A Guide to Financial Forecasting for Small Businesses

In order to help your small business succeed, you will need to create a financial forecast. Financial forecasting can help you to work out where your business is and how it’s likely to fare in the future. This can prove beneficial if you wish to approach prospective lenders or angel investors.e

1. What is Financial Forecasting?
2. Why is Financial Forecasting Important?
3. How Do You Do a Financial Forecast for a Business?
4. What is Included in a Financial Forecast?
5. What’s the Difference between Financial Forecast and Budgeting?
6. Is Financial Planning Possible Without Financial Forecasting?

What is Financial Forecasting?

A financial forecast involves making a few financial statements. These statements are also known as “pro forma statements”. When a financial forecast is made, they layout plans for the owner of the business, the banks and any other parties that are interested.

Three statements help to form the financial forecasting plan. These are:

• An income statement
• A cash flow statement
• A pro forma balance sheet

Each of these statements will need to be completed in the correct order. For example, the income statement shows how much money is coming in and going out of the business. The cash flow statement shows how a profit will be made from the money. The balance sheet helps to predict liabilities, assets, and equity. It does this by using data from other documents. Once these statements are completed, a small business owner can show how their business will change over a period of time.

Why is Financial Forecasting Important?

Small business owners need to understand how their business will grow. A forecast will should your benchmarks and your goals and these should be viewed on a regular basis.

Many small owners create a financial plan that forecasts at least six months. However, it’s essential to ensure that you have a plan the stretches even further into the future. Most banks and investors need a plan that will cover the next two to five years.

Small business owners often create a financial plan that will help them if they need to take out a loan or they need to raise funds.

How Do You Do a Financial Forecast for a Business?

When creating a financial forecast, you will need to:

• Put all your financial statements in one place. You will need them to project all of your income, your cash flow, and your balance.
• Make a decision about your projections. You should do this using your records and other data so the projections are accurate.
• Draw up your pro forma statements. This might take a while so give yourself enough time to complete it.

What is Included in a Financial Forecast?

• A Sales Forecast
  On a spreadsheet, project your sales over 3 years. Set up sections for every month for the first 12 months and on a monthly/quarterly basis. Add a column for unit sales, block pricing, sales calculation, unit costs, and the cost of sales.
• An Expenses Budget
  Work out the fixed and variable costs. Fixed costs are your rent and your employee’s wages. Variable costs include promotions and advertising.
• A Cash-Flow Statement
  This will be based on your balance sheet and your sales forecasts. Use any historical documents that you have.
• Income Projections
  This is your profit and loss. Use the numbers in your expense projections, sales forecast, and cash flow.
• Assets and Liabilities
  This includes that assets and the liabilities that are not included in the profit and loss statement.
• Break-Even Analysis
  This is where your expenses match your service or sales volume. The three-year projection will help you work this out.

What’s the Difference between Financial Forecast and Budgeting?

When you have a business budget you typically set aside some money for some of your costs. These costs will take into account your income and your expenses. The budget is based on the information that is based on the financial forecast.

A financial forecast makes a prediction, a budget is a plan. A forecast will help you to see the direction of your business whereas a budget plans how you are going to spend all of your money, based on your financial forecast.

Is Financial Planning Possible Without Financial Forecasting?

It is but only to a degree, you will not be able to plan ahead or to show banks or potential angel investors your goals for the future. You can make a few guesses, but these guesses might not help you get loans or show that you’re serious about the future of your business.