Maybe you’ve been planning to do this for years, or maybe the perfect opportunity arose out of the blue. Either way, you’ve made the leap and entered the world of entrepreneurship. Congratulations- you now have a small business start up! So…now what? One of the most important things any small business owner can do is have a financial forecast. In fact, oftentimes this is something that should be done, or needs to be done, before you put up that OPEN sign on the door.
What is a Financial Forecast?
“A prediction concerning future business conditions that are likely to affect a company, organization, or country. A financial forecast identifies trends in external and internal historical data, and projects those trends in order to provide decision-makers with information about what the financial status of the company is likely to be at some point in the future.”
After reading through this definition, you may be thinking, “But, I’m just starting my business, I don’t have any historical data!” It’s true that your new start up will not have any data of its own to make predictions with, however that does not mean that there isn’t data available.
For example, before starting your business, did you work at a company that did similar work? If so, can you use some of their data and your knowledge from that? Ask your accountant for help. Hopefully, if you did great accountant research, your accountant is working with or has worked with similar businesses to yours. Your accountant should be able to help with numbers and financial data. Also, there is some information you can find on your own, such as certain fixed expenses for your business, i.e. building lease or specific utilities. Do your research to make informed decisions and an educated estimated about your business’s finances. Do not simply create numbers out of thin air. Click here for more information.
Why Should a Financial Forecast be a Priority?
1. It Helps with Finding Investors/Lenders
Most business start ups are looking for investors for their business, or they are looking for banks to give them a loan to help cover costs until the business really starts turning a profit. Typically, start ups begin breaking even around 18 months. You may be an incredibly convincing sales person and thoroughly believe in your product or service, but when it comes to money, investors and lenders want to see numbers and not just hear your enthusiasm. They want to know when they should see a return on their investment or expect to get paid back.
It is advised that you create at least two different financial forecasts: a conservative one and an optimistic one. You want to excite prospective investors, but you also do not want to seem unrealistic with your expectations.
Do you need help looking for investors? Check out this article from Forbes for tips.
2. It is Necessary for Planning, Budgeting, Decision Making
“A goal without a plan is just a wish.” –Antoine de Saint-Exupéry
Taking the time to produce a financial forecast for your new business will help to ensure that your goals do not simply become wishes. A financial forecast can aid you in setting up a budget and a course of action for your business in both the short and long term.
Think of the financial forecast as the GPS on your smartphone. Based on data—speed, construction, closures, and traffic during that time of day—the GPS tells you when you will get to your destination. Using that information you can decide when to leave and which route to take. The financial forecast does the same. It “indicates where the business is actually headed” (Steven Nikolas, Investopedia). Based on that information, decisions can be made to try and move the business in the direction that you would like it to.
3. It Provides Direction and Motivation For the Whole Team
Maybe you are flying solo with your start up right now, but if not, having a financial forecast gives the whole team the big picture and direction. Team members and employees can and will understand why certain decisions are being made if they are aware of the information from the financial forecast. In an article for Entrepreneur, Marcus Erb explains, “When employees have the full context about a decision and the options considered, they are more likely to support it regardless of whether they agree with it or not.”
Your start up is important to you. You want it to be important to your employees as well. Help them feel involved and really invested in the business by having a plan that everyone knows about.
Yes, you are excited about your business. Yes, you want to get going on the “fun stuff,” such as selling, marketing, and actually being in business. But, you should stop and work out a financial forecast first. It will help you to gain investors, guide your business, and create more invested employees. If you would like help creating your business’s forecast, please contact us at Lucid Accounting and Finance!