Starting a Business 101:
Financial Forecasting

by John Chapman, FLMI, Financial Planning Advisor

Dear Entrepreneurial Spirit,

Elaine Garnet has asked me to write to you about the dreaded subject of "Financial Forecasting". Why me? Well, besides having a business of my own, I spent a good chunk of the '80s as a technical writer for a turnkey software provider and two years in the '90s as a part of a corporate tax team putting together SR&ED (Scientific Research & Experimental Development) claims for a large insurance company. So, I have a feel for writing to deadlines plus having my income dependent upon the quality of the work I do.

The Financial Forecast

The financial forecast is the soul of your business plan because it describes numerically what you think you are worth, now and in the future. Putting it down on paper is so hard because once you do; you know that you are going to be held accountable to those numbers. Also, most of us have not thought about the excruciating details of this new and exciting business idea yet and our egos are at stake, so we shy away from doing this section of the business plan as long as we can. Well, I'm here to say that this fear, while understandable, is not necessary. It is the approach that matters. Don't start with the question of how much can I make in this business? Start with how much do I need?

A Compelling Vision

You must start with a vision of how this new business is going to be part of your whole life and how it is going to make the financial contribution towards all of the other things that you want to do besides work. A compelling vision will energize your creative powers to develop the motivation, skills and energy to accomplish the goals that are defined by your vision.

Three big questions:

1) How much money do I need? (Be brave; ask the universe for what you want!)

2) How much time do I want to spend on my business versus my family?

3) Does my time need to be structured the way it is now?

Having developed that vision, you now need to translate it into the numbers that make up the financial forecast.

The Components of a Financial Forecast

There are 4 components to the financial forecast. Remember, these are projections of the future vision that you are designing. Reality will undoubtedly turn out different, but this part of the plan will give you the tools to measure your success and make changes based upon changes in circumstances that happen to all business people.

1) The Business Assumptions

Your numbers in the next three sections are going to be dependent on the assumptions that you are going to make about your business. This is where you spell out those assumptions. They are things like who your customers are, where they are geographically located, why your expertise is valuable and how it will be best utilized. Also included may be how upcoming changes in a particular field will create a demand for your services, how doing one project for a company will allow you to leverage that work into multiple projects. In other words, what factors are you going to take advantage of that will make you more successful than just being an employee of a single firm?

2) The Pro Forma Income Statement

This is where you outline your projected income, expenses and profit for one, three and even five years. If you have been in business for a while, use your past statements as a basis to start. If you are just starting up your business, this is where the hard work comes in. Search out other people in the business; go to trade shows; find out what you can from consultants in your field. Ask questions and test the business assumptions that you've made.

3) The Estimated Balance Sheet

This balance sheet projects what you will own (the assets you will bring and purchase along the way), what you will owe (the debts you expect to incur to purchase those assets) and what your company will be worth year-by-year, again over that five-year period. These are snapshots taken at specific points in time (usually quarter and year-ends) that show how your company is expected to grow.

4) The Cash Flow Projections

The projected cash flow statement will help you ensure that you will always have money around when you need it. It helps you recognize when income will be coming in and when expenses are to be paid. Do it monthly for the first year and quarterly thereafter. If you have a seasonal business, it is very important to include those variations in income and expense in your projections.

Conclusion

It is very important that the work you do initially is reviewed monthly in the first year and quarterly every year thereafter. While the business plan tends to be used most often when businesses first start up, most successful entrepreneurs will tell you that constant monitoring of these components is the key to keeping your business in good shape. Good Luck!

In this issue:

Starting a Business 101: Financial Forecasting