Financial Forecasting for Your Business Plan
Work out your margins
A lot of people forget to do this when financial forecasting in a business plan, but where else are you going to get your potential profits from?! Write up a list of all the products and/or services you’re going to offer. If you have a lot of products, perhaps pick a range to work with (otherwise you’ll be here all day). Make a note of what you want to charge for the product or service, along with all of the expenses related to it. Here’s an example for a cake making business:
Cost of cupcake – £1.20
Ingredients – £0.65
Cupcake case – £0.15
Total gross profit per cupcake = £1.20 – £0.80 = £0.40
In order to work out profit margin, you then want to divide the gross profit by the revenue from each cupcake. Then times by 100 to get your profit margin percentage. Eg:
£0.40/£1.20 = 0.33 x 100 = 33%
You make 40p for each cupcake – or a profit margin of 33% (not bad!). Of course, this doesn’t include the time it takes to make the cake, advertising, kitchen equipment and so on. However, these expenses will come later on in your financial forecast. What it does give you is an idea of how many cupcakes you will need to sell, in order to reach your sales target. You can then use this to put together a sales forecast. Want to make £400 a week? You’re going to need to bake 1,000 cupcakes before any other expenses!
Now that you have an idea of how much gross profit your products/services will bring in, it’s time to put together your sales forecast. You can choose to forecast sales for a year or for up to three years; we say the more financial forecasting you have, the better it is for investors. You can split the first year into monthly columns and then move onto quarterly for the second and third years, if that makes it easier. Under each column, right the number of sales you predict you will make that month. It might be that the first few months have 0 sales as you’re starting up. Or perhaps you have potential clients waiting, in which case you can make a better estimate. Remember, be realistic with these figures! Your sales aren’t necessarily going to double month on month! Also consider times that may be specifically busy for your industry; such as wedding season, Christmas or summer holidays.
If you sell different products or services then have a column for each of these – to make it easier, just list the ones you’ve worked out gross profit and margins for. At the end of each month total up the sales numbers, the revenue, and the gross profit. You will then have a rough idea of your profit for that year (without any other expenses).
Financial forecasting for your business plan – Next up: Expenses, fixed costs and variable costs