Financial forecasts are among the most intimidating pieces of any new business plan. Actually putting numbers alongside the conceptual components of the plan give it the weight it needs to become a reality. Elizabeth Wasserman in an article for Inc. writes, “A business plan is all conceptual until you start filling in the numbers and terms.”
Being able to predict the expenses and revenue of your new business will show you if your plan is reasonable, or if you need to go back to the drawing board. Wasserman notes, “The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan.”
Pro Forma for Professionals
Projected financial statements carry a lot of weight in the world of small business. Rosemary Peavler writes for The Balance: “Having this financial plan allows the owner to track actual events against the financial plan and make adjustments as the year passes. If the business firm needs a bank loan or other financing, these pro forma financial statements are usually required.”
Accurate forecasting can be difficult for a new business. It can be hard to predict how much something will cost or how much a certain product or service will bring in. According to Entrepreneur.com, “Forecasting business revenue and expenses during the startup stage is really more art than science.” However, a well-researched pro forma financial statement is a great tool for attracting investors and managing growth.
Expenses vs. Revenues
According to Entrepreneur.com, “When you’re in the startup stage, it’s much easier to forecast expenses than revenues.” This is why it’s a better place for a new business to start. As you begin compiling your first projections, the picture will become clearer. And there’s no shame in jumping back and forth, according to Wasserman. “For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses,” she writes.
Revenue can be a little bit more difficult to accurately forecast. Per Entrepreneur.com, “If you’re like most entrepreneurs, you’ll constantly fluctuate between conservative reality and an aggressive dream state which helps keep you motivated and helps you inspire others.” While there is a lot to be said for thinking realistically, allowing yourself to be optimistic while working on your financial projections leaves room for inspiration and innovation.
The Cash Budget
For small businesses, maintaining a monthly cash budget is a form of short-term financial forecasting. As Peavler explains, “Cash budgets are done on a monthly basis. Cash receipts or inflows, which are usually sales revenue, are based on the sales projections from the expected income statement.” This allows a business owner to know if they are on track, or doing worse or better than expected.
Getting an online BBA in Entrepreneurship is a great first step in learning how to compile and manage financial forecasts. Lamar University’s online BBA in Entrepreneurship program includes a course that covers financial forecasting. No matter what kind of business you are in, having a solid financial forecast is necessary, particularly for those looking for investment capital.
Learn more about Lamar University’s online BBA in Entrepreneurship program.
Sources:
Inc.: How to Write the Financial Section of a Business Plan
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