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One of the most powerful tools in business is a reliable financial forecast. It acts as a roadmap to help quantify the number of services provided or goods that need to be sold to achieve the desired outcome and sheds light on potential threats to achieving the financial goals of the enterprise. Ideally the forecast should paint a picture of what the financial results will be based on the business owner’s knowledge and intuition rather than actual transactions. For a start-up business, a financial forecast is meant to assist the owner to define the expected financial outcomes. 

The goal of the financial forecast

A financial forecast should be viewed as a tool to help build a business. Through its creation, a business owner is forced to think strategically about the venture and to identify the key drivers in the business. An ideal starting point is to look at the enterprise from a big-picture perspective. Non-financial drivers such as the number of customers secured, total hours worked, or units sold need to be examined and quantified before realistic income projections can be made. Owners are encouraged to ensure that their estimates are conservative - it is best to err on the side of caution so that any surprises are to the upside. Evaluate actual income against the projections throughout the year so that changes can be made as needed to better impact the bottom line. Maintaining a good understanding of the projections versus reality will also enable the business owner to be even more accurate in creating the next annual forecast.

Key considerations when creating the forecast

Building a financial forecast involves entering revenues and expenses and reviewing the results. Expenses fall into fixed and variable categories. Fixed expenses such as rent, insurance, telephone charges, and utilities will be consistent regardless of the level of revenue. Variable costs such as cost of goods, raw materials, and shipping will vary depending on the revenue projections and gross margin expectations.  If the results look too high or too low, adjust the estimates accordingly. As the results are reviewed and refined, the numbers will provide a deeper understanding of what drives financial results in the business.

When creating a financial forecast for an existing business, historical data can be used to guide projections. While not always a reliable guide for the future, the past will provide a starting point of reference. With a start-up business, the lack of historical results makes the development of a forecast more challenging, but tools do exist to help with the process. Consider a range of possibilities based on how things may unfold and examine differing levels of revenue and expense expectations to be prepared for the best and worst case scenarios.

A reliable financial forecast can be created by anyone, regardless of their affinity to accounting. Not only will the process offer a better understanding of how financial statements work; it will also provide a great deal of clarity to how an adjustment in activity can impact the financial health of the business. Every business owner needs to have a basic level of financial literacy and the Orangeville & Area Small Business Enterprise Centre offers a template for the financial forecast as well as guidance in completing it. Contact us today to get started.

Mark Jamieson is the Co-ordinator of the Orangeville & Area Small Business Enterprise Centre. He can be reached at [email protected], 519-941-0440 Ext. 2270 or via cell phone at 519-942-6334.