Financial forecasts assist in managing your finances. They are a future prediction of your business finances, as compared with statements, which provide details of actual results or progress.
Predicting the financial future of your business is not easy, especially if you’re starting a business and don’t have a trading history. However, forecasting and making adjustments frequently will enable you to become more accurate.
Monthly or weekly forecasts may be necessary when starting your business, experiencing rapid growth, or having financial difficulties. Regular forecasts allow you to closely monitor your finances and develop strategies to fix problems before they become major issues.
Monthly or quarterly forecasts may be more appropriate for a stable, established business.
Financial forecasts may include:
Whether starting a new business or purchasing an existing one you will need to factor in start-up costs, such as:
- legal or accounting fees
- insurance costs
- furniture, equipment, supplies or fit-out
- cash required to fund the business until you start collecting payments from customers
- staff wages
- leasing costs of property, plant and equipment
Download our business tool: Initial start-up costs and funds
TIP: Starting a business often costs more than you expect; it is a good idea to add an extra 20 per cent to your forecast to allow for unexpected expenses.
Estimating the sales your business will generate over the forecast period can be difficult. If you are staring a new business you can base your estimates on market research and industry benchmarks. For an established business, take into account previous sales data over the same time period. You will also need to consider the current market and other economic conditions.
TIP: Regularly review actual sales figures against your forecast, revising your forecast accordingly if the results differ from those expected. Being able to identify the reason for the difference may help you to address a problem before it becomes a major issue.
There are two methods to forecast sales; unit sales and margin sales.
Unit sales forecast = number of units sold x price per unit
If your business has many products or services it may be useful to group them into categories and forecast sales for each group.
Margin sales forecast = (total cost of stock x mark up ÷ 100) + total cost of stock
This method is only suitable for businesses that use the same mark-up percentage on each product or service. If you apply different mark-ups then consider arranging them in groups according to the mark-up being applied.
Download our business tool: Sales forecast
An expenses forecast estimates your ongoing operational costs over a period of time. Business expenses may include (amongst others) rent, insurances, vehicles, advertising, employee wages, and accounting and legal fees.
If you are starting a new business, base your forecast on market research and industry benchmarks. If you are already operating a business, use records from previous years to assist you. Make sure you allow for any likely changes, such as an increase in costs or employing additional staff.
Download our business tool: Operating expenses forecast
If you sell physical products you will need to forecast how much it costs to produce or stock them.
The COGS forecast relates to your sales forecast. If you are forecasting an increase in sales, the cost of producing the goods will also increase (you will need to purchase more components or stock).
To forecast COGS you will need to include all the direct costs associated with production and preparation for sale. These may include:
- the wholesale cost of buying completed goods, raw materials or parts
- freight and freight insurance
- commissions paid on sales
- direct labour costs used to manufacture the product
Download our business tool: Cost of goods sold (COGS)
A cash flow forecast estimates the amount of money you expect to flow in (receipts) and out (payments) of your business, including projected income and expenses. A forecast is usually done over a 12 month period but could also cover a shorter period, such as a month.
Cash flow forecasts can help you identify when you may have extra cash available or experience shortages, so you can make the right decisions for your business.
It is important to review your cash flow forecast regularly against actual results. A forecast can provide warning signs that may help you to avoid future financial problems. Watch out if:
- cash payments are more than cash receipts – you will run out of money
- net operating cash flow is less than profit after tax – you are spending more than you earn
Download our business tool: Cash flow forecast