Around 58% of small business owners are concerned about their businesses financial health. On top of that, 38% of startups failed last year due to running out of money, USA Today reports. If you’re in a similar boat, a financial forecast can give you a realistic idea of how your business will perform in the upcoming months, so you can make strategic decisions that support your growth. Yet, as a new business, it’s not so easy to forecast your financials when you don’t have past data to work off — but it’s certainly possible once you know how. By devising a sales forecast, expenses budget, and cash flow projection tailored to your business’s unique needs and niche (whether you’re in tech, law, or retail), you can put yourself in a better financial position and up your chances of long-term success. In this article, we discuss how you can utilize financial forecasting as a valuable to for your success.
Devise your sales plan for financial forecasting
A sales forecast estimates your expected future sales within a set timeframe, so you have a good idea of how in demand (and profitable) your product or service will be. You can then anticipate any sales issues, and find ways to boost sales, or otherwise cut costs where possible. Since your business doesn’t have a big sales history to help you predict future sales just yet, you can instead research industry trends relevant to your niche.
If you’re a tech startup, for example, Gartner is a great resource for insights into consumer demand and behavior. From your research, you may see the entire tech industry experienced a dip in sales in the last quarter, for example. You can then anticipate for this dip to potentially continue in your own sales forecast.
Changing consumer preference is another trend that can influence your forecast. For example, if there’s a growing demand for a certain product feature, it’s likely products with this feature will start selling more — which can mean either more or less sales for you depending on whether or not your product fulfills this particular growing demand. So, with this information, you can then plot your expected sales projections. It’s usually simplest to forecast the expected number of units sold along with expected price points for the next month.
Create an expenses budget
Although budgeting can be difficult for all startups, it’s particularly challenging for law firms as high overhead costs tend to eat into profits and leave you with less wiggle room for other spending. And now with firm expenses on the rise (they increased by 13% in 2022), budgeting is becoming even trickier to get a handle on. You can hire specialists within your business or you could utilize an effective virtual CFO to streamline financial management by taking care of your books for you. An expert team can provide you with monthly financial reports, so you can get a clear and accurate picture of your business’s financial health.
You can also take further control of your finances by creating a budget for upcoming expenses, so you know how much you’ll roughly be spending in the upcoming months. With this information, you’ll be better positioned to make informed financial decisions that prevent stressful cash flow crunches. Since your firm’s operating expenses can be broken down into two general categories (fixed expenses and variable expenses), this can be a useful way of organizing your budget. Understanding fixed and variable expenses can help you get a better idea of where exactly your money is going each month, as well as the effect each payment has on your firm’s financial health.
Your fixed expenses will be things like rent and malpractice insurance. These costs generally always stay the same. On the other hand, your variable costs are those that change based on business activity, demand, and sales — for example, legal research fees, court fees, settlement costs, and litigation expenses. Keeping track of fixed and variable expenses allows you to better allocate resources effectively and improve profitability. As a new firm, it’s important to be frugal above all. Only spending on what’s really necessary (without compromising excellent client service) can help put you in a stronger financial position in the long run.
Create a cash flow projection for financial forecasting
If you’re in the retail sector, cash flow forecasting — the process of estimating how much cash will be flowing in and out of your business over a certain time period — is essential to account for seasonal fluctuations in sales. Consumer purchases typically go into overdrive during holidays like Thanksgiving, Valentine’s Day, Christmas, or Easter. On the other hand, summer slowdowns can also crop up as customers generally spend less time shopping during July and August. Cash flow forecasting can help you get a handle on these cycles, so you can prepare for expected cash shortages before they hit.
So, to create your forecast, list all your expected income for the next month. This includes expected sales, as well as other inflows like incoming grant money, investments, or loan repayments. Add all these figures together to get your net income. Then, list all your outgoings for the month — including everyday operating expenses, loan repayments, and any bank fees — and add these numbers to get your net outgoings. You’ll then need to take away your net outgoings from your net income.
The figure you’re left with will represent either a positive cash flow (when more money is coming in than going out) or a negative one (when you’re spending more than you’re making). A positive cash flow is a sign of a healthy business, but negative cash flows can happen from time to time. If you predict an upcoming period of negative cash flow, you’ll need to find ways to access enough cash to cover your everyday expenses like inventory and rent. For example, you can cut expenses as much as possible, or negotiate cheaper prices with suppliers.
Financial forecasting should be a priority for startups across all industries. Armed with a realistic projection of your future sales, a solid expenses budget, and a cash flow forecast, you’ll have all the data you need to set yourself up for long-term financial success.
