In our last article, Putting your plans to paper, we established a business plan was crucial to improve your chances of success. This week, we are examining the next step: establishing a financial forecast So, what is a financial forecast?
A financial forecast is simply a short- or long-term projection of your business future revenues and expenses. A short-term financial forecast is a projection of the company’s financial position with a short period (usually with the first 12 months of operation) while a long-term financial forecast extends for a longer period (3-5 years and above).
As a start-up, a short-term financial forecast is important in providing a base projection for planning a long-term forecast. It is critical part of the business plan and the most essential document to obtain external funding.
For a new business, creating your financial forecast involves:
Researching your market - this is a reoccurring process in your business journey. As a start-up without previous data on income and expenses, you need to gather information from the industry on the items that constitute expenses and revenues.
Creating a financial projection - based on the information from your market research, input your estimated expenses and revenues in an excel sheet that will show your monthly inflow and outflow.
Preparing a projected profit and loss statement and balance sheet.
Being realistic while using your projections to plan - this entails planning based on different scenarios i.e. from best to worst-case scenario.
Updating your financial forecast - when your business starts operating, you will need to monitor your business progress against your projections to measure whether or not you are on track. In most cases, the projection will need to be adjusted.
Although financial forecasting may not be an entrepreneur’s favourite occupation, it has the following benefits. It:
serves as a benchmark to measure your progress concerning your plans.
is essential for obtaining business loans and to attract investors.
helps you to understand the financial position of your business.
prepares you for unforeseen events that might affect your business.
helps to make important decisions.
Basic accounting knowledge helps towards making a financial projection. However, to save time and increase the potentials of getting funds from external sources, you may consider consulting with a professional to guide you through the process.
If you need help with your financial projection and forecasting, please email us at email@example.com