SayAhh’s Revenue Projections

While Jane was building SayAhh’s revenue projections, Dick focused his attention on building the expense side of the projections. He procrastinated for a few weeks because he was deep in product development, but surfaced a few days ago when he realized they had an investor meeting coming up and really should have at least a basic financial model ready in case the investor asked about it.

Before building his projections, Dick needs to make three main decisions:

  1. Should he build a simple cash forecast or a set of projected financial statements?
  2. What are the right drivers for each expense category?
  3. How should he account for unforeseen expenses?

1. Cash Forecast vs. Projected Financials – What’s the difference?

A simple cash forecast is just that – it is a model that helps anticipate cash balances over time. It is simple in that it forecasts how much cash will be coming in the door (revenues + equity financing + debt financing) and then subtracts from that amount how much cash is expected to be going out the door. The expense forecast tends to be organized by what the money is being spent on such as office space, employee salaries, or computer hardware and software.

Building a set of projected financial statements is more complicated. For one, it requires keeping track of not only what the company is going to be buying, but also where the purchased goods/services are used. In the straightforward example of a widget manufacturer, expenditures on electricity (the “what”) can get spread across multiple line items on the Income Statement. Part of the spend may be assigned to Cost of Goods Sold, part to Marketing, and part to General & Administrative, all of which can be separate line items on the Income Statement (the “where”).

Creating a set of projected financial statements also requires understanding different types of expenses. Specifically, is an expense an operating expense (generally speaking, spend on a good or service that is consumed immediately) or a capital expense (spend on an asset that will be used up more gradually over time)? The former will impact the Income Statement, Balance Sheet, and Cash Flow Statement while the latter will only impact the Balance Sheet and Cash Flow Statement (although as the asset depreciates, the depreciation will show up on the Income Statement).

To keep track of all of this, companies assign every expense to a Cost Center (tells where the spending occurs, indicating the line item on the Income Statement that will be impacted), a Cost Code (which indicates what was purchased, e.g. Office Supplies, Salaries, Utilities, etc.) and a spend type (e.g. Capital vs. Operating).

Finally, building projected financials requires a strong understanding of the interactions between the three financial statements.

Due to the added complexity of building projected financial statements and because Dick and Jane are currently focused on cash, Dick chose to build a cash forecast. This is fine for now, but eventually SayAhh will need to become sophisticated enough to build projected financial statements.

2. Choosing the right drivers for each expense category

Just as it was important for Jane to choose the right drivers for her revenue projections, it is similarly important for Dick to choose the right drivers for his expense forecast. Since this was addressed on the revenue side, we won’t go into details on the expense side.

3. Accounting for unforeseen expenses

Dick is confident that his forecast will capture SayAhh’s major business expenses. But how should he forecast unanticipated expenses? Dick decided that unanticipated expenses will be equal to 10% of anticipated expenses in order to provide a cushion in SayAhh’s budget.

4. Putting it all together

With that, SayAhh now has their initial set of revenue & expense projections. Subtracting the expenses from the revenues provides a forecast of cash flow from operations. Dick and Jane are not currently anticipating any additional cash flow from financing (or investments), so these projections are a good indication of SayAhh’s anticipated cash burn, which will help Dick and Jane determine when/if they need to raise more money.


  • Nice. Thank you, I do.. 🙂

  • James Mitchell

    “it forecasts how much cash will be coming in the door (revenues + equity
    financing + debt financing) and then subtracts from that amount how much cash
    is expected to be going out the door.”

    Assuming you are using accrual accounting (which in almost all cases you
    should), revenue does not cause an increase in cash any more than an expense
    causes a decrease in cash. It would be more accurate to say collected revenue
    increases cash and paid expenses cause a decrease in cash. This is the fundamental
    point of accrual accounting.

  • Pingback: Reblog – Finance Fridays (Sayahh’s Revenue Projections – Part 2) | ithacaVC()

  • guest

    Thank you!

  • Good job. Thank you!

  • David

    Dear Jane & Dick,

    Stop! Wait! Back up! Please!

    The choice of simple cash forecast or a set of projected financial statements is no choice at all. You
    must create projected financial statements. The good news is that by properly doing this you will also
    have created the cash forecast you, your management team, your investors, potential
    investors and lenders need.

    So why “must” you create projected financial statements.
    Well, this get’s to the issue of understanding the difference between what’s
    happening with cash, for better or worse, and profit (more specifically
    operating profit, EBITDA), for better or worse. Echoing Josh, it also gets to
    the issue of the, sometimes different, drivers of cash vs. operating profit. A
    couple of examples might be helpful.

    Example #1: Ugly cash, great business – Eons ago
    there was this nascent industry called cable television. Now if you were to
    look at just a cash forecast for an early stage business in this industry you
    might wonder why in the world anyone would get involved. The business is just
    bleeding cash! With no end in sight! It would take looking at the projected
    financial statements to see the company’s significant operating profits, even
    as it bleeds cash. It would take looking at the financial statements to
    understand how much debt the business could support, what kind of dividends
    investors might expect, etc., etc., etc. 

    Example #2: Great cash, ugly business – Many SAAS companies
    charge their customers “up front” for a subscription. That is, pay me now for twelve
    months and I’ll deliver the service over the succeeding twelve months. In this
    case the cash flow might be extraordinarily positive. Lots of cash around means
    you’re successful, right? Well, a Ponzi scheme has lots of cash around, for a
    while anyway. Knowing what’s going on with your company’s operating earnings,
    the path to operating profit, will tell you whether you’ve got a business worthy
    of investment; that is, investment of your friends and family’s cash, potential
    investors cash not to mention the investment of your time/effort/sweat.

    The point is that without a full set of projected financial
    statements you have no map, you have no compass and you will likely be prone to
    some huge, expensive mistakes. The projected financial statements give you the
    platform upon which you can “test, learn and improve”.

    Yes, building projected financial statements is complex, it
    is hard. “Hard” comes in building the product and it also comes in financial
    management, sales and marketing, human resources and just about every other
    aspect of your business. But then if you weren’t prepared for the “hard” you
    would never have left the mother ship. Embrace the “hard”, find a way to get it done, and win.


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