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 year. 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 considering the preceding questions, draw up your pro forma income statement. Estimate your sales revenue for this year by looking to your sales from last year. If you have no sales history, look to your competition for sales goals. Always remember to estimate your sales conservatively at first so that you do not set yourself up for failure.
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.
Then, based on the line items of your income statement, create your monthly cash budget. You can take the annual figure that you projected and divide it by twelve, or you can vary the monthly revenue based on seasonality. As you consider your expenses, definitely consider seasonality as a factor.
Once you have prepared your cash budget, you will have a tool that lets you know how much you must generate monthly in order to make a profit. If, as you go through the year, you notice that you are ahead of or behind your forecasts, make adjustments to your income statement and to your monthly budgets.
Your final step in forecasting is to prepare a pro forma balance sheet, which is a list of assets versus liabilities. Cash, accounts receivable, inventory, and fixed assets, like equipment, vehicles, buildings that you own, and land that you own are all assets. Accounts payable, bank loans, and owner equity, which is the portion of your earnings that you retain for yourself and shareholders, make up your liabilities.
If you plan to ask for money from a venture capitalist or from a lender, you will need to have all of these documents prepared in advance of your meeting. Investors will not lend you money unless you show them your forecasts.
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.
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 considering the preceding questions, draw up your pro forma income statement. Estimate your sales revenue for this year by looking to your sales from last year. If you have no sales history, look to your competition for sales goals. Always remember to estimate your sales conservatively at first so that you do not set yourself up for failure.
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.
Then, based on the line items of your income statement, create your monthly cash budget. You can take the annual figure that you projected and divide it by twelve, or you can vary the monthly revenue based on seasonality. As you consider your expenses, definitely consider seasonality as a factor.
Once you have prepared your cash budget, you will have a tool that lets you know how much you must generate monthly in order to make a profit. If, as you go through the year, you notice that you are ahead of or behind your forecasts, make adjustments to your income statement and to your monthly budgets.
Your final step in forecasting is to prepare a pro forma balance sheet, which is a list of assets versus liabilities. Cash, accounts receivable, inventory, and fixed assets, like equipment, vehicles, buildings that you own, and land that you own are all assets. Accounts payable, bank loans, and owner equity, which is the portion of your earnings that you retain for yourself and shareholders, make up your liabilities.
If you plan to ask for money from a venture capitalist or from a lender, you will need to have all of these documents prepared in advance of your meeting. Investors will not lend you money unless you show them your forecasts.
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.
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