Small Business Forecasting: A Step-by-Step Guide
To be successful in small business, you need to know your financial status at all times. Small business forecasting, through the building of an income statement, a cash budget, and a balance sheet, helps you to estimate your both your expenses and your revenue for the next year. When you are finished, you will know exactly how much revenue you should generate each month in order to make a profit.
Before preparing the documents, ask yourself some basic questions. What quantity of goods or services do you think you will sell next year? How much income do you expect from these sales? What are your costs going to be? Do you anticipate hiring next year? And finally, do you need financing, and what will your monthly loan payments be?
After considering the preceding questions, draw up your pro forma income statement. Estimate your sales revenue for this year by looking to your sales from last year. If you have no sales history, look to your competition for sales goals. Always remember to estimate your sales conservatively at first so that you do not set yourself up for failure.
Next, add up your expenses. These may include rent, utilities, telephone bills, equipment purchases, dividends, loan payments, payroll taxes and payroll, and, finally, what you will pay yourself as a salary. Subtract your expenses from your anticipated income to arrive at your expected profit. The official term for profit is net income.
Then, based on the line items of your income statement, create your monthly cash budget. You can take the annual figure that you projected and divide it by twelve, or you can vary the monthly revenue based on seasonality. As you consider your expenses, definitely consider seasonality as a factor.
Once you have prepared your cash budget, you will have a tool that lets you know how much you must generate monthly in order to make a profit. If, as you go through the year, you notice that you are ahead of or behind your forecasts, make adjustments to your income statement and to your monthly budgets.
Finally, prepare a pro forma balance sheet. The balance sheet lists your assets and your liabilities. Assets include cash, accounts receivable, inventory, and fixed assets, like land, buildings, vehicles, and equipment. Liabilities include accounts payable, bank loans, and owner equity, which is the portion of earnings you retain for you and your shareholders, if applicable.
If you plan to ask for money from a venture capitalist or from a lender, you will need to have all of these documents prepared in advance of your meeting. Investors will not lend you money unless you show them your forecasts.
To be successful in today's business climate, you need to know your financial metrics, and you need to know your progress toward meeting those metrics at all times. While small business forecasting can be time-consuming at the beginning of the year, it will help you set and monitor your financial goals, and it will put you on the road to success.
Grow your small business start up with the aid of advice, business tools, and resources. Read a small business blog that can help you prepare for challenges facing your business such as business financing.
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