Let’s talk about money. There is no getting around the fact that if you are in business – no matter what your why is – you will need to generate a profit in order to sustain all the moving parts of your business. Even not-for-profits and social enterprises need to generate a profit in order to support a cause. While the motivation behind your business is ideally heart felt, impactful and to do good in the world, the truth is that without profit you probably won’t achieve what you want with your business.
“Profit isn’t a purpose, it’s a result. To have purpose means the things we do are of real value to others.” – Simon Sinek
No matter how much you might love business, it won’t last long without making money. Generating profit makes most business owners minds jump to sales – making more of them. That means getting new customers – or does it?
There are actually many ways to generate profit. Getting more customers and making more sales is not definite in this endeavour. Before you jump into overwhelm in even thinking about this there is a step to take before making any decisions. That is to check in with your financial forecast.
Wait, WHAT?!? You don’t have one? Well it is time you do. A financial forecast is a vital roadmap into your business future.
A financial forecast in its simplest form is merely a list of anticipated expenditure and income based on anticipated sales and historical expenditure. Did that sound complicated?
Let’s break this down even more then. To create basic financial forecast
- Make a list of all the bills and expenses per month you are confident you will occur in the next year – then add 10%.
- Make a list of your anticipated sales and other income per month for the next year – then subtract 10%.
NOTE: This will provide a Gross figure – you will still need to pay Tax and GST.
You can choose to use a different percentage as a buffer depending on your industry, how long you have been in business or how government/industry regulations might be changing in the next year.
Forecasting is the art of saying what will happen, and then explaining why it didn’t. – Anonymous
In a perfect world the business expenses over the year will be less than the amount of revenue you will generate
There are two outcomes to look at here.
Size Up Your Sales
Estimating the sales your business will generate over the forecast period can be challenging and you won’t always get it right. If you are starting a new business you can base your estimates on market research and industry benchmarks, basically this needs to be an educated guestimate. For an established business, take into account previous sales data over the same time period. You will also need to consider the current market and other economic conditions which you may need professional advice for. Your bookkeeper or accountant will be able to help you with this.
Size Up Your Sales
Estimating the sales your business will generate over the forecast period can be challenging and you won’t always get it right. If you are starting a new business you can base your estimates on market research and industry benchmarks, basically this needs to be an educated guestimate. For an established business, take into account previous sales data over the same time period. You will also need to consider the current market and other economic conditions which you may need professional advice for. Your bookkeeper or accountant will be able to help you with this.
Estimate Your Expenses
An expenses forecast estimates your ongoing operational costs over a period of time. Business expenses may include rent, insurances, vehicles, advertising, employee wages, accounting, legal fees, and more. Sometimes when you actually sit there and look at all the memberships, purchases and expenditure in your business it can be quite a shock! It is the unknowing and seemingly innocent $20 here and $50 there that can really undo all your efforts. If you aren’t tracking the little things they will pull you under and leave you in a state of shock – because you won’t see it coming if you aren’t watching it.
Again, if you are starting a new business, base your forecast on market research and industry benchmarks. If you are already operating a business, use records from previous years to assist you. Make sure you allow for any likely changes that I have mentioned previously, such as staff, equipment financing, supplier increases – things like that.
Calculate Your Cost of Goods Sold (COGS)
If you sell physical products you will need to forecast how much it costs to produce or stock them. Don’t forget that it costs you money to have products sitting on the shelf.
The COGS forecast relates to your sales forecast. If you are forecasting an increase in sales, the cost of producing the goods will also increase (you will need to purchase more components or stock).
To forecast COGS you will need to include all the direct costs associated with production and preparation for sale. These may include:
- the wholesale cost of buying completed goods, raw materials or parts
- packaging
- freight and freight insurance
- commissions paid on sales
- direct labour costs used to manufacture the product
Cash flow
Cash flow forecasts can help you identify when you may have extra cash available or experience shortages, so you can make the right decisions for your business. A forecast can provide warning signs that may help you to avoid future financial problems. Watch out if your cash payments are more than cash receipts – you will run out of money.
TIP: Lack of cash flow can result in business failure even when a business is profitable.
Financial forecasting is associated with being time consuming and difficult. It can often be stressful too. Battling with hypothetical numbers across multiple jargon filled financial statements.
But companies don’t just complete an arbitrary quarterly forecast for the sake of due diligence. They do it to help them make the right decisions in an informed way. Financial forecasting doesn’t have to be arduous. It doesn’t have to be difficult either, and it can be incredibly beneficial to any scale of business.
Forecasting, at its heart, is about making predictions over how the various activities your business conducts will perform in the next 3 months, 6 months, 12 months, and beyond.
Making predictions helps you understand what impact your business performance will have on the financial health of your business and your overall goals.
These predictions and results must be presented in a form that you can understand and make decisions on.
It generally means you’ll be asking lots of questions that look like this:
If I do ‘X’ activity and it performs like ‘Y’ then what impact will it have on ‘Z’ in my business?
Don’t let your preconceptions about creating financial statements deceive you into thinking forecasting is any more complicated than it needs to be. This is what it boils down to.
The Financial Forecast Formula
Estimate Revenue (How much and when) – Estimated Expenses (How much and when) = Cash Flow/Profit (How much and when)
Hopefully I have convinced you of the merits of financial forecasting – without making it sound too overwhelming. Either way, I don’t want you to think of this as just another thing to do, it is a thing you must do. It can be great fun to see where your business is heading and what levers you can pull to bring your vision to life.
Do you have a block when it comes to money? Do you spend without thinking about the consequences of that spending? It doesn’t have to be that way – let’s do a financial health check on your business. Book in a free 30 minute session with me and we can work through your financial forecast (or create one if you haven’t done this before).