In our last blog we discussed the need for financial forecasting. In this blog we will take you through the main elements of what you need to consider when doing your forecasting.
- Sales Forecasting
Ideally project your sales over 2-3 years on a monthly basis for the first year and on a monthly or quarterly basis for the second and third years. This will also include your pricing strategy and how to price your product or service. Our next blog will take a look at how to price.
The amount of sales you are forecasting will underpin your entire business so be realistic when looking at how many sales you will achieve. Forecast too little and you may not attract the funding you want. Forecast too much and you won’t achieve them!
- Create an Expenses Budget
You need to know how much it’s going to cost to make the sales you have forecast. You can split the costs into materials and labour, which are also known as direct costs, and are part of the cost of sales in the Sales Forecast. Overheads, which are also known as indirect costs, can be split into fixed and variable costs. Fixed are things like rent, rates, payroll whereas variable are costs such as advertising and promotional expenses.
- Develop a Cash Flow Forecast
Cash is King and needs to be kept a close eye on as even a profitable business can run out of cash if its customers don’t pay on time. Use your sales forecasts, expense budgets and balance sheet items to create this. Use a realistic expectation of when your sales invoices will be paid so that you can project cash requirements for paying expenses. Don’t forget to factor in items such as VAT and tax payments.
- Income Projections
This is a Profit & Loss Account. Use the numbers from the first three schedules above (i.e. sales, expenses, cash flow) in order to build this up.
Again, it is good practice to revise this monthly with actual figures so that you can see how the business has performed and alert you to any potential problems.
- Deal with Assets & Liabilities
You’ll also need a projected Balance Sheet. This is a snapshot of your business at a point in time showing the net value of the business. There are items in the business which don’t go into the P&L e.g. capital elements of a loan, stock held, accounts payable and receivable, assets such as equipment etc, but which are still part of your business.
- Break-even Analysis
The break-even point is where income from your sales matches the expenses going out of the business and every business should know where this is so they can see if the business is viable. The ideal situation is to reach break-even and then grow from there as every additional sale is then contributing towards the profit.
We will be covering some of these sections in more detail in future blogs. However if you want to know more then pick up the phone and speak to Sharron on 01207 509871.
At Westwood Accountancy we are friendly accountants. We won’t bamboozle you with accountancy! We will talk to you in plain English.
So if you’re at a cross roads with your business and want some help with your forecasts we will help you.