Mastering Financial Forecasting For Small Businesses: A Complete Guide
A Greek philosopher once said that the only certainty in life is change. 💯 TRUE! Everything changes and the future holds nothing but uncertainties – not just in life, but also in business! One of the biggest pushbacks that I always get is that like …
“But Marguerite, you’re talking about the future when you talk about a financial plan. How do I know what the future is going to hold?”
And like, yeah, you’re 100% exactly right. You don’t know what the future is going to hold, but here’s what I can promise you. The more that you think about the outcomes of the future and how those outcomes may look different, the better you can be as a CEO.
Do not worry about what you cannot control. You cannot foresee the future, BUT you can always plan ahead!
And you’re in luck because in this article I will share with you how to shoo away that fear of the unknown by mastering Financial Forecasting for your small business! So stay with me until the end.
So what’s financial forecasting anyway? Financial forecasting is the process of predicting and planning your business’s future financial performance which involves planning for your:
✔️ Revenue Plan – forecasts how much money your business will earn from its core operations and sales activities, allowing you to set clear revenue targets, allocate resources effectively, and develop strategies to achieve your financial goals. Regularly monitoring actual revenue against your forecasted figures helps you adapt and make informed decisions to help better ensure your business’s financial success.
✔️ Spending Plan – answers the question “Where is my money going each month?”. You forecast and project the anticipated expenses and costs your business expects to incur over a specific period of time to make your revenue plan a reality. It enables you to allocate resources wisely and ensure that you can cover all necessary expenses while working toward your financial goals.
✔️ Profit Plan – forecasts the net income or profit you’ll have left after deducting all expenses, both operating and non-operating expenses, from your revenue.
✔️ Cash Map – forecasts and projects the anticipated cash inflows and outflows for your business over a specific period of time. This will give you a comprehensive clear picture of how cash is expected to flow into and out of your business, helping you ensure that you have enough cash at any given point in time to cover your expenses and other financial obligations.
In short, a financial forecast (projection) tries to predict what your business will financially look like in the future.
“Marguerite, but why do I need to do financial forecasting?”
If you want to achieve any of the following, you can completely skip this step! (Which is 0% recommended for you if you are a serious business owner!)
Financial forecasting helps you set clear, SMART financial goals and develop a roadmap for achieving them. It provides a sense of direction for your business’s growth and financial stability.
Example: You forecast a 10% increase in annual revenue, allowing you to plan for inventory expansion and marketing efforts to meet this target.
Financial forecasting is also a great way to communicate with lenders and investors about your plans to grow and the cash needs of your small business. Accurate forecasts can increase the chances of obtaining loans or attracting investment.
Example: When investors ask you how much you need, you can use your financial plan and projections to convince investors to provide the capital needed for product development.
Cash is queen! If you want to prevent running out of cash and maintain your day-to-day operations, certainly do a cash flow projection! Forecasting cash flows helps you manage your cash needs effectively. This is especially critical for small businesses with limited access to capital.
Example: You use cash flow forecasting to ensure you have enough cash on hand to pay suppliers, employees, and rent during seasonal fluctuations.
In a dynamic business environment, forecasts can help you adapt to changes in market conditions, competition, and economic factors. They provide insights for adjusting strategies as needed.
Example: A small retail clothing store revises its sales forecasts and marketing plans in response to shifting consumer preferences and market trends.
While we can’t predict the future with absolute precision, we can certainly prepare for it. The essence of financial forecasting lies in acknowledging the unknown and strategically planning for it.
It’s more than just crunching numbers; it’s about envisioning your business’s financial landscape. The process encompasses revenue planning, spending optimization, profit projections, and an eagle-eyed view of your cash flow. It’s your compass in the unpredictable terrain of entrepreneurship.
So, remember, while the future may remain uncertain, your ability to plan ahead is your greatest asset. Embrace financial planning as your ally in navigating the ever-evolving business landscape, and you’ll be better equipped to steer your small business toward prosperity.
If you want to be guided step-by-step and in-depth support in preparing your financial plan, click this link and join our waitlist for the Your Profit Playbook, our once-a-year, 6-week business financial planning course that guides you through step-by-step how to create a realistic financial plan so that you have a clear profitable roadmap for your business to follow.