Your financial forecasts are an essential part of your business plan. Put
the right assumptions in place and the rest will follow. Our financial
plan template will help take you through this step by step.
Step 1: Calculate your set up costs
Set up costs will include:
- Accounting fees
- Registrations and licences
- Equipment and fit out
- Initial working capital
By comparing your start up costs to your start-up equity investment, you can
work out how much money you need to borrow to kick-start your business, if
any.
Step 2: Profit and loss
forecast
A forecast of sales and expenses, usually for the next 12 months of
operations. By comparing your potential sales revenue to your cost of goods
sold and your fixed costs of doing business, you can calculate your likely
margins and put your pricing model to the test.
Step 3: Cash flow forecast
A cash flow forecast is vital. New businesses can be hungry for cash to
build the capacity they need to service their customers — and those same
customers may be slow to pay. That can open up a cash flow gap that could leave
you vulnerable if you’re not prepared.
Step 4: Balance sheet forecast
This is a snapshot of the business in 12 months time. Your forecast of the
business’ assets and liabilities after 12 months of operations will be based on
the purchases you anticipated in your set-up costs, together with the results
of your profit and loss forecast.
Step 5: Break-even analysis
Once you’ve forecast your fixed costs, you can calculate how much revenue
you need to break even and how many units you need to sell.
If you’ve already decided on your pricing, then obviously it’s easy enough to
calculate your revenue given a certain number of sales — but how do you predict
what your sales will be?
Here are some commonly used approaches:
- For a service business, set a benchmark based on the average number of
hours worked per week. Generally base your figures on something between 60% and
70% utilisation, rather than assuming 100% of your time will be spent on
chargeable activities.
- For other businesses, start by scoping the size of your market, and then
use a conservative estimate of your likely market share to estimate potential
sales.
- It can also be useful to prepare several forecasts, based on best-case,
worst-case and average scenarios.
- Whatever approach you take, make sure you document your assumptions and the
reasons behind them, then test and update them in line with your current
knowledge and business performance.
With the right assumptions in place, you’re ready to start planning. Our financial
plan template is a great place to start.
