How to Forecast Financial Statements in Excel

Building a financial forecast in Excel is more than just crunching numbers, it's about creating a clear roadmap for your business's future. This roadmap helps you make smarter decisions, secure funding, and track your progress against your goals. We'll walk through a practical, step-by-step guide to forecasting your income statement, balance sheet, and statement of cash flows, all within a spreadsheet.

Before You Start: Gathering Your Historical Data

Every solid forecast is built on a foundation of historical performance. You can't predict where you're going without knowing where you've been. Before you open a blank Excel sheet, you'll need to gather your historical financial statements.

Ideally, you should have at least two to three years of data. This includes:

• Income Statements: Shows your revenue, costs, and profitability over a period (e.g., a quarter or a year).
• Balance Sheets: Provides a snapshot of your assets, liabilities, and equity at a specific point in time.
• Statements of Cash Flows: Details how cash has moved in and out of your business.

Most of this information lives inside your accounting software like QuickBooks, Xero, or financial platforms like Stripe. The key is to organize it consistently in Excel. Set up a tab for your historical data with each year in a separate column. This clean setup is the bedrock of your accurate model.

Step 1: Define Your Key Business Assumptions

Your forecast is only as good as the assumptions that drive it. Here, you'll translate your business strategy and market knowledge into a set of quantifiable drivers. Don't worry about getting every number perfect, the goal is to be thoughtful and realistic.

Your assumptions tab in Excel should be separate from your financial model. This makes it easy to change them later and see how those changes impact your entire forecast (this is also known as "scenario analysis").

Common Assumptions to Define:

• Revenue Growth Rate: How much do you expect sales to grow each year? Is it a single percentage, or will it be driven by more specific factors like price increases or new customer acquisition goals? For a more detailed model, you could forecast revenue by building a driver-based model such as: (# of Customers x Average Revenue Per Customer).
• Cost of Goods Sold (COGS) % of Revenue: As your revenue grows, what percentage of that revenue will go towards the cost of goods? For most businesses, COGS are the variable costs that scale almost perfectly with your revenue. Using a simple percentage works well to project your future gross margins.
• Operating Expenses (OpEx):
• Capital Expenditures (CapEx): Plan for purchases that are greater than $1,000 and are expected to last longer than a year. This will affect your cash flow from investing activities on the cash flow sheet.
• Working Capital: This reflects how efficiently you manage your cash flow. How fast do customers pay you (Accounts Receivable Days Outstanding) or you pay suppliers (Days Payable Outstanding)?

Having all these assumptions neatly organized in a separate Excel tab will make stress testing and transparent reporting simple and efficient.

Step 2: Building the Income Statement

With the assumptions in place, you're ready to start forecasting the income statement. Historically, your income statement can be a template.

• Revenue: Start with a baseline revenue number and apply the forecasted growth rate or use a more sophisticated approach where you forecast revenue drivers. Use the formula: Revenue (Year 2) = Revenue (Year 1) * (1 + % Revenue Growth).
• COGS: As the revenue grows, multiply COGS by the predicted revenue to calculate this value. Use the formula: COGS = Revenue * COGS %.
• Operating Expenses: Estimate the operating expenses based on your assumptions:

Once you calculate Operating Income (EBIT), a non-GAAP metric, you can reference this to understand how you could adjust operating margins.

Step 3: Putting Together the Balance Sheet

Income statement figures will convert to the balance sheet and show the linkage with your forecasts, like assets, liabilities, and equity cases.

• Assets: Here, two categories predominate:
• Liabilities: Important elements are:

Final Thoughts

Forecasting financial statements in Excel is crucial for having a structured approach to your decision-making, ensuring you add value as you aim to achieve your goals. Often, the hardest part is starting with clean, organized data. Once you have your historical records set, the rest is largely putting numbers in the right context and iterating with your assumptions.

Keep learning and refining your approach by utilizing tools such as Granular Data Collection, and effectively using your forecasting insights to stay ahead. Consider testing your techniques with Excel or similar software like QuickBooks for more automated reporting, looking forward to the greater specificity you gain each year through deeper context.

Graphed helps you handle the critical aspects in your workflow efficiently, collecting relevant data effectively to continue improving upon your forecasts.