Many business owners find themselves in a similar situation. They start a business based on their specific expertise or interest (a hairstylist opens a salon or a developer creates an app). They build a business around what they know — and then realize they also need to know how to be a financial expert if they want to run their business successfully.
All businesses need a financial plan, yet not all business owners are finance experts so important tasks like financial forecasting are often overlooked, skipped, and ignored.
But, these financial tasks are simply too important to ignore — and you don’t need to be a financial expert to execute them for your business.
If you are a business owner who isn’t a financial expert, here is what you need to know about financial forecasting and how you can start to create a financial plan for your business, even if you aren’t an expert.
What Is Financial Forecasting?
Financial forecasting is the process a business goes through to create a projection of their financial future. It uses existing data and expected data to create a model that predicts a business’s expected sales, expenses, and growth.
Why Is Financial Forecasting Important?
A financial forecast is important because it helps businesses look into their future and make better, more informed decisions. A forecast is ultimately a guess, but it is an informed guess that comes with a variety of benefits.
A financial forecast helps a business:
- Determine how to allocate their budget
- Plan for upcoming expenses
- Anticipate increasing costs that come with growth
- Predict hiring needs
- Plan for operations adjustments
- Show growth potential to investors
- Create a baseline to compare to actual results
The predictions in a financial forecast aren’t perfect. They will change, and they will not always be accurate. But having these numbers is far better than the alternative — having no numbers for your predictions.
A financial forecast gives you an educated guess for what to expect in your business, helping you avoid cash flow issues and giving you more peace of mind.
What Do You Need for Financial Forecasting?
Now that you know what financial forecasting is and why you need to do it, let’s look at the factors that will help you create your projections.
Income History
To know where you are going, you need to know where you’ve been. Financial forecasting requires going back to look at your income history. This process includes calculating sales data as well as any other revenue and cash flows coming into the business such as investments and loans. Pull reports that show your monthly revenue and sources to get an idea of how much money comes into your business and if there are lags or bumps throughout the years.
Pulling reports is much easier when you have accurate bookkeeping that tracks all of your income. If you want to create an accurate financial forecast for your business, start by keeping good books. Need help? See how CFO2U can help you get your books in order.
Expenses
Next, take a look at the money your business sends out. Create a list of expenses for your business. Start with the fixed costs you know will remain static for a set period of time (such as rent, utilities, and insurance). Consider all of the costs to run your office or store, to promote your offerings, and staff your business.
Don’t only look at short-term costs. Plan ahead and consider how costs will increase if you plan to hire staff, bring on new offerings, or launch new products and services.
Related: Build an Accurate Business Budget In 8 Simple Steps
Cost of Sales
Income isn’t always free. There are expenses associated with generating sales and revenue. As you look at your income, consider how your costs might change if there are increases or decreases in sales. Also, consider if factors that are out of your control (such as cost of products and raw materials, changes in supply chain, etc.) may also impact your expenses.
Related: The 6 Essential Financial Metrics Every Business Owner Must Know
Qualitative Models
Income history, expenses, and cost of sales are sets of quantitative data that can inform your financial forecasting. You can also include qualitative models to create better predictions.
Qualitative models, such as market research and the Delphi method, involve using expert opinions and polls to create projections for both your industry and your business. These models factor in changes in markets and public opinion when forecasting sales projections, cost increases, and potential for growth.
An Important Note on Financial Forecasting for Small Businesses
It’s important for small business owners to know that financial forecasting has many ranges. Financial forecasts can be extremely complicated. Large, multinational organizations have complex financial forecasts that utilize detailed models in their predictions. Most small businesses don’t need this high-level of detail in their business forecasts.
As a small business owner, you can keep it simple and create a basic forecast focused on the data available in basic bookkeeping.
You will still get immense value out of a simple document that shows you where you have been, where you are, and where you want to be. Don’t let the complexities of creating a business financial forecast hold you back. Start simple and start now.
Start Forecasting for Your Business Today
You have expertise that makes you uniquely positioned to provide an offering and serve your customers. While you should focus on that part of your business, that doesn’t mean you can ignore the financial elements of your business.
You need a financial plan to help your business survive, thrive, and grow.
If you don’t have one, use the tips in this post and download our free Small Business Financial Planning Guide. It will help you collect the information you need to generate accurate forecasts for your business. Download your guide and get started today.
Or if you’d rather leave the numbers to the finance team, talk to our team of financial experts today to see how we can help you create a financial plan for your business.
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