Financial projections are the most scrutinized part of any funding application. This guide shows you how to create credible 3-year forecasts for income, cash flow, and balance sheet that funders trust, with proper assumptions documentation and sensitivity analysis.
Required for: All funding applications above R250,000. Most funders require monthly projections for Year 1, quarterly for Year 2, and annual for Year 3.
Who This Is For
- Businesses applying for loans, grants, or equity funding
- Startups and growing businesses planning expansion
- Entrepreneurs needing financial forecasts for business plans
- Business owners preparing investor pitches
What Funders Expect
The Three Core Financial Statements
- Income Statement (P&L): Shows revenue, costs, and profitability over time
- Cash Flow Statement: Shows cash coming in and going out (more critical than profit for funders)
- Balance Sheet: Shows assets, liabilities, and equity at points in time
Supporting Analysis
- Assumptions Schedule: Every number explained and justified
- Sensitivity Analysis: Best case, base case, worst case scenarios
- Break-Even Analysis: When you become cash-flow positive and profitable
Projection Timeframe
Standard practice for South African funders:
- Year 1: Monthly projections (12 months)
- Year 2: Quarterly projections (4 quarters)
- Year 3: Annual projection (1 total)
Tip: Some funders (IDC, NEF) may require 5-year projections for large investments. Always check the funder's specific requirements.
Income Statement (Profit & Loss)
The income statement shows whether your business is profitable. It tracks revenue minus costs to arrive at net profit.
Structure
| Line Item | Description |
|---|---|
| Revenue | Total sales from all products/services |
| Cost of Sales (COS) | Direct costs to deliver product/service (materials, direct labor) |
| Gross Profit | Revenue - Cost of Sales |
| Operating Expenses | Salaries, rent, utilities, marketing, admin costs |
| EBITDA | Earnings before interest, tax, depreciation, amortization |
| Depreciation & Amortization | Non-cash expense for asset value decline |
| EBIT | Operating profit before interest and tax |
| Interest Expense | Interest on loans and financing |
| Profit Before Tax | EBIT - Interest |
| Tax (28%) | Corporate income tax (28% in South Africa) |
| Net Profit | Profit after all expenses and tax |
Example: 3-Year Income Statement
| Line Item | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Revenue | R5,000,000 | R7,500,000 | R11,250,000 |
| Cost of Sales | (R2,800,000) | (R4,200,000) | (R6,300,000) |
| Gross Profit | R2,200,000 | R3,300,000 | R4,950,000 |
| Gross Margin % | 44% | 44% | 44% |
| Salaries & Wages | (R1,200,000) | (R1,500,000) | (R1,950,000) |
| Rent & Utilities | (R240,000) | (R264,000) | (R290,400) |
| Marketing & Sales | (R300,000) | (R375,000) | (R450,000) |
| Other Operating Expenses | (R180,000) | (R210,000) | (R250,000) |
| EBITDA | R280,000 | R951,000 | R2,009,600 |
| Depreciation | (R150,000) | (R150,000) | (R150,000) |
| EBIT | R130,000 | R801,000 | R1,859,600 |
| Interest Expense | (R80,000) | (R64,000) | (R48,000) |
| Profit Before Tax | R50,000 | R737,000 | R1,811,600 |
| Tax (28%) | (R14,000) | (R206,360) | (R507,248) |
| Net Profit | R36,000 | R530,640 | R1,304,352 |
| Net Margin % | 0.7% | 7.1% | 11.6% |
Key ratios to track: Gross margin (should be consistent), EBITDA margin (shows operational efficiency), and net margin (improves over time as you scale).
Cash Flow Statement
The cash flow statement is often more important than the income statement for funders. It shows whether you can pay bills, service debt, and stay solvent.
Critical insight: You can be profitable on paper but run out of cash. This is why funders scrutinize cash flow closely.
Structure
| Section | Components |
|---|---|
| Operating Activities | Cash from customers, cash to suppliers/employees, working capital changes |
| Investing Activities | Purchase of equipment/assets, sale of assets |
| Financing Activities | Loans received, loan repayments, equity injections, dividends |
| Net Cash Flow | Sum of all three activities |
| Cash Balance | Opening balance + Net cash flow = Closing balance |
Example: 3-Year Cash Flow Statement
| Line Item | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Operating Activities | |||
| Cash from Customers | R4,750,000 | R7,312,500 | R11,081,250 |
| Cash to Suppliers | (R2,660,000) | (R4,095,000) | (R6,195,000) |
| Cash to Employees | (R1,200,000) | (R1,500,000) | (R1,950,000) |
| Operating Expenses Paid | (R720,000) | (R849,000) | (R990,400) |
| Interest Paid | (R80,000) | (R64,000) | (R48,000) |
| Tax Paid | (R14,000) | (R206,360) | (R507,248) |
| Net Operating Cash Flow | R76,000 | R598,140 | R1,390,602 |
| Investing Activities | |||
| Equipment Purchase | (R800,000) | (R200,000) | (R150,000) |
| Net Investing Cash Flow | (R800,000) | (R200,000) | (R150,000) |
| Financing Activities | |||
| Loan Received | R1,000,000 | R0 | R0 |
| Loan Repayments | (R150,000) | (R200,000) | (R200,000) |
| Equity Injection | R200,000 | R0 | R0 |
| Net Financing Cash Flow | R1,050,000 | (R200,000) | (R200,000) |
| Net Cash Flow | R326,000 | R198,140 | R1,040,602 |
| Opening Cash Balance | R100,000 | R426,000 | R624,140 |
| Closing Cash Balance | R426,000 | R624,140 | R1,664,742 |
Red flag: Negative cash flow in any period is a major concern for funders. If your projections show this, explain how you will cover the gap (e.g., overdraft facility, owner contribution).
Balance Sheet
The balance sheet shows your business's financial position at a specific point in time (end of each year). It must always balance: Assets = Liabilities + Equity.
Structure
| Category | Components |
|---|---|
| Assets | |
| Current Assets | Cash, debtors, inventory (convertible within 12 months) |
| Non-Current Assets | Equipment, vehicles, property, intangibles |
| Liabilities | |
| Current Liabilities | Creditors, short-term loans, tax payable (due within 12 months) |
| Non-Current Liabilities | Long-term loans, deferred tax |
| Equity | |
| Share Capital | Investment by owners |
| Retained Earnings | Cumulative profit retained in the business |
Example: 3-Year Balance Sheet
| Line Item | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| ASSETS | |||
| Current Assets | |||
| Cash | R426,000 | R624,140 | R1,664,742 |
| Accounts Receivable | R416,667 | R625,000 | R937,500 |
| Inventory | R280,000 | R420,000 | R630,000 |
| Total Current Assets | R1,122,667 | R1,669,140 | R3,232,242 |
| Non-Current Assets | |||
| Property, Plant & Equipment | R800,000 | R1,000,000 | R1,150,000 |
| Less: Accumulated Depreciation | (R150,000) | (R300,000) | (R450,000) |
| Total Non-Current Assets | R650,000 | R700,000 | R700,000 |
| TOTAL ASSETS | R1,772,667 | R2,369,140 | R3,932,242 |
| LIABILITIES | |||
| Current Liabilities | |||
| Accounts Payable | R233,333 | R350,000 | R525,000 |
| Short-Term Loan | R200,000 | R200,000 | R200,000 |
| Total Current Liabilities | R433,333 | R550,000 | R725,000 |
| Non-Current Liabilities | |||
| Long-Term Loan | R650,000 | R450,000 | R250,000 |
| Total Non-Current Liabilities | R650,000 | R450,000 | R250,000 |
| TOTAL LIABILITIES | R1,083,333 | R1,000,000 | R975,000 |
| EQUITY | |||
| Share Capital | R653,334 | R653,334 | R653,334 |
| Retained Earnings | R36,000 | R715,806 | R2,303,908 |
| TOTAL EQUITY | R689,334 | R1,369,140 | R2,957,242 |
| TOTAL LIABILITIES + EQUITY | R1,772,667 | R2,369,140 | R3,932,242 |
Debt-to-equity ratio: Funders look at this (Total Liabilities ÷ Total Equity). Year 1: 1.57, Year 2: 0.73, Year 3: 0.33. Improving ratio shows decreasing leverage and financial health.
Documenting Assumptions
Every number in your projections must be explained. Funders will ask: "How did you arrive at this?" Document your assumptions clearly.
Key Assumptions to Document
- Revenue growth: Based on what? (market growth, new customers, capacity expansion)
- Pricing: Why these price points? (competitor benchmarking, value-based)
- Cost of sales: Percentage of revenue or per-unit calculation
- Salary increases: Annual % increase (e.g., 6% per year)
- New hires: When hired, at what salary
- Payment terms: Debtors (30-60 days), creditors (30 days)
- Interest rate: Actual rate from funder or current market rate
- Tax rate: 28% for companies in South Africa
Example Assumptions Schedule
Revenue Assumptions
- Year 1: R5m based on current R3m run rate + R2m from new Western Cape market (50 units/month × R3,333 avg sale × 12 months)
- Year 2: 50% growth based on increased production capacity (150 to 250 units/month)
- Year 3: 50% growth based on pay-as-you-go model attracting 2x customers
Cost of Sales Assumptions
- Material costs: 56% of revenue (current supplier quotes)
- No efficiency gains assumed (conservative)
Sensitivity Analysis
Show funders that you have considered risks. Create three scenarios:
- Best case: Everything goes right (e.g., 20% higher revenue)
- Base case: Your realistic expectation (main projections)
- Worst case: Things go wrong (e.g., 20% lower revenue, 10% higher costs)
Tip: Even in the worst case, you should show that you can service debt and avoid insolvency. If worst case shows failure, explain mitigating actions (e.g., cost cuts, overdraft facility).
Break-Even Analysis
Show when you become cash-flow positive and profitable. This is critical for funders.
Break-Even Calculation
Break-even units = Fixed Costs ÷ (Price per unit - Variable cost per unit)
Example: If your fixed costs are R1.92m/year, you sell units at R3,333, and variable costs are R1,867 per unit:
Break-even = R1,920,000 ÷ (R3,333 - R1,867) = 1,310 units/year (109 units/month)
Your projection: 150 units/month in Year 1, so you exceed break-even from Month 1.
Common Mistakes to Avoid
- Hockey stick growth: Unrealistic sudden growth in Year 2-3
- Missing cash flow: Only providing income statement
- Undocumented assumptions: Numbers appear from nowhere
- Ignoring working capital: Forgetting debtors/creditors impact on cash
- Overly optimistic: Assuming 100% capacity utilization from Month 1
- Inconsistent statements: Numbers don't tie between P&L, cash flow, and balance sheet
- Forgetting tax: Not accounting for 28% corporate tax
Building Credibility in Projections
- Base on history: If you had R3m revenue last year, R5m Year 1 is believable. R20m is not.
- Conservative is credible: Underpromise and overdeliver
- Use industry benchmarks: Compare your margins to industry averages
- Show proof: Customer orders, letters of intent, contracts pipeline
- Capacity constraints: Don't project more than you can physically produce
- External validation: Have an accountant review your projections
Next Steps
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