Creating An Effective Financial Forecast for a Start-Up

Creating An Effective Financial Forecast for a Start-Up

As entrepreneurs, we know that planning a startup is a tedious task. This is even harder with little to no capital to do effective research. But for the success of any new venture, planning is critical. The business plan and financial forecast gives you the opportunity to make strategic decision to ensure that your business succeeds. The financial forecast gives you an idea of the potential worth of the business and also alert you to chances of bankruptcy. It also gives you the opportunity to estimate the startup capital you will need to operate the business. Most entrepreneurs tend to make the mistake of being too optimistic and believing their startup will start to make millions in a few months. Most times this is not the case and statistics show that approximately 35% of startups usually past 5 years in operation.

Approximately 46% of the businesses that fails are caused by incompetent entrepreneurs (Source). This incompetence includes lack of planning. Creating a financial forecast should not only be to get investments or loans from investors and banks. Your financial forecast should also help you to budget wisely, price products accordingly and to spend smartly. Here are some ways you can ensure that your financial forecast will help you to succeed.

Analyze Your Expenses First

start up expenses

Your startup will depend on cash to survive. You want to ensure that you capture all the expenses your startup will face. If there are different cost to an item, use the highest one, as its better to over state expenses than to understate them. This way you ensure that your revenue and spending will help you to stay in the “green”. So for example, if you shop around for raw materials from four suppliers, and you get four different prices… use the highest price. In business, anything can happen. You might think the supplier with the lowest price is your best bet and right when you are ready to start they raise their prices to match the competition. This can be frustrating and you might end up revisiting and making changes to the rest of the financial plan.

You need to ensure that the expenses estimated for the first six months are researched as much as possible. This is a nightmare, especially for entrepreneurs that are looking to start a restaurant. In most cases, restaurants startup expenses are way above what you planned for. It is best to get consultation from experienced restaurant owners or a financial advisor. You should ensure that you get the capital that will cover the first six months of expenses. Assume that you will be making no money for the first six months of business.

Carefully Predict Sales Revenue

This is the section where a lot of mistakes are made. It is difficult to project your sales, especially for a new venture. Entrepreneurs who choose to go into foods and retail usually find this less difficult as there is available information out there. They can also get this from watching other establishments and estimating their business potential. If you are stuck at this point you should conduct a small survey. You can start from friends, family and acquaintances to see how wanted your services is and the value that they put on it. You can even tap into your social media contacts and set up a simple online survey to capture results.

After getting the feedback from your survey, you need to critically analyze the results to predict your sales revenue. Do not get excited and make the mistake of overstating your revenue as this can lead to frustration and eventually failure. Either use the lowest of the value that your results show or the average of the values. If 75% of your correspondents says they will use your products, assume that a lower amount will use your product in the actual market.

Project Advertising Expenses

 

You are going to need to get your name out there, and there are lots of ways to do this. You should breakdown your advertising channels and allocate expenses accordingly. The great thing about the advertising expenses, is that you can control what you spend. You still have to be smart in terms of the channels you choose to use. You want to ensure you get back the highest Return on Investment (ROI). For example a company that provides B2B products will not put most of their advertising budget to Facebook. They will allocate most of it to direct marketing and trade show events.

Cash Flow and Income Statement

 

After getting the figures for sections listed above, it is now time to create your cash flow and income statements. This part is a bit more straight forward but still takes some amount of analyzing. For the cash flow statement, which is very important to banks and investors, you need to ensure that there is always cash in the business. Cash is like “blood” to your business. Without cash your business will most likely fail. For service based businesses or B2B businesses that receives payments in parts or provides credit you need to ensure that you carefully predict your cash inflows. You should also note that receivables tend to end up as bad debt and should be accounted for accordingly.

The Income statement is basically a report of the information you have gathered already. If you have accounting knowledge then you will find this section simple to complete. If you don’t have the accounting knowledge then it is best to have an accountant help you with this section as banks and investors also require this. You can also use softwares such as Quickbooks to help you with this.

Preparing an effective financial forecast will benefit you as the owner and also sets your business up to get the capital it requires from banks and investors. It should not be done blindly and in some cases you should get the help of financial advisors or other experienced entrepreneurs.

Categories: Business

About Author

Darren Beckford

A young entrepreneur who is dedicated to the development of advanced and useful technological systems. Growing up in the city of Montego Bay I was a lover of mathematics, problem solving, aviation, finance, technology and business.

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