Forecasting the future of your small business
Updated: Sep 13, 2019
Financial forecasting is easily one of the most important things small business owners can do to envision the future health of their business. It can also be a very complicated process if you don't know where to start, or your business model has a lot of ins and outs. But, just because something might be hard doesn't mean it's not important.
Forecasting gives you the ability to essentially run your business for the year without having to go through the hassle of actually running the business. You can see what making small changes might do for your bottom line, and see what costs you might be able to cut to make positive gains in your profit. And you can do all this with a single spreadsheet.
For those of you who are struggling on where to start, here are a few pointers:
No need to get fancy
In the end, a budget forecast is simply taking your Revenue, then subtracting your Cost of Goods Sold (COGS) and your monthly Expenses to get your EBITDA (earnings before interest, taxes, depreciation, and amortization). Unless you're running a fairly financially complicated business the effect of interest, depreciation, and amortization shouldn't have too much of an effect on your bottom line, so your EBITDA should come pretty close to forecasting your actual profit, except for taxes (your CPA should be giving you direction on forecasting those).
So, start with the simple stuff: Where do you get your revenue from, and how much do you expect each month. To make things even simpler, you can take a look at your forecast by quarter, instead of monthly. This will give you a nice 10k foot level view of your business through the year. If you have multiple streams of income, group them together by category. For instance, if you're a convenience store owner, you don't necessarily have to have a line for Snickers bars and Little Debbie snacks. You can just group them together under the category of "sweet snacks." This will help simplify things for you.
Start from the top and work your way down
One of the easiest ways to work out your budget is by simply starting at the top and working your way down. That means starting with your revenue, then moving to the costs derived from production, and finishing up with the fixed expenses you incur whether you sell anything or not.
Here's how that might look for a restaurant owner:
REVENUE - All the proceeds from operating the restaurant
(minus) COGS - Food cost + Utensil cost
(minus) EXPENSES - Labor cost, utilities, manager salaries, rent, etc.
One of the ways small business owners can get in the most trouble with budget forecasting is when they budget based on what they want, instead of what is likely going to happen. To combat that, it's best to simply underestimate revenue, and overestimate costs. That way you are being conservative and will likely end up with a budget surplus at the end of the month instead of being shell-shocked by your final numbers.
As with all financial operations for your business, it can ultimately be helpful to hire a consultant or advisor to assist in getting the meat of your business financials, but these three tips can help you get started and get a down and dirty grasp of your business.