Drafting a financial forecast is the process of estimating the future financial outcomes for a company. Financial forecasts estimate future income and expenses for a business over a period of time, generally the next year. They are used to develop projections for profit and loss statements, balance sheets, burn rate, and other cash flow forecasts.
Financial forecasts can use historical accounting and sales data, and external market and economic indicators, to predict what will happen to the company in financial terms over the given period of time.
Characteristics of financial forecasting include:
- Financial forecasts do not analyse the variance between financial forecasts and actual performance.
- Are updated monthly or quarterly, when there is a change in operations, inventory, and business plan. Regular forecasts allow you to closely monitor your finances and develop strategies to fix problems before they become major issues.
- May be both long-term and short-term.
- A management team can use financial forecasting and take immediate action based on the forecast data.
Financial forecasts may include start-up costs, sales, expenses, costs of goods sold, and cash flow.
Drafting Start-up Costs for a Financial Forecast
Whether starting a new business or purchasing an existing one, you will need to factor in the following costs:
- Legal or accounting fees;
- Insurance costs;
- Furniture, equipment, supplies or fit-out;
- Cash required to fund the business until you start collecting payments from consumers;
- Staff remuneration; and
- Leasing costs of property, plant, and equipment.
Drafting Sales and Expenses for a Financial Forecast
If you are starting a new business, you can base your estimates on market research and industry benchmarks.
Estimates your ongoing operational costs over a period of time. Business expenses include rent, insurance, vehicles, advertising, employee insurance, and accounting and legal finances.
Drafting Costs of Goods Sold for a Financial Forecast
If you sell products, you will need to forecast how much it costs to produce or stock them. If you are forecasting an increase in sales, the cost of producing the goods will also increase.
Include all the direct costs associated with production and preparation for sale, including:
- The wholesale cost of buying completed goods, raw materials or parts;
- Freight and freight insurance;
- Commissions paid on sales; and
- Direct labour costs used to manufacture the product.
Estimates the amount of money you expect to flow in (receipts) and out (payments) of your business, including projected income and expenses. A forecast is usually done over a 12-month period but could also cover a shorter period.
Cash flow forecasts can help you identify when you may have extra cash available or experience shortages, so you can make the right decisions for your business. A forecast can provide warning signs that may help you avoid future financial problems.
Contact us for more information on drafting a financial forecast for your company’s business plan.