Running a business requires you to plan ahead frequently. If you don’t and there are unexpected expenses or losses in your future, your business may end up suffering. In order to prevent these kinds of setbacks, business owners create financial forecasts.
This article will provide you with a few ideas on how to make financial forecasts for your business. We’ll cover a few topics, including:
- What are financial forecasts?
- Why are financial forecasts important?
- How can I create a financial forecast for my new business?
- How can Countingup help me create financial forecasts?
What are financial forecasts?
Financial forecasts are basically a prediction of what will happen to your business finances in the future. Most established businesses create them using historical data: the financial events of the previous month provide a rough outline of what to expect, then they adjust the new forecast to account for any events specific to the upcoming month.
This article will focus on creating a financial forecast as a new business, which means you may not have historical financial records available. Fortunately, there are other methods of creating a financial forecast for new businesses.
An important point to remember is the difference between a forecast and a budget. In business, a budget is a document that shows how you would like your company finances to look in the long term. Most companies make them annually, and they cover every aspect of the company’s finances. They should also act more as a goal or an ideal, rather than an actual prediction.
Forecasts, on the other hand, more accurately reflect what’s happening with your business. They cover a shorter period of time and focus on a particular part of your accounts, like sales or cash flow. While a budget can guide the overall direction of your business, you can use forecasts to make more specific and urgent decisions.
Why are financial forecasts important?
Financial forecasts are vital for a business to measure its success. Although a forecast should be realistic rather than show the perfect financial future for your business, selling much less and spending much more than your forecast indicated means something is going wrong within your company. Always compare your financial forecasts with your actual financial data to ensure your business is improving rather than struggling.
Having a few different high-quality financial forecasts as part of your business plan is an excellent way to attract investors to your business. Accurate forecasts indicate to potential investors that you have a good idea of what the future holds for your company, which will make them more confident when investing.
Of course, people are only likely to invest in your company if the forecasts also show that you’ll be successful, but showing the positive impact their investment could have might persuade them to put money into your business idea.
How can I create a financial forecast for my new business?
Creating forecasts by researching competitors
Researching your competitors is a key part of writing your business plan, but this research is also very valuable for creating forecasts. For example, if your research can dig up competitors’ sales figures or expenses, it will provide a good outline for how your sales and expenses might look, so you can use this as a starting point for making forecasts.
This method is particularly useful if your competitors are registered as limited companies, as these businesses must make their accounts publicly available. Simply find your competition on the government website Companies House, and you can examine their financial data in detail.
Please note that if your competitors are mostly sole traders, this method will be far more difficult to use, as their accounts will not be publicly available.
Creating forecasts by researching your target market
Another key subject for research when you’re starting your business is your target market. A target market is a group that a particular product has the potential to be popular with, so most businesses focus a lot of marketing on attracting their target market.
With enough research, you can find out how many people in your local area are part of your target market and how much of your product your target market is likely to buy. Once you have this information, you can start making all sorts of financial forecasts.
For example, you can create a sales forecast if you know how large your target market is, as this will give you an idea of how many people will be interested in buying your product. Then, using your sales forecast, you can start checking how much the amount of inventory you’ll need will cost. Once you have this price, you can also create an expense forecast.
Both these methods are very helpful to new businesses that have no historical financial data. Remember that forecasts based on historical data can be much more accurate, though, so incorporate that data into your forecasts after a couple of months.