May 12, 2015 Basic Money Management

If you apply for a loan, chances are very good you’ll be asked to provide a financial forecast for your business. Your current numbers will figure prominently in the decision-making process. A lender will also want to see where you expect to take your business financially, and how you plan to get there.

Creating a financial forecast doesn’t have to be something you do just because a lender asks for it; it’s an extremely helpful tool no matter what. In fact, Entrepreneur Magazine suggests, “Planning out and working on your company's financial projections each year could be one of the most important things you do for your business.”

What Is a Financial Forecast?

Imagine you have a crystal ball and can see into the future of your business. Considering your current revenue and expenses, the present market conditions, and your business plans, what would the crystal ball show you? Your financial forecast describes that vision in detail. It’s a monthly or yearly prediction of where you expect your business to be financially, and it’s based on where you stand now and your assumptions for the future.

How to Put Your Financial Forecast Together

When you’re just starting out, financial forecasts can be tough to put together. Because you don’t have a lot of historical information to go on, you’ll probably wind up doing a lot of guesstimating. That’s okay; just use the best judgment you can, and keep your projections realistic. It will get easier (and more accurate) over time.

Step 1 - Gather All the Info You Need

Any look into the future starts with where you are now, so the first bit of information you need is a detailed picture of your current income and expenses. If you don’t have any firm figures, as would be the case for a startup, use the numbers you put together for your first year’s budget.

Information from previous years will be extremely helpful in figuring out trends, so keep that handy, as well.

Step 2 - Analyze Your Income

Plot out the trend your business has been following. Has income been rising or falling? If you have money coming in from various sources (a retail location, website, catalogue, etc.), break it down by category. By what percentage have things been growing or decreasing each year? If you expect the pattern to continue, apply it to the current numbers to see where your income might be a year from now.

If you expect to make changes, like adding a new product or service, opening new locations, or increasing your advertising, factor that in, and estimate what kind of impact it might have.

You may find it helpful to make monthly forecasts, especially if your business is seasonal. Create an estimate from last June to forecast next June, for example, which is likely to give you a more useful prediction. You can do this for each month until you have projections for the entire next year.

Step 3 - Analyze Your Expenses

Repeat the exercise with your expenses, comparing one type at a time. Include all the direct expenses for your business, such as equipment, wages, and the cost of goods, along with general operating expenses like professional fees, insurance, advertising, etc.

Some will be pure estimates, but others, such as rent and salaries, may already be determined. Some expenses may not increase, some may drop (for example, gas prices this past year), and some may rise. Do your best to project each category.

Don’t forget about expenses that may not have been budgeted or incurred already. If you know your website will need a redesign this year, or the roof on your building has to be replaced, factor that into your expense forecast. Conversely, take out of your forecast any expenses you might have had in the past that you won’t have to deal with this year.

Step 4 - Put It All Together

Now that you’ve got the numbers, you’ve got to make sense of them. SCORE, formerly known as the Service Corps of Retired Executives, has a free spreadsheet template you can download. Depending on how involved you want to get, the spreadsheet will help you project everything from startup expenses and payroll costs, to sales, cash flow, income, and more. You can forecast up to three years with SCORE’s template.

Intuit has an online financial planning tool geared to startups that can also be used for existing businesses. Intuit also has a free template download that will help you project your total income, cash flow, and bottom line balance sheet, which is a summary of all your business assets, liabilities and equity.

If you want to put the data together on your own, you can create a simple spreadsheet that will provide you with a basic forecast of future revenues and expenses:

  1. Plot out the coming months across the top of the sheet.
  2. For each of the months, enter your estimated total income for the month.
  3. Underneath that, enter the estimated total expenses.
  4. Subtract the expenses from the income, which will leave you with the projected net income (or loss) for the month.

How to use Your Financial Forecast

If you’re putting together a forecast as part of a loan application, the lender will tell you how far to project. If it’s for your own internal use, you’ll probably find it most helpful to do month-by-month projections for the first year, and yearly projections for three to five years.

Putting the numbers together will give you the opportunity to think about every bit of income and expense your company will have. It sets goals and targets for where you think you’ll be, and at the same time, gives you something to measure your progress by.

Comparing your actual performance with the forecast will let you know if you’re veering off track, and help you figure out what’s working and what isn’t. Happy forecasting!

 

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