Small Business Forecasting: A Step-by-Step Guide

Written by Adriana Noton Thursday, 12 May 2011 04:19

As a small businessperson, you need to know the amount of revenue that your business should generate in order to remain afloat. The process of small business forecasting allows you to prepare pro form financial statements and to set a cash budget. You will know your anticipated revenue and expenses for the next six months to a year, and you will be aware of your financial position at all times.

As a small businessperson, you need to know the amount of revenue that your business should generate in order to remain afloat. The process of small business forecasting allows you to prepare pro form financial statements and to set a cash budget. You will know your anticipated revenue and expenses for the next six months to a year, and you will be aware of your financial position at all times.

Before jumping into the technical part, mull over some bottom-line questions. How much of your goods or services do you think you will sell in the next year? How much do you expect to make? What costs do you have? Will you have to hire additional help to meet your needs? And finally, if you have a loan or are getting a loan, how much is your monthly payment?

After considering the preceding questions, draw up your pro forma income statement. Estimate your sales revenue for this year by looking to your sales from last year. If you have no sales history, look to your competition for sales goals. Always remember to estimate your sales conservatively at first so that you do not set yourself up for failure.

Next, write down your expenses. Expenses include loan payments, payroll and payroll taxes, equipment purchases, telephone bills, utilities, rent, dividends, and finally, what you plan to pay yourself. Once you have totaled your expenses, subtract them from your expected revenue. This will give you a figure for net income, which is another word for profit.

After preparing the income statement, set up your cash budget for each month. Either divide your yearly income by twelve or make adjustments for seasonality. For instance, an accountant would expect more revenue during tax season and less during other seasons. Think about seasonality also as you compute your expenses.

When you have a cash budget in place, you will know how much profit you can expect to make each month. If you see that, as the year goes on, your profits are trending ahead of your forecast or behind your forecast, make changes in your income statement and in your budget to accommodate those trends.

As a final step, create a pro forma balance sheet listing assets and liabilities. Cash, accounts receivable, inventory, and fixed assets, like vehicles, buildings, land, and equipment, should be listed under assets. Accounts payable, bank loans, and owner equity is listed under liabilities. Owner equity is the amount of your earnings that you will keep for yourself and distribute to your shareholders.

If you plan to ask for money from a venture capitalist or from a lender, you will need to have all of these documents prepared in advance of your meeting. Investors will not lend you money unless you show them your forecasts.

The process of small business forecasting may sound tedious, but when you have completed the process, you will have a business plan in place for the next six months to a year. Having a plan, even though not everything will go according to plan, allows you to know your financial goals and will help you outpace the competition.