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To meet your startup’s goals, you must be familiar with financial forecasting.
Without a financial forecast, you have no plan for basing your future financial decisions. After all, how can you know what type of costs and revenue your business will have in its first year of operation?
Investors will want to see how your choice of startup business plan translates into revenue and profits. You have to show the logical and realistic assumptions you are making in your financial forecast.
The goal of this article is to provide you with the tools you need to forecast the financial operations of your startup.
Read on to learn more!
What is a Financial Forecast?
A financial forecast is a projection of future costs and revenues. It covers external market factors and internal data. A good financial forecast shows your lenders or investors that you know your target market.
It may be a projection that what happened in the previous year will happen in the present year. Although you can use historical patterns to create a financial forecast, also consider changes in technology, competition, and laws and regulations.
Also, a financial forecast is a basis for inventory, budgeting, and planning for market share and sales. Financial forecasting is an important tool in merger analysis, capital expenditure, profit planning, and budgeting.
Tips for Creating a Financial Forecast
These are our top ten tips for creating a financial forecast for a startup business.
Set Financial Goals and Objectives
Every startup business owner dreams of making money. But how much capital do you need to achieve your financial goals? And if you’re a stock investor, how do you know what stocks to buy? You need to write all of your financial goals in your financial forecast.
Create a Business Plan
Any startup business needs a good business plan. It is a guide that outlines goals for your startup and how you plan to achieve them. When creating a business plan, you need to evaluate why you are in the business. A business plan should include:
- Executive summary
- Mission statement
- Business concept
- The team
- Industry analysis
- Competition
- Goals and objectives
- Description of day-to-day operations
- Financing
Develop a Sales Forecast
To create a reliable financial forecast, you need a sales forecast. A sales forecast is based on predictions in terms of the quantity of a product that your business is likely to sell.
Sales forecasting is important because it shapes your business decisions. It can help your business reduce unnecessary spending, manage cash flow, and avoid missing out on big opportunities. It can be a driving force for your startup business, helping improve production.
Forecasting sales will help your business predict future demands. You can measure the interest customers have in your product with an accurate sales forecast. It can help your startup plan supply to meet the increased demand.
A sales forecast is a great way to spot potential issues while there is still time to mitigate or avoid them.
Sales forecasting is the lifeblood of every startup business. A normal sales forecast looks at present conditions in your startup business. Then it makes assumptions about product and service offerings, the economy, and customer acquisition.
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Build an Expenses Budget
An expenditure budget can help you get a grip on your spending. An expenditure budget is useful for planning your goals and evaluating your progress.
An expenditure budget is an annual projection of what you expect to achieve operationally and financially. It is a plan that commits resources to business projects and makes formal statements of your expectations of expenditure, sales, production, and volume for the coming period. It puts guidelines and limitations on spending.
An expenditure budget is a blueprint for planning and control. It should be realistic and consistent with your business policy. Make sure you evaluate your budget constantly since internal or external conditions may warrant changes. It is also a forecast and deviation from it should be expected.
An expenditure budget should include costs of operation and overhead costs. This includes any costs that you expect to incur operating your startup business.
We also advise you to break down your expenditure budget into fixed and variable costs. This makes budgeting easier and helps improve your profitability.
Risk Management and Insurance
It doesn’t matter the nature or size of your enterprise. One thing that remains the same is the need for business insurance.
Its main purpose is to provide financial protection for your startup in the event of your (owner) death. Make sure you choose a life insurance company in your state.
You have to consider different aspects of your startup business when looking for insurance.
Income Tax Planning
Tax planning can often be forgotten or downplayed. So, the best thing to do is to include it in your financial plan.
You can even work with a tax preparer to take the burden off your shoulder. It is also important for a business to consider not only the tax savings of a specific strategy but also the potential non-tax costs.
In tax planning, you have to analyze your current tax situation. This can include the amount of income you report and the type of taxes you pay. Then you have to arrange your financial situation per the tax law to reduce the amount of taxes you pay.
The taxes you owe are due to the facts and numbers that you report on your tax return.
Create a Cash Flow Forecast
A cash flow forecast is an important tool for a startup because it helps you predict when you may have a liquidity problem.
This financial tool can help you understand how the cash available to your business will rise and fall in relation to the decisions you make and the sales you get. It can also help identify moments cash will be insufficient so action can be taken where appropriate.
The best place to start when creating a cash flow forecast is with your sales targets. You must form a realistic expectation of turnover and payment terms granted to consumers. This helps to estimate the cash that will flow into your startup business.
Then determine what resources you need to deliver those sales. Split your payments to suppliers to show those that need to be paid immediately and those that don’t need to be paid for a longer period.
Once you are done preparing the cash flow forecast, see what it tells you about your worst cash position. Then determine whether or not you can resolve the issue with the current cash resources.
Forecast Your Break Even Point
One of the most important numbers to know when creating a financial forecast for a startup business is the break-even point.
It is the point at which your costs and your income are equal. In other words, it is the sales volume where neither loss nor profit is made. Anything your business sells above the break-even point generates profit.
You can use this point to forecast sales because it tells you how much you have to sell to cover all your costs. This includes your overhead costs.
To calculate your break-even point, you need to know the following:
- The direct costs per unit
- Your overheads and total fixed costs for the year
- The expected selling price
First, you have to determine the contribution of each unit to the total fixed costs. To do this, you have to subtract the direct costs per unit from the selling price.
Then, divide the total fixed costs by the contribution to get the number of units you have to sell to break even. Your sales forecast, therefore, has to be higher than the number of units. You can adjust the figures to see what effect the selling price has on your break-even point.
Investors can use your break-even point forecast to determine when they can start recouping their investment.
Balance Sheet Pro Forma
The balance sheet boldly declares where your business stands at a given moment in time. It provides a good picture of your business’s financial health.
It shows what your business owes, owns, and how much it’s worth at a particular date. A balance sheet lists all your business assets and the liabilities show funding for your assets.
As a new business, it is important to create a balance sheet at least quarterly or every month.
Profit and Loss Forecast
Every year before the end of your financial year you should put together a profit and loss forecast of what you want your business to be doing. This provides you with important scenario planning.
You can refer to your accounting ledgers and profit and loss statements to find trends. Some popular trends to be aware of are overspending, slow sales cycles, and stock shrinkage.
In Conclusion
A financial forecast is a very important tool for a startup business plan. As you have seen, a financial forecast helps you plan for the future. These handy tips should help you understand what financial forecasting is all about. Then equip you with the data and facts you need to make good business decisions. Good luck with your startup!
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
