If you’re just starting a business, you might be wondering how to make accurate financial forecasts since you don’t have past data to work from. But financial projections are helpful in planning, and if you’re trying to raise capital, they’re required.
Entrepreneur.com recently published a guide to help startup businesses create more accurate financial forecasts. Here’s a summary.
Start With Expenses
You probably know what your expenses are going to be, so start there. List fixed expenses, such as rent, utility bills, phone bills, accounting/bookkeeping costs, legal fees, insurance costs, licensing fees, postage, technology, advertising and marketing, and salaries. Then list variable expenses, such as cost of goods sold (materials, supplies, packaging) and direct labor costs (customer service, direct sales, direct marketing).
These tips will help you more accurately forecast your expenses:
- Double your estimates for your marketing costs—they usually exceed expectations.
- Triple your estimates for legal, insurance, and licensing fees, since they’re hard to predict.
- Keep track of any time you spend working in the business since you will eventually hire someone to do that work and will need to forecast it as an expense.
Create Two Versions of Revenue Forecast: Conservative and Aggressive
It’s impossible to know beyond a shadow of a doubt how fast your business will grow. There’s the likely case that it will grow gradually and conservatively. But there’s always a chance, and it’s the chance you’re working hard for and dreaming of, that it will take off like a rocket and grow aggressively. Go ahead and create two versions of revenue forecast. This will not only help investors, but it will motivate you to strive for your dreams while giving you a plan for what to do if things progress more slowly.
Check Your Ratios
Realize that if your business grows aggressively, your expenses will grow aggressively also. Check your expense and revenue ratios for each forecast to make sure you’re taking that into account.
Here are a few ratios to check:
- Gross margin — What’s the ratio of total direct costs to total revenue during a given quarter or year? If your forecasts cause your gross margin to increase too dramatically too quickly, they aren’t realistic.
- Operating profit margin — What’s the ratio of total operating costs to total revenue during a given quarter or year? As revenues grow, overhead costs will represent a small proportion of total costs and your operating profit margin will improve. But many business owners forecast their break-even point too early and run out of operating capital.
- Total headcount per client — If you’re currently doing most of the work yourself, you’ll need to be sure to take this ratio into account. When the number of clients grows, you’ll have to hire staff. Divide the current number of employees (including you) in your company by the total number of clients you have or think your employees can effectively manage. As your clients increase, your staffing needs will increase proportionally.
If you take the time to make financial projections, you’ll dramatically increase the chances of your success. Planning is essential to knowing what actions to take and what you’ll need to do as different scenarios arise.