You may not have the need for a complete financial forecast, but it's just a shame to run a business without managing a simple sales forecast, expense budget, and -- if and only if you're planning a startup -- an estimate of startup costs. These are all relatively simple estimates, with relatively simple math, that anybody who is smart enough to run a business can handle.
After all, a lot of the real value of the plan-as-you-go business plan is the tracking, following up, seeing what was different between what actually happened and what was planned. That's much more likely to happen if you have numbers, like sales and expenses, that you can track.
Furthermore, you really should also be aware of the very important cash traps that can kill your business even if it's growing and profitable. These traps are avoidable.
So in this section what I want is to get you into the basic numbers that can run your business. There is so much benefit from tracking the difference between sales forecasts and actual sales; this is where you really get into planning process and managing your business better.
Don't worry, this isn't (yet) a full-blown financial forecast. Don't call your local accountant or management consultant. The math is simple, and although the educated guessing isn't, you can do it, and you are uniquely qualified. Here's what we're going to look at:
- A sales forecast. How to do it, why to do it, what to look for, how much to do.
- Your spending budget. You need to know -- and track changes in -- the money flowing out of your business. This is related to burn rate, fixed and variable costs, and milestones. It's real management. This ought to include just a few of the most important parts of spending:
- costs of sales
- a simple expense budget
- starting costs (this is only if you're planning a startup. If so, you have expenses that will get deducted from future income, and you'll have assets that you'll have to buy. You want to have a good idea of what it takes to get started, before you get halfway there.)
- Cash flow traps. Just so you know, we're going to leave the full-blown financial forecast, with its standard formats, and balances, and accrual accounting and definitions and all, for the following chapter about dressing the plan as needed. But we can't pretend we have you in good shape with numbers if we aren't anticipating the cash-flow traps that can kill even profitable and growing businesses.
There's a scene in one of the Monty Python movies in which the woman on the operating table is about to give birth. Frightened, she asks the doctor--a memorable John Cleese character--"Doctor, doctor, what do I do?"
The doctor, looking down at her with a sneer, answers "You? Nothing. You're not qualified!"
It's a very funny scene. I'm a man. I've been present for several births. I know who does everything. Not the doctor.
And the same strange hesitance shows up a lot when people in business need to forecast. They think somebody else, somebody with more schooling, knows better. Someone else can run the numbers, do an econometric analysis, look at the data better, find the trends.
The truth, however, is that nobody is more qualified than a business owner to forecast her business. You've been there, you've lived through the ups and downs of it, you have the sense of it better than anybody.
For the record, I spent several years as a vice president in a brand-name market research consulting company. Our clients often thought we knew better, because that's how we made our living. And most of the time we were just making educated guesses, like you do when you forecast your own business.
You are qualified. Trust yourself.
And I'm sorry, I just found the scene in YouTube. You can click the link if you don't see the video below. I couldn't resist adding it here. The specific "You're not qualified" moment is at about 1:25:
Think of the weather forecast. You don't have to study the process to know what's going on. In the background, there's a community of meteorologists and public sector agencies gathering lots of data, constantly, on winds and clouds and pressure. The forecast takes that data into account and guesses the future, usually adding human judgment to the mix. For example, in the past, when things looked like this, it usually rained. So they call that a 70 precent chance of rain.
Do you think every weather forecast requires some defined amount of data processing? Or, to ask that question another way, do you ever look at the horizon and see clouds looming or rain in the hills and predict, accurately, that it's going to rain where you are? Of course you do.
Here's an interesting statistic: in Palo Alto, CA, if you predicted today's weather by saying, "It will be the same as yesterday" you'd be right more than 75 percent of the days in a normal year.
Sometimes almost everybody knows the weather by looking at the sky. Sometimes only the data-rich people know the weather because what's coming shows up in the data -- radar, pressures, wind speeds, storms off shore, etc. -- but not in the sky.
Now take this idea to business forecasting. I think you have to get used to the idea that business forecasting, like weather forecasting, is a combination of data gathering and guessing. You want to have as much data as possible before you make an educated guess, because those guesses should be educated.
- You use past results of your own company first -- if you have a company and you have past results -- and think through how and why future results might be different.
- Whether you have past results, you use available industry averages as well. Find out about sales per employee or sales per square foot for your industry. Or use the reverse telephone tree (see sidebar) to get help from people with more industry experience. Look at financial reports published by the publicly traded companies in your industry, because they are required by law to report details.
And remember as you forecast, that it's just the first step. You're not going to live with your forecast for that long, because (at least with the plan-as-you-go business plan) you'll be reviewing and revising as soon as you get results.
So you want to know something you don't know. Here's one way to find out.
Get on the phone. Think of somebody to call first. Come on, you can think of somebody. Somebody who might have some idea. No ideas at all? Then call up the local Small Business Development Center, if you have one near you, or the equivalent development agency, if you're not in the United States. Or call a local bank and ask for somebody who works with business loans. Call the nearest business school. Call your cousin who owns her own business. Call somebody.
Unless you're really lucky, that first person won't have the answers you need. Don't worry. Ask her whom she knows who might have the answer.
Every person you call, ask who else might know.
Eventually, you'll find out as much as you're going to. It's not magic. You don't get to know everything about every subject. Particularly with business planning, sometimes you have to guess.
Your sales forecast is the backbone of your business plan. People measure a business and its growth by sales, and your sales forecast sets the standard for expenses, profits and growth. The sales forecast is almost always going to be the first set of numbers you'll track for plan vs. actual use. This is what you'll do even if you do no other numbers.
When it comes to forecasting sales, don't fall for the trap that says forecasting takes training, mathematics or advanced degrees. Forecasting is mainly educated guessing. So don't expect to get it perfect; just make it reasonable. There's no business owner who isn't qualified to forecast sales -- you don't need a business degree or accountant's certification. What you need is common sense, research of the factors, and motivation to make an educated guess.
Your sales forecast in a business plan should show sales by month for the next 12 months -- at least -- and then by year for the following two to five years. Three years, total, is generally enough for most business plans.
If you have more than one line of sales, show each line separately and add them up. If you have more than ten or so lines of sales, summarize them and consolidate. Remember, this is business planning, not accounting, so it has to be reasonable, but it doesn't need too much detail. Here's an example, from a sales forecast for a local computer retail store.
It's a simple example. You should recognize the arrangement of rows and columns. I'm just showing you a portion of the spreadsheet, because it has to fit on the page.
Notice the predictable structure. First you have units, then prices, then you multiply price times units to get sales. It's simple math, but breaking it up like that makes things easier later on, when you look at what went wrong (and remember, something will go wrong; business plans are always wrong).
Even if you've never done a spreadsheet, you can do this one. The hard part is remembering that you can estimate, you are qualified, and nobody else can do it better. Just take a deep breath, calm down, and make an estimate.
Or, if you prefer, read on. Let's talk about working from past data, estimating entirely new products, your data analysis qualifications, and some other factors. Then you can make your forecast.
You probably know this already, but I'll go over it just in case. I recommend using Business Plan Pro software so you don't have to do this, but it's good to know anyhow, and you can certainly do everything in this book without that software. So here's a bit about spreadsheets.
Spreadsheets are normally arranged in rows and columns, with rows numbered from 1 to whatever, and columns labeled from A to whatever. Simple mathematical formulas refer to the cells that are identified by row and column. For example:
So what we see here is a simple formula that adds the 34 in cell B2 to the 45 in cell C2 to get the sum of those two, which is 79. That number is in cell D2, so you see the formula showing at the top when you click on D2. Also the number in the upper left corner indicates which cell the displayed formula belongs to.
Here's another simple example:
In this case the cell named B5 is highlighted, and its formula says to sum up all the cells from B2 to B4. That's three cells, and the numbers they contain sum up to 128.
There are lots of books and websites and different instructions and tutorials available for spreadsheets. This is enough for now, so you can understand my simple forecast examples.
So you make a sale. When you deliver the goods, you record it as a sale. If the customer didn't pay you immediately, you record the accrued amount as Accounts Receivable.
You order some goods. When you receive them, you don't pay for them. Instead, you record the accrued amount as Accounts Payable.
At the end of the tax year you have some expenses outstanding, like professional services you know you'll be billed for but you haven't been billed yet. You accrue those expenses into the current tax year. They are deductible against income.
In so-called cash basis accounting, the opposite of accrual accounting, you don't put the sale or the purchase onto your books until the money changes hands. With business-to-business sales, the norm is the money changes hands later. So accrual accounting is better. It gives your books a more accurate picture of your financial flow and financial position.
Why does this matter here? Because timing of sales, costs, and expenses makes a difference. Start your forecasts correctly so the can be part of a more formal financial forecast when you finally need one.
Just a quick note. I hope it's obvious. With examples in this book I'm not showing you the full columns of the spreadsheets, because that would be awkward. Numbers would have to be very small and difficult to read. I use my spreadsheets for sales forecasting and other normal monthly projections with a standard layout.
I base my tables on the standard spreadsheet layout as used in Microsoft Excel, Lotus 1-2-3, AppleWorks, Quattro Pro, and even the true pioneer, VisiCalc, the first spreadsheet, from 30 years ago. The rows are labeled from 1 to whatever, and the columns are labeled from A to whatever. When you get past the 26 letters of the alphabet you start over again, with AA, AB, AC, etc.
|Labels in Column A
||Special uses for Column B
||12 Months Monthly in Columns C-N
||Annual Columns as Needed.
|I run the labels along the lefthand side. These might be Sales, Expenses, Profits, etc.
||I keep column B open for variables like growth rates and such. This is convenient for starting balances too.
||My months go off toward the right, one by one, in 12 columns.
||The first year's totals of the numbers from the previous 12 months. Then come the additional years as needed.