Knowing the amount that your business needs to make each month to stay afloat is crucial to your success. Small business forecasting involves the preparation of pro forma financial statements and a cash budget, which help you to anticipate your revenue and expenses for the next six months to a 12 months. These documents also help you to know your financial position anytime, anywhere.
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 answering these questions, prepare a pro forma income statement. Use your sales from last year to estimate the sales revenue that you will generate this year. If this is your first 12 months in business, try to find out what your competitors sold last year and forecast accordingly. Be conservative in your estimates. If you beat your projections, you can congratulate yourself later.
In addition to income, consider your expenses. These may include what you will pay yourself, other payroll, payroll taxes, loan payments, dividends, equipment purchases, telephone, utilities, and rent. Subtract these expenses from the income you expect to generate, and you will have a metric called net income. Net income is another term for profit.
Based on your income statement, prepare a monthly cash budget. Divide your expected income by twelve or adjust it seasonally if that matches your revenue flow. Also consider seasonality in expenses. For instance, heating costs are more in the wintertime, and cooling costs are more in the summertime.
The cash budget allows you to know what you must make each month in order to break even or to make a profit. If you notice a trend throughout the year that you are either exceeding or not making your income forecast, adjust your income statement and budget for future months accordingly.
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.
Once you have these statements in place, you have created your business plan for the next six months to a 12 months. If you need to borrow money from a lender or a venture capitalist, having these documents available for them to peruse is essential.
Success in small business is not always easy, but you can erase a lot of headaches for yourself by both knowing where you stand monthly and by planning ahead for the future. Small business forecasting may seem like a lot of work, and no plan can anticipate all contingencies. But having a plan in place gives you a set of clearly defined financial objectives and puts you a step ahead of your competition.