The financial projections template produces an income statement, balance sheet, and cash flow statement which at first glance appear to be separate independent statements. However, a closer look reveals that there are in fact links between financial statements.
When preparing financial projections for a business plan it is important to understand how a change in one statement can impact another. For example, a change in net income shown in the income statement has an impact on cash flow shown in the cash flow statement and corresponding impacts on cash and retained earnings shown in the balance sheet at the end of the year.
Links Between Financial Statements Example
The links between financial statements can best be seen by reviewing the trading operations of a typical business.
Each accounting period (usually a year) starts with a beginning balance sheet on the first day of the period and finishes with an ending balance sheet on the last day of the period. The financial activity of the business between the two balance sheet dates is reflected in the income statement and the cash flow statement.
The highlighted items indicate the various links between financial statements which are more fully discussed below.
Beginning Balance Sheet
The balance sheet or statement of financial position, shows the assets, liabilities and equity of the business at a specific point in time. In this case the balance sheet is taken at the start of the year before any trading activity takes place.
Beginning Balance Sheet at 1 January 2021 | Cash | 8,000 |
| Other assets | 30,000 |
| Total assets | 38,000 |
| |
| Liabilities | 26,000 |
| Capital | 5,000 |
| Retained earnings | 7,000 |
| Total liabilities and equity | 38,000 |
Income Statement for the Year
The income statement shows the financial performance of the business between the beginning and ending balance sheet dates in terms of its revenue, expenses, and net income. The income statement is sometimes referred to as the profit and loss statement.
Income Statement for the Year to 31 December 2021 | Revenue | 90,000 |
| Expenses | 80,848 |
| Net income | 9,152 |
Cash Flow Statement for the Year
The cash flow statement or statement of cash flows shows the cash inflows and cash outflows of the business during the year between the two balance sheet dates.
Cash Flow Statement for the Year to 31 December 2021 | Beginning cash balance | 8,000 |
| |
| Net income | 9,152 |
| Depreciation | 4,000 |
| Working capital | -3,340 |
| Operating cash flow | 9,812 |
| Investing cash flow | -2,000 |
| Financing cash flow | -2,519 |
| Net cash flow | 5,293 |
| |
| Ending cash balance | 13,293 |
Ending Balance Sheet
The ending balance sheet is in the same form as the beginning balance sheet. Again it shows the assets, liabilities and equity of the business at a specific point in time, in this case at the end of the financial period.
Ending Balance Sheet at 31 December 2021 | Cash | 13,293 |
| Other assets | 31,972 |
| Total assets | 45,265 |
| |
| Liabilities | 25,113 |
| Capital | 5,000 |
| Retained earnings | 15,152 |
| Total liabilities and equity | 45,265 |
How do Financial Statements Link Together?
There are various links between financial statements each of which is discussed in more detail below.
Link Between Balance Sheet and Income Statement
The net income shown in the income statement of (9,152) is the earnings the business has generated during the year. These earnings are accumulated together retained earnings from the beginning balance sheet (7,000) and either paid out to shareholders by way of dividend or retained by the business.
The statement of retained earnings is used to summarize this movement as shown below.
Statement of Retained Earnings at 31 December 2021 | Net income | 9,152 |
| Beginning retained earnings | 7,000 |
| Less: Dividends | -1,000 |
| Ending retained earnings | 15,152 |
The statement of retained earnings effectively links the net income shown in the income statement to the balance sheet. The accumulated balance of retained earnings from the statement (15,152) is included in the ending balance sheet and forms part of the equity of the business.
Link between the Income Statement and the Cash Flow Statement
The net income (9,152) from the income statement is also the starting point for the indirect method cash flow statement.
Referring to the cash flow statement shown above, by adjusting the net income for non-cash items such as depreciation, and for movements in working capital requirements, the business can determine its cash flow from operating activities. The operating cash flow together with the investing and financing cash flows determine the net cash flow of the business for the year (5,293).
Link Between Balance Sheet and Cash Flow Statement
The cash flow statement is completed by adding the cash from the beginning balance sheet (8,000) to the cash movement for the year (5,193) to give the ending cash balance of (13,293). This final cash amount is included in the ending balance sheet under the heading of cash and forms part of the assets of the business.
Summary
The links between financial statements discussed above are summarized in the diagram below.
Referring to the numbers highlighted in red on the diagram.
- Net income from the income statement is used in the statement of retained earnings.
- Retained earnings from the beginning balance sheet is added to net income using the retained earnings statement.
- The retained earnings statement final balance is included in the ending balance sheet.
- Net income from the income statement is also used as the starting point for the cash flow statement.
- Cash from the beginning balance sheet is used in the cash flow statement.
- The cash flow statement final balance is included in the ending balance sheet.
Last modified June 7th, 2022 by Michael Brown
FAQs
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.
What are financial statements based on projections? ›
A projected profit and loss statement is a financial document that reflects the amount of profit or loss you expect your business to generate in future periods. This is an essential document that you or your accountant should put together.
What are the links between the financial statements? ›
The major links in the three financial statements are: Net income from the IS links to the BS (retained earnings) and the CFS operating section. Property, plant and equipment in the BS creates depreciation in the IS and the CFS operating section, and also creates capital expenditure in the CFS investing section.
What are the interrelationships between the financial statements? ›
The net income figure in the income statement is added to the retained earnings line item in the balance sheet, which alters the amount of equity listed on the balance sheet. The net income figure also appears as a line item in the cash flows from operating activities section of the statement of cash flows.
What is an example of a financial projection? ›
A financial projection is an assumption about an entity's future operations and cash flow. For example, a company may assume that their revenues will increase if they release a new product line. Or, a government may assume that if they institute a new tax, that there will be new revenue from it.
How to calculate projections for a business plan? ›
How do you calculate revenue projection? To calculate revenue projection, multiply the projected sales or services by the anticipated price, taking into account factors like market demand, growth rates, and any potential fluctuations in sales volume.
How to make projections of financial statements? ›
6 steps to making financial projections for your new business
- Project your spending and sales. ...
- Create financial projections. ...
- Determine your financial needs. ...
- Use the projections for planning. ...
- Plan for contingencies. ...
- Monitor.
A three-statement financial model is an integrated model that forecasts an organization's income statements, balance sheets and cash flow statements. The three core elements (income statements, balance sheets and cash flow statements) require that you gather data ahead of performing any financial modeling.
What are the four uses of financial projections? ›
Financial projections are the cornerstone of informed decision-making in the world of finance. They are a comprehensive financial roadmap that enables businesses to anticipate future financial performance, analyze potential risks, allocate resources effectively, and set realistic goals.
What links financial statements? ›
The concept of retained earnings is the centerpiece that links the three financial statements together. The retained earnings balance in the current period is equal to the prior period's retained earnings balance plus net income minus any dividends issued to shareholders in the current period.
The net income (or loss) from the income statement affects retained earnings on the balance sheet. Depreciation from the income statement reduces the value of assets on the balance sheet. Expenses that are accrued but not paid (like wages payable or interest payable) show up as liabilities on the balance sheet.
What measures key relationships between financial statement items? ›
Answer (C) ratio analysis
The ratio analysis is used to measure relations among the financial statement items. They measure the current financial standing of the organization. There are different types of ratios are used such as profitability ratio, liquidity ratio, and efficiency ratio, and so on.
What are the 4 interrelated financial statements? ›
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings.
How do the three financial statements link together? ›
Net income from the bottom of the income statement links to the balance sheet and cash flow statement. On the balance sheet, it feeds into retained earnings and on the cash flow statement, it is the starting point for the cash from operations section.
What are the interconnected financial statements? ›
The three financial statements are interconnected and provide different aspects of a company's financial performance. While the Income Statement shows profitability, the Balance Sheet shows financial position, and the Cash Flow Statement shows how the company generates and uses cash.
What financial statements should be included in a business plan? ›
There are three primary financial statements a business needs to generate and regularly monitor:
- Profit and loss statement, or P&L, also known as the income statement.
- Balance sheet.
- Cash flow statement.
The financial projections section provides a detailed overview of your financials, including income statements, balance sheets, and cash flow statements. This section is important because investors and lenders can refer to this to assess the feasibility and potential profitability of the business.
What are the financial projections of a strategic plan? ›
Financial Projections
A strategic plan should include yearly financial forecasts of revenues, expenses and income. The yearly forecast, at least for the first year, is based on the cumulative monthly forecast for the first 12 months.
What are the financial projections in a marketing plan? ›
In a marketing plan, financial projections are put together to forecast a three year period from the beginning of the project. The plan will, at a minimum, include an income statement, a cash-flow projection, and a balance sheet.
