The entrepreneurial movement is rising steadily across the world as more people opt to become their own boss and start a business. However, not all businesses will become successful. More businesses fail than those that do succeed, and entrepreneurs have been looking for ways to be on the winning side. An often overlooked aspect of business development is financial management and forecasting. The reason why 82% of businesses fail is because of poor cash flow management. This stark reality reminds all aspiring business owners of the importance of financial forecasting in business.What are the benefits of financial forecasting? Here are just a few of the many:
It increases the chances of success. As the old saying goes, “if you fail to plan, you plan to fail.”
It helps paint a better picture of the future.
It protects a business owner from running the company financially dry.
It helps in planning for a more financially healthy business.
And so much more.
How to Set Up Financial Forecasting
So how does a business owner start with financial forecasting? Here are the steps in financial forecasting to ensure better business success when starting a business.
1. Determine your objectives
Business goals play a crucial role in the business’ financial performance. What’s the mission and objective of the business? Having those objectives in mind will help determine your target market, business opportunities, and many other factors that play into revenue and expenses. When businesses are clearer about their objectives, the easier it will be to set things like expense reports, revenue projections, and so on. Start by sitting down as a business owner and writing down what your goals are— who do you want to help? How many products do you want to sell in a month? How much do you want your business to earn? The more specific and realistic you are with these goals, the better the chances of having sound financial forecasts.
2. Create a business plan
Putting a business plan in writing provides a lot of clarity for your business. The business plan should include the company’s unique value proposition— what makes the product or service stand out from the rest of the competition.Also, include feasibility studies of other adjacent businesses that share your roadmap and word out what they did right that you should emulate and what they did wrong that you should avoid. Your business plan should also include a marketing plan, including all the necessary expenses to promote your business. Consider using grassroots marketing strategies like social media marketing or getting affordable publicity on micro influencer accounts and blogs.
3. Set revenue goals
All techniques of financial forecasting go back to the cruciality of revenue forecasting. The key to having sound revenue forecasts is to be as realistic as possible with the predictions. Don’t bloat the numbers. But also don’t set it too low that it doesn’t challenge the business to shoot for higher standards. The best way to set revenue goals is to start with a realistic estimate of how many clients or customers you can serve in the first twelve months. Then look at how much those people will be willing to pay for your service or product.
4. Determine expenses
Like anything in life, your business will need money to stay operational. List down all your expenses and categorize them according to purpose and nature. The purpose of your expense will include categories like operations, marketing, manpower, utilities, and so on. The nature of your expenses will generally fall under two categories— fixed and variable expenses. Fixed expenses will remain constant no matter how many products you sell. Your variable expenses are the cost of delivering a product or service to a client.
5. Set contingencies
Thinking that all things will go well when starting a business is wishful thinking. Some things could go against your business operations and launching. Consider all external variables such as COVID-19 restrictions, competition, political issues, market response, and so on. Prepare for these contingencies by putting into consideration a drop in revenue or an increase in expenses. It’s best to always hope for the best but prepare for the worst.