As a small or medium-sized business (SME) owner, it’s essential that you create financial forecasts for your business so to ensure you have a firm grasp of how your business is performing financially, and thus you are better placed to make business decisions going forward.
There are many types of financial forecasts that you could choose to employ; with the three most significant for SME owners being your sales forecast, profit and loss forecast, and cash flow forecast:
Sales Forecast
Your journey into business forecasting should begin with a basic sales forecast for your company. You can predict your sales revenue for a given month, for example, by multiplying the number of units (products or services) you expect to sell next month by the retail price per unit.
When you perform a sales forecast month after month you’ll begin to notice how accurate your forecasts are compared to your actual sales for the period in question, and adjust your upcoming sales forecasts respectively.
When making your sales forecasts in the very beginning you’ll have to base them on a number of factors, such as your share of the market (local, regional, or global, depending on what you’re selling), and the prices of your products or services compared to your competitors.
Profit and Loss Forecast
One step along from sales forecasting is performing a profit and loss forecast; where you take into account not just your sales, but also the costs (both direct and indirect) you incur in achieving these sales.
These costs will include the cost of sales; which can be everything from the raw materials that are formed into your products, to the monthly salary costs of any employees who work for your business in assembling your products, or performing your services.
Indirect costs are the monthly expenses your business incurs that are not directly related to the products or services you have on sale (you have to pay them, regardless of whether you make any sales that month). These include office/premises rent, utility bills, and general business overheads.
Cash Flow Forecast
Your cash flow forecast is the most complex forecast in this list, yet it’s arguably the most important.
Your cash flow forecast allows you to see when you’re likely to have cash flowing into your business, thus (when compared to when you’ll have a significant number of costs coming out of your business) you’ll be able to see when you’re likely to experience a cash surplus or shortfall, and adjust accordingly.
It’s important that your cash flow forecast paints an honest picture of your business as it stands (and as it’s likely to look in the coming months). For this reason, all sources of income coming into your business should be included in your cash flow forecast, as should all costs, alongside specific dates which detail when payments are likely to come in, and costs are likely to go out.
If you’re looking to make progress on the forecasts mentioned above, it would be wise to have a read of some related topics to bring some depth to your knowledge of the financial aspects of business.
Here’s some pieces that might help:
SME Taxes You Should Know About
Financing Your Small Business in 2016
If this isn’t enough, there’s plenty more information on our blog.
Experienced Accountants
To speak with a professional to discuss your SME’s accounting and forecasting needs, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.