieved?
• Exit valuation: Revenue multiple or EBITDA multiple at the time of exit — validates the return potential