How to Create a Financial Forecast for Your Business
A financial forecast is critical to your business plan. Here’s how to create one that has all the elements for success.
A business plan is only a conceptual thing until you start filling in the number and creating a sensible and reliable financial forecast for your business. The marketing strategies for your business are right, but they won’t make any significant difference when the figures cannot tally, and the forecast is already wrong. You will need the financial forecast for your business to ensure that your business withstands the test of time and becomes prosperous in the future.
Even though the financial forecast is not necessarily a sequence, here is the step-by-step guide to ensure that you create an effective financial forecast to help you steer your business.
1. Start with a Sales Forecast
You need to start by setting up a spreadsheet and projecting how you want your business to be faring in terms of sale within a course of the next three years. You will start by setting up different lines of sales and columns for each month, or quarterly for every year. The sales forecast should be in a spreadsheet, and there should be five blocks respectively; for unit sales, pricing, the total sales after multiplying the sales and the units, the unit costs and the final block which multiplies the units sale and the units cost to calculate the cost of the sales.
You need to have calculated the sale forecast to have a clear picture of the gross margin. The gross margin is the total sales less the cost of the sales, which is a good figure which will help you have some insight before you venture into the business.
2. Create an Expense Budget
You’re going to need to have an understanding of how much you need to spend to achieve the sales forecast you have. You have to differentiate between the variable cost and the fixed cost. The fixed cost includes inevitable cost like the payroll and rent while the variable cost might be the cost you will incur for promoting and advertising your products. These are vital considerations you will have to keep in place during the financial forecast to ensure that all the expenses are within your capability.
3. Develop a Cash-flow Statement
This will be a statement that will show the real dollars that will be moving in and out of your business. You will base this partly on the sales forecast and the balance sheet items while still putting other assumptions into consideration.
4. Income Projections
This will be your pro forma profit and loss statement and will detail all your forecasts for your business in the next three years. You will use the figures that you used as sales forecast and also the expense projection.
5. Breakeven Analysis
The breakeven point is the point where your expenses will match your sales and the service volume. With the three-year financial forecast, you will have a vital analysis to know whether you will be investing in a viable business that will bring you higher profit margins or not.
For more information on how to create a financial forecast, or if you need any assistance with your business plan, contact us.
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