Creating a financial forecast for a growing business is an essential part of its strategic planning. It helps business owners anticipate future financial outcomes, manage cash flow, and make informed decisions. Whether the company is seeking investment, planning for expansion, or simply aiming to maintain sustainable growth, a well-thought-out financial forecast can be key.
We have created a step-by-step guide to help build an effective financial forecast.
- Understand the purpose
Before diving into the numbers, it is important to know the goal of the financial forecast. What is being planned for; the next fiscal year, preparing for a loan or evaluating a new market opportunity? The purpose will determine the level of detail and the specific financial data that is needed. For a growing business, a financial forecast can help:
- Project sales and revenue growth.
- Plan for operational expenses.
- Manage cash flow to avoid shortfalls.
- Identify potential funding needs.
- Gather historical data
If a business has been operating for a while, historical financial data will be an asset. It will be important to review income statements, balance sheets, and cash flow statements from the past 1 to 3 years. Look for trends in revenue, seasonal sales, and recurring expenses. For a new business, industry benchmarks or competitor analysis can be used to set realistic assumptions.
- Create revenue projections
Revenue forecast is very important. It involves estimating sales based on market research, historical trends, and growth expectations. This can be broken down by month, quarter, or year, and factors like seasonality, new product launches, or expansion into new markets need to be considered. If a business is growing rapidly, they will need to be optimistic but also realistic, overestimating revenue could lead to cash flow issues later.
- Forecast expenses
Once revenue projections have been finalised the next step is to calculate the expenses associated with achieving the growth. Expenses will include:
- Fixed costs – rent or commercial mortgage, salaries, utilities, and other overheads.
- Variable costs – raw materials, production costs, and sales commissions (all of which rise as sales increase).
- One-time costs – new equipment purchases, marketing campaigns, or other investments to support growth.
A business will need to note that these costs can increase during scale up phases. For example, more employees might be needed, or additional marketing efforts might be required to maintain growth.
- Plan for cash flow
A growing business can face cash flow challenges even when revenue is increasing. Delays in receiving payments or high upfront costs can create gaps in cash flow. To avoid surprises, a cash flow forecast will help to understand when money is received and when expenses need to be paid. This will help ensure the company has enough liquidity to cover daily operations and plan for any short-term financing needs.
- Build financial statements
There are three key elements to a financial statement:
- Income statement (profit and loss) – will show projected revenue, expenses, and net profit.
- Cash flow statement – displays expected cash inflows and outflows.
- Balance sheet – provides a snapshot of projected assets, liabilities, and equity at the end of each operational period.
These statements help give you and potential investors or lenders a clear view of the financial health of your business.
- Review and adjust regularly
Financial forecasts should be dynamic. As a business grows and conditions change, it’s important to revisit all projections. Quarterly reviews will allow the adjusting of forecasts based on actual performance and updated assumptions. This ensures accuracy and reality.
Finally, by creating a financial forecast, a growing business requires a mix of historical data, market research, and strategic thinking. By following these steps, a company can build a comprehensive forecast that guides the business towards sustainable growth and helps anticipate future challenges. A well-prepared forecast not only enhances decision-making but also boosts credibility with investors and stakeholders.
If you need help with financial forecasting, please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.
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