Business forecasting is an integral part of your business plan. As part of this, financial forecasting may be required for a number of reasons:
- If you need funding to start up or grow, then all lenders will assess your forecasts.
- Seeking out a potential business partner will be made all the easier with a set of robust financial forecasts that could help to persuade them to join your business.
- When you’re looking to sell your business, a prospective buyer will want reassurance that the business will continue to survive and make them money.
The forecasts you produce will be ongoing and changeable according to circumstances and should be a guide to running your business. So, if you feel that you need funding from a bank loan or another source, you already have the documents in place to go and visit a potential lender.
When creating a financial forecast, it may not necessarily be done sequentially. You could find yourself jumping between different sections as the results of one section may cause changes to be made to another section. In fact, you’ll probably find each section will need revising a couple of times until the overall outcome is acceptable to you.
In this article we’ll take you through the main elements to consider when forecasting.
1. Sales Forecasting
Project your sales over 2 – 3 years on a monthly basis for the first year and on a monthly or quarterly basis for the second and third years. This will also include your pricing strategy and how to price your product or service.
The amount of sales you forecast will underpin your entire business, so be realistic when looking at how many sales you will achieve. Forecast too little and you may not attract the funding you want. Forecast too much and you won’t achieve them!
2. Create an Expenses Budget
You need to know how much it’s going to cost to make the sales you have forecasted. You can split the costs into materials and labour, which are also known as direct costs, and are part of the cost of sales in the Sales Forecast.
Overheads, which are also known as indirect costs, can be split into fixed and variable costs. Fixed are costs such as rent, rates, payroll; variable costs include advertising and promotional expenses.
3. Construct a Cashflow Forecast
Cash is King and needs to be monitored as even a profitable business can run out of cash if its customers don’t pay on time. Use your sales forecasts, expense budgets and balance sheet to create this.
Use a realistic expectation of when your sales invoices will be paid so that you can project cash requirements for paying expenses. Don’t forget to factor in outgoing costs such as VAT and HMRC tax payments.
4. Income Projections
This is a Profit & Loss Account. Use the numbers from the first three schedules above (i.e. sales, expenses, cashflow) in order to build this up.
Again, its good practice to revise the P&L on a monthly basis with actual figures, so that you can see how the business has performed, and alert you to any potential problems.
5. Deal with Assets & Liabilities
You’ll also need a projected Balance Sheet. This is a snapshot of your business at a point in time showing the net value of the business.
There are items in the business which don’t go into the P&L e.g. capital elements of a loan, stock held, accounts payable and receivable and assets such as equipment, but which are still part of your business.
6. Break-even Analysis
The break-even point is where income from your sales matches the outgoing expenses of the business. Every business should know where this is so they can see if the business is viable.
The ideal situation is to reach break-even and then grow from there, as every additional sale is then contributing towards the business’ overall profit.
How EFM will support your business
If you’re at a crossroads with your business and want some help with your financial forecasts, EFM is here to help you. Our experienced team of Financial Controllers and Finance Directors are here to support your business.