Most business owners would agree that budgeting and financial forecasting in business are two of their least favourite tasks, but they are necessary ones. Without a clear picture of your business finances, it is difficult to know what you have on hand and what you can reserve for the future. It’s not just about the budget though. In order to plan for business growth and capital expenditures, you may need to seek external funding. Those creditors will want to see a financial projection in a business plan to get an idea of how you plan to repay the borrowings. Think of it as translating your ideas or plans into numbers.
What is Forecasting in Business?
A financial forecast is not set in stone; it’s a best estimate or a financial projection in the business plan of what you expect to happen with your business finances. Naturally, you have to make some assumptions about sales and expenses in the financial forecasting process.
- Existing business can look to past years’ experience to make assumptions about how many customers they expect to gain or lose each year, the average level of sales to each customer and any seasonal variations.
- New businesses don’t have the luxury of looking back at past experience and will likely have to rely on market research of what companies of similar size in similar industries have done and what you believe you will be able to do.
How Do You Start the Financial Forecasting Process?
Any financial forecast business plan worth its salt begins with revenue forecasting: the process of estimating the revenues you expect to come from the business in a certain time period. Typically, a financial forecast should run for three to five years.
Start by determining your sales forecast assumptions that will form the basis of your forecast. Some typical assumptions may be:
- How much you expect the market to grow by or decrease by each year.
- Expectations you have to increase/decrease your sales resources such as sales people or advertising by each year.
- Plans to boost sales such as moving to a better location, raising prices, speeding up accounts receivable turnover by changing invoice terms.
- Product changes such as the addition or elimination of products in an existing line, launch of a new line of products, or entry into a new market with an existing product.
Once you have forecasted your revenues, it’s time to take stock of the business expenses, which are primarily fixed and variable costs.
- Fixed costs are those expenses that are the same no matter how much of your product you produce or how many sales you generate. Whether you make a million dollars or $1, you will still have to pay for your office or plant space.
- Variable costs are changeable expenses that can be affected by how much product you produce or how many sales you generate. As you produce or sell more, you will need to hire more people and purchase more raw materials. As your office or plant stays open longer to handle the increased volume of business, your utility costs will increase. All of these types of expenses are variable based on production and sales.
Now that you have an idea of your costs and how much you will need to sell in order to make a profit, you are ready to prepare your financial forecast business plan. Three types of financials statements will make up the financial forecast business plan:
- Profit & Loss Statement, which shows the business income netted against the business expenditures to determine whether the business is operating at a net income or loss.
- Cash Flow Statement, which shows the business’s financial liquidity by netting cash disbursements against cash coming into the business. This determines whether the business has a cash surplus or deficit.
- Balance Sheet, which shows the business assets vs. its liabilities to determine the equity that is left in the business.
It is standard practice to make two types of financial projections in the business plan — a conservative plan and an optimistic plan.
- A conservative plan should show what you realistically expect the business to do.
- An optimistic plan should show what the business would look like if you have a really good year.
By now your head is likely spinning with all the numbers, statements and projections your business has to calculate. Fear not, an experienced accounting firm, like NuVest Management Services, can guide you through the financial forecast business plan process and do the heavy lifting for you. Call us at (888) 926-9645 or book a consultation so we can help you focus on what you do best, while we handle the rest.