A financial forecast is at the heart of your business plan, showing whether your business is financially feasible and giving you a roadmap to survive through those exciting first days, weeks, and months.
Let’s be honest, the term ‘financial forecast’ doesn’t tend to strike joy into people’s hearts – but Barbara Steadman, founder of Love Our Shops UK, an online shopping directory celebrating the amazing shops on the UK high street, wants to change that. After many years as a Finance Director, working with major brands such as Gillette, Barbara decided to start up on her own.
“Writing a financial plan is fun!” says Barbara. “Honestly. It’s like playing with the future. Who wouldn’t want to see how far you can push yourself and your business to put another £10k in the bank? During my years in accountancy and finance I have created hundreds of financial plans and forecasts. This experience was invaluable when it came to creating my first financial forecast for Love Our Shops UK. Here are the 5 simple steps I took to create my first financial forecast.”
Begin with the words! Seems a bit strange advice for creating a financial forecast.
Write the rest of your business plan first (you can download the Virgin StartUp Business Plan here.) Without this you have no basis on which to work out your forecast costs or sales.
What is your mission and vision? Who are your customers? What is your product or service? How are you delivering your products or service? What resources do you need? How are you going to do your marketing?
Brainstorm a list of expenditures by looking through your business plan and deciding the costs that each element is going to incur. For now, you may not know exactly how much. That is fine - add your best estimate. Just make sure you have the headings and a value against each.
For example. I said, in my plan that one of my key channels for marketing will be Facebook and Facebook ads. I therefore thought I would need to schedule the posts for my Facebook page and incur costs for the ads. I included costs for my scheduler software and an estimate of what I would spend each month on Facebook ads.
I did this cost evaluation process for every element of my business plan.
At this stage, don’t worry about format or headings. Simply create a list – in a spreadsheet is best.
Don’t be afraid to put it all down, you can change it later.
What other costs are there? Write all these down, the ones that did not come up when you went through the plan. These might be insurance, banking fees, travel, stationery, subscriptions or membership fees, professional fees and office costs. Try to think of everything you can.
Total all the costs up. You now have your first expenditure forecast.
The next thing I did was think about sales. This is where “start with the end goal” comes in. How much do you want to earn in the first year? I put in a conservative estimate when I first started pulling my forecast together.
Add this figure to your costs and that becomes your starting sales figure.
For example, if my costs were £20,000 and I wanted to earn £30,000 in my first year, my first year’s sales would need to be £50,000.
Using this sales figure, break down how you can achieve it. So as an example, in its simplest form, 500 customers each spending with you £100 - you have achieved your sales figure.
You then need to consider whether this is realistic. Keep changing the sales figures until you are happy with them.
The final tweaking. This is where I considered whether it was all realistic, and actually, whether I could achieve more.
I went through every cost and decided if they were fixed or variable. Fixed are the ones that stay the same no matter what the sales. The variable ones will change dependent upon the sales.
For all the variable ones I linked, via a formula in the spreadsheet, to the sales volume. So, they automatically went up or down according to the sales level I keyed in.
I then tweaked the sales to the level I considered to be achievable and a challenge. Most importantly to a level of profit that would make me want to get out of bed in the morning. A level of earnings I got excited about!
My first plan was complete. I grouped a few costs and changed the formats in a few places, just to make it more readable. But other than that, I was done. That easy!
One important thing to remember is that this is a forecast, so there are no right or wrong answers. Only your best estimate at the time. It will change as time moves on, and that’s fine. Keep tweaking and updating it as more accurate information comes to light.
I love numbers. Sometimes for a bit of motivation I will have a play with my forecast just to see how far I can push my business. The excitement of increasing the profit figure always keeps me going. The numbers keep me motivated and inspired to work harder. Financial success is just a forecast away!
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