Statistically, nine out of ten startups fail. So, if you want to be among the 10% that succeeds, one of the most important things is to have a well-thought business plan. Essentially, a business plan is a thorough document that specifies a company’s vision and strategies, providing a roadmap to success. And it includes practices like innovation accounting and other vital functions. However, creating a financial forecast is one of the most important parts of a business plan. That goes for bootstrapped businesses as much as for those seeking investors. Read on and we’ll share some tips about how you can do it like a pro.
What is a Financial Forecast?
A financial forecast is vital in the budgeting process of your startup. Chiefly, it represents a projection of the costs and revenues you anticipate the business will incur. It is not merely based on a simple guessing game but considers many factors, including the macroeconomic conditions and the competition.
Financial forecasting evaluates present and future fiscal conditions, providing insights on how such will impact the operations of the startup. So, it is an important fiscal management tool. In a business plan, the financial forecast will provide you with an idea of the feasibility of your startup.
Benefits of a Financial Forecast
When it comes to effective financial management, forecasting is one skill you must learn. Familiarity with how to perform forecasts can deliver an array of benefits, including the following:
- Evaluate Financial Viability: Financial forecasting will let you know the potential of the startup’s success. If the projections fail to look good, you might think twice about your plan.
- Assist in Decision Making: Data in your financial forecast is a good foundation for making well-informed decisions. Ultimately, it provides a solid basis for the strategies your business will pursue.
- Invite Investors: If you are looking for investors to help grow your startup, one of the first things they will look at is the financial forecast. This will help them decide whether putting money into your venture is a good idea.
- Get Approved for a Loan: Lenders will look at your business plan, including the financial forecast because it will help them evaluate your risk and creditworthiness. Speaking of loans, if you need money for startup expenses, check out installment loans from CreditNinja.com. They have personal loans that can help with your financial needs.
How to Create a Financial Forecast
Now that we know how important financial forecast is, below are some tips on how you can incorporate it into your business plan.
1. Pick a Method
Choose a financial forecasting method that will work best for your startup. For instance, you can use quantitative methods, such as percent of sales, moving average, and simple linear regression. Meanwhile, you can also do your financial forecast using qualitative methods, with the most popular being market research.
Many of the methods may seem technical. So, you can elevate your skills and take our online financial courses. We take pride in working with experts who can impart valuable insights to help you manage your startup better.
2. Predict Your Sales
When creating a financial forecast for your business, one of the first steps is sales forecasting. As the name implies, it predicts your sales for a given time (usually within 12 to 18 months) after starting your business. Without past results, sales forecasting can be a challenge, since you do not have a solid basis. With such, you can use market analysis, competitor research, and industry trends, among other prediction methods.
In most cases, the sales forecast will present monthly data up to the first year of operation. Beyond that point, you can present information in a quarterly format up to the third year. You can also present your sales in terms of price or units.
3. Identify Your Expenses
Forecasting your sales is not enough to constitute having a well-thought business plan. You also need to determine the expenses of your startup for a minimum of one year or relative to the duration of the sales forecast. Make sure to include both operating expenses and overhead costs, as well as other factors that will require your startup to spend money. You should also categorize your expenses into two groups – fixed and variable.
By identifying your expenses, you can enjoy better cost management, which will make your startup more competitive. To become more effective, you need to ask for help from an expert. Keep it simple, and use the right tools at the right time. The more effective your financial projections are, the more efficient your approach to cost management will be.
4. Determine Your Break-Even Point
One of the most important parts of your financial forecast is the break-even point. As the name implies, it identifies when you think the startup will break-even, which is when revenues and costs equate. Here, there is no gain or loss for the startup. Instead, it indicates when you can start becoming more profitable.
The break-even point is one thing that investors and lenders will look at. This will give them a sense of a timeline. Taking too long to reach a break-even point can be a negative indicator, making the business look unfeasible.
5. Create a Cash Flow Projection
Your sales forecast is different from a cash flow projection. The latter is another important component of your financial forecast, as it will estimate the amount of money going in. In turn, this helps determine if you will have enough resources to sustain growth.
Preparing a statement of cash flow can be difficult if you have not yet started your business operations. Fortunately, cash flow tools are available, making it easier to predict your financial position, even without expert knowledge and experience.
Thinking of building a startup? Make sure that you create a business plan. It has many crucial components. But one of the most important is the financial forecast. It will predict sales, expenses, break-even point, and cash flow among other things. A well-thought financial forecast will give you realistic expectations of the future of the startup. It is also a valuable tool for lenders and investors, as it can give insights into the feasibility of your business.
Guest article composed and provided by Lydia Nash. Cover photo by Carlos Muza from Unsplash.
Last updated May 30, 2023