By Kevin Leahy, Executive Director, CEDR & CCC SBDC
Doing financial projections for a business is the same process as creating a household budget. It’s a chance to consider what future sales (revenue) and expenses (costs) will be for your business. Typically a lender will want monthly financial projections for the first year and annual projections for the next two years. Monthly projections show the business cycle, when the business will be busy and when you expect slower sales. Building a financial projection includes careful consideration of what you believe will happen in the future, industry research and documentation of the assumptions you are making to create the forecast. No one will ever be 100% accurate in predicting the future so doing financial projections may seem like a futile effort but it’s important to help guide you in making business decisions.
For many business owners the hardest part is determining where to start. If you have an existing business, use historical information to guide you. Using the current financial data decide how much sales are predicted to increase based on advertising, industry trends and environmental changes in the area. If a new competitor is expected to enter the market, perhaps sales will go down or maybe advertising expenses will need to increase to keep customers buying from your business. Expect expenses to increase at least by the cost of living factors provided by federal government reports. Think about any changes you are planning such as moving to a new location or adding employees. Communicate with suppliers and other businesses in your industry to get a feel for the changes they see. Be sure to document the assumptions made in your business plan narrative. Documentation might include citing the sources used for research or bids from suppliers or letters of intent from customers.
Doing projections for a startup business can be more difficult. This forecast will be based totally on research. Start with the expenses, contact the insurance agent to get a quote. Talk to the landlord about rental rates. Contact the phone company for a bid on a phone system. Ask each supplier for an idea of what it will cost for a year. Don’t forget to include any loan repayments and interest. To estimate revenue look at the market potential. How many customers are there? How much competition? How often do customers buy? What is the average amount they spend each time they buy? How will the customers find your business? Always document where you found the information used to project income and expenses.
A spreadsheet is a helpful tool for creating a forecast. Often your lender can provide a format they like for doing financial projections. Other online resources are also useful in forecasting or contact your accountant for assistance creating a budget. Our Clatsop Community College SBDC advisors are here to assist you with this, as well, always FREE and CONFIDENTIAL. Contact us at firstname.lastname@example.org for more information, or call 503-338-2402 to set an appointment.
(Thanks to Arlene Soto, my colleague and SBDC Director at Southwest Oregon Community College for sharing the information in this article)