Working on a startup can be exciting, exhilarating, fulfilling and maybe even a little terrifying.
Creating financial forecasts and budgets are not typically how many entrepreneurs envision spending their time, but these tools are incredibly necessary.
An accurate and thoughtful forecast can be time-consuming, but it will help you to make informed decisions regarding staffing and growth, and it will help you attract investors.
Here are tips to create a practical and well-rounded financial forecast for your startup.
The value of a forecast
It can be tempting to put off creating projections and a forecast. You have a business to run, and it is completely possible the landscape may change in unexpected ways, and you know your business will need to adapt to those changes in real time.
Dedicating time to a forecast that could very well be obsolete in six months may seem like a waste of time, but it’s actually of extreme importance. As the saying goes, if you don’t aim at something you will always miss.
Creating financial forecasts takes practice, so even if the forecast ends up in the recycling bin, the knowledge and experience you gained will help you create a more dialed in forecast next time.
First, understand your finances
Putting together the information you need to create a forecast and a budget will help you realize where your money is going, so you can zero in on areas where you are overspending or losing money, as well as areas that are underfunded.
Objectively reviewing your finances is important, and this is a prerequisite to creating a forecast.
Show and tell
Investors will want nothing to do with your company if you don’t understand your business’s financial needs and goals. Your business numbers and KPI’s (key performance indicators) should be available at your fingertips. You can track your most important financials in Excel spreadsheets, but using a business dashboard tool that integrates with your accounting software can make it easier and help you avoid doing double data entry.
A forecast is documentation that shows potential investors and lenders what they need to know about your business, but also that you are competent, knowledgeable about your business and its strengths and weaknesses, and a reasonably safe investment.
Without investment capital or business loans, your business may be unable to grow and reach the great things you know you and your team are capable of doing.
Start your financial forecast with your known expenses.
Expenses are easy to identify. Make sure you think about known, regular expenses, variable expenses, and include even small items like office supplies.
Your business has specific expenses, or overhead, each month, quarter or year that will always be there.
Examples of known expenses include:
- Utility bills
- Employees (include salaries and benefits, like insurance and retirement contributions)
- Communication (telephone, internet)
- Equipment and licensing (computers, servers, software, and so on)
Your business also has fluctuating expenses.
Things like product development, materials and packaging, performance-based bonuses, and more.
These are very necessary expenses, but unlike your rent that will stay the same for the length of the lease, these are expenses that may change from one quarter to the next based on a variable.
When pulling together a list of your expenses, include everything. It can be easy to overlook things, but make sure you get it all.
From the coffee you buy for the break room to paper clips and more if you spend money on it add it to your list.
Pro tip: If you’re not yet using an accounting software to track your expenses and income, track every line item in your bank account and document it for a period, and it will be easy to come to grips where you are spending your cash.
The early days of a startup can be intense. There is a lot to do and there likely isn’t enough time or people to do it all.
This can be a dangerous time.
In the hustle to get everything done, important tasks may be overlooked. Many entrepreneurs also start out with little, if any, business experience.
In the excitement to develop a product and push it to market, an entrepreneur may overlook paying all of the necessary state and federal taxes, filing licensing paperwork and paying the appropriate fees to do so, and more.
It is possible you have expenses you have not realized, and late fees may be accruing on those expenses. For these reasons, you should always build in an emergency fund into your budget to cover unexpected bills and expenses.
Bringing in a business manager or an advisor is a great way to make sure all of the details are taken care of and paid for. This is an additional expense, but it is one that can help keep your business moving forward while you grow.
Map out your plan for growth
Once you have an understanding and a thorough list of your expenses, put that aside and figure out the next steps for your business.
Evaluate your business plan to determine if that plan is still on course and viable, and start to think about what you’re going to do differently if you need to make changes to the plan.
Review sales goals and look to see if there are any aspects of your business in need attention, and therefore financing.
Consequences of your plan
Once you have your plan mapped, figure out if there are any hidden expenses to reach milestones and achieve your goals.
For instance, if you want to increase sales, outline how this is going to happen. Will your sales team simply need to deliver more results, or will you add staff?
Or will you run a promotion or offer coupons to encourage sales?
Clearly, hiring new team members is an expense, and running promotions means increased marketing expenses, and depending on the nature of the special, selling products at a reduced rate.
Look at the market and your competition
Follow trends and emerging technologies and keep an eye on what your competition is doing. Knowing your place in the market can help you decide your next move.
A solid forecast is created using data from your performance along with real-time data from your industry and the market.
Depending on your industry this can be obtained from:
- Government and statistical bureaus publishing small business statistics.
- Doing a competitor analysis. The bigger players in the market publish their data freely online.
- Find a research firm to do market research on your behalf and get a detailed view of your situation and industry.
Be cautiously optimistic
When creating a financial forecast, you need to find a balance between being realistic and optimistic.
You want to set achievable goals that you can plausibly reach, but you want to have reason to stretch and put in some effort.
If you create a forecast and budget, and you ignore the possibility of having a bad sales month in terms or a new competitor coming onto the scene (or both of these things happening at once) you will find your plan falls short and you may be unprepared to handle setbacks.
On the other hand, if things go exceptionally well and you are superseding your benchmarks, it can benefit your business to have a plan. The key here is to use your forecast as a tool to think through a couple of different scenarios so that you’re not surprised if things don’t go exactly the way you hoped.
A budget is a plan you use to transition from the here and now to the best case scenario of your forecast. You need cash flow to keep the business afloat and to roll out your plan for growth.
When you have a handle on all your expenses and you understand where you want to go, you can create an informed budget.
Build in flexibility
A budget is predicated on many factors, and if one of those factors is delayed or doesn’t go exactly as anticipated, that can impact your budget and your forecast.
This is fine—it happens.
Build flexibility and contingencies into your plans, so if unexpected variables are introduced you can recover.
The more often you update your forecast, the less time consuming the entire process will be. If you only touch the forecast once a year, you will need to do a lot of research when you sit down to create your next annual forecast.
Gradually updating your forecast quarterly or monthly enables you to have a more precise and potentially accurate document.
You will also spend less time working on it, because a major overhaul will not be necessary.
Use the tools at hand
There is specialized forecasting software available to help you create your forecast.
You can enter your info and adjust parameters to turn out a financial forecast for your business.
While this may be a great fit, it may also be unnecessary. Also, consider the expense and possible training necessary to use such software.
If you just want a simple forecast, something as easy as a spreadsheet may be all you need to get the job done.
Recap the past
Occasionally, take the time to go back and review your forecast against what actually happened. Comparing your plan against your reality helps you make informed decisions moving forward.
For example, if you had more money come in than anticipated, this may take the edge off of an unexpected expense.
Reviewing missed opportunities can be painful, but it is a learning experience and a necessary one if you want to build a successful business.
Budgeting and forecasting get easier with time, and reviewing your forecast and budget after the fact will help you create stronger plans and tools going forward.
Taking control of your future
Forecasting matters, and a comprehensive forecast can help you both weather storms and reach new heights.
Creating a forecast is a substantial undertaking. To do it properly, you need to give yourself time and objectively and rationally evaluate your past, present, and future.
You also have a business to run, so find the balance between the day-to-day activities and ensuring you successfully navigate your business to where you want to be in the future.