For entrepreneurs, developing financial forecasts are often the least exciting part of business planning. Many feel that their time is better spent developing and running their business, but financial forecasts are vital. A realistic financial forecast helps you develop a long-term strategic plan and attract potential investors. Here are five helpful tips to develop accurate forecasts.
#1 Create various scenarios
When forecasting future growth, many entrepreneurs fall into the trap of being either too optimistic or conservative. To create a realistic picture, do not rely on just one estimate. Rather, predict one optimistic and one conservative scenario. This is especially helpful if government regulation, economic growth or new competitors impact your business.
#2 Start by predicting expenses
Start your financial model with fixed expenses, such as insurance, utilities and rent. You can rely on these expenses being consistent, as they will be due several times each year. Then, consider costs that may directly fluctuate with revenue. If your revenue increases by 10 percent, for instance, your cost of sales will increase by 10 percent also.
Following this, project expenses you can control. You can pinpoint discretionary expenses to cut if business is slow, or where you can invest future growth.
#3 Make realistic assumptions
In realistic financial forecasting, you must make assumptions about factors you do not control. Manage these assumptions effectively by identifying each one and writing it down. These should include:
• Market growth/decrease
• Changes in direct and indirect competitors, and;
• How future technology will impact your business.
#4 Outline the sales process
Instead of guessing a top-line figure, ensure revenue projection covers the whole funnel of your sales channel. To do this, follow these simple steps:
1. Identify the entire target market (i.e. how many people will purchase goods/services from your business)
2. Estimate the percentage of this market which can be reached through marketing (i.e. online and offline)
3. Estimate how many of the people exposed to marketing efforts will actually make a purchase, and;
4. Estimate how much the average customer will spend.
#5 Compare your projections
To determine whether your projections are realistic, compare them to similar companies. When examining financial forecasts, look for gross margin, revenue per square metre (for retailers), and total headcount per customer. However, if your projections are superior to all of your competitors, you may be too optimistic.
For more information on developing accurate financial forecasts, please contact the experts at Propeller Advisory today.