3 year forecast business plan
Forecasting business revenue and expenses during the startup stage is really more art than science. Many entrepreneurs complain that building forecasts with any degree of accuracy takes a lot of time--time that could be spent selling rather than planning. But few investors will put money in your business if you're unable to provide a set of thoughtful forecasts. More important, proper financial forecasts will help you develop operational and staffing plans that will help make your business a success. Here's some detail on how to go about building financial forecasts when you're just getting your business off the ground and don't have the luxury of experience. Start with expenses, not revenues.
6 steps to making financial projections for your new business
This section relates directly to the market analysis, competitive edge, marketing plan and pricing sections see our guide to writing a business plan. Building a sales forecast is a double exercise. You first need to build the numbers using a bottom-up approach and then sanity check them using a top-down approach. If you are not familiar with these 2 methods of building financial estimates, these are explained in details in our article on how to do a market for a business plan.
The idea when building a financial forecast is to decompose the figure in a set of measurable sub-hypothesis. That way you will later be able to easily analyse the differences between the forecast figure and the actual figure, adjust the hypothesis and get a new, more accurate, forecast.
Here we will use a series of hypothesis to build a sales volume forecast and a price hypothesis. How to set the price is explained in the pricing section of our business plan outline article therefore I won't talk about it here. Estimating the volume is a difficult exercise but there are a couple of techniques you can apply to increase the accuracy of your guess.
If you are operating a location driven business, such as a shop or a restaurant, the best thing to do is to go in the street where your business will be based and look at how many customers the other shops or restaurants in the street have. If you feel that your concept is too different from the shops and restaurants in your street, then try to find a street with similar traffic which has shops and restaurants with a similar concept to yours.
When you go on street due diligence like this you need to make sure you that your analysis isn't biased by the day of the week and the attached seasonality. Make sure you cover at least one weekday and a full weekend. Once you have estimated the traffic, all you need to do is to apply a conversion rate to deduct the number of sales. If your business is not location driven then it is more complicated.
The first thing to do is to go on a financial information website such as Companies House, and try to get your competitors accounts or the accounts of a similar business.
These accounts will give you the historical sales figure of these businesses from which you can estimate their historical volume sold. This should give you an indication of what a mature business can deliver: Therefore if you are just starting out it will probably take you a bit of time to get there so you need to try to estimate what your ramp-up is going to be. Also, if you are selling your goods through a distributor he should be in a position to give you an estimate.
My advice here would be not to take it at face value and to discount it slightly to avoid any bad surprises. One of the best techniques to forecast the sales of businesses that have a sales force is to build your volume forecast based on your lead generation capacity. Let's see how it works with an example. Let's say that you sell services to small businesses and that your sales process is as follow: you phone potential customers to get a meeting and then go to the meeting and try to close the sale.
To forecast your sales, you can estimate how many phone calls an average sales representative can handle in one day. From there you can deduct how many meetings your sales representative is likely to get based on an estimated success rate. And then apply another estimated success rate to deduct the number of sales from the number of meetings.
Try to work out the entire sales funnel rather than using a global conversion ratio. That way you will be able to track the intermediary steps and adjust your sales forecast on the fly as you get more clarity on what the conversion rate at each step is. You will also be able to set more precise objectives to your sales force. If you are on online business you can use Google Adwords keyword tool. This tool will give you an estimate of the traffic associated with each keyword as well as an estimate of the number of clicks you should get for a given ad campaign.
Then to build your volume forecast you need to figure out how much you can afford to spend on Adwords which will give you an estimated number of clicks. You can then apply a conversion ratio to the number of clicks to estimate you number of sales. Once you have build your volume and your sales estimates you need to sanity check them using a top-down approach.
The idea here is to compute the implied market share of your forecast and check how realistic it is. If the number seems too high then you probably missed something. If you are a capacity constraint business such as a hotel or a restaurant you also need to ensure that the volume makes sense compared to your capacity. You also need to factor in the seasonality and check that it is reflected properly in your sales forecasts.
There are two reasons why you need to build your sales forecast using a bottom-up approach and not a top-down approach.
The first one is that, once you have started trading it enables you to check your assumptions and adjust your forecast based on your actual numbers. For example, if you estimated that your salesmen will be able to get in average x meetings per month but they are actually getting y. Just replace x by y in your model and you have a revised, more accurate forecast on which you can take business decisions. The second reason is to prepare your discussion with investors.
And you are in trouble. Now if you say: "we have 2 sales representative who will be able to generate 50 leads per month. The investor will most likely say nothing, give a phone call to a competitor or an expert and ask him if 25 leads per salesman per month makes sense and what is the average success rate in the industry.
If you are not too far off remember that you need to demonstrate that you know your market the investor will come back to you and ask you to run your model with the numbers the expert gave him which you will then challenge because it is your market and you are the expert!
The bottom line is that using a bottom-up approach enable a constructive discussion based on the assumptions used to build the number whereas the top-down approach is a black box and it just looks like you took a guess. No one likes to invest money based on a guess. Make sure that your business idea is profitable and create a convincing business plan to pitch investors. Not ready to try our on-line application? Learn more about our solution.
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Financial projections are an important business planning tool for several Sales forecast; Operating expenses for the first 3 years in business. But forecasting is a critical planning tool. It provides a guide for running your business as well as providing information for potential lenders or investors. A typical.
A business plan is one of the key building blocks of any new company. One of its main components should be financial projections for your first two years. These projections are forecasts of your cash inflows and outlays, income and balance sheet. They show bankers and investors how you will repay loans, what you intend to do with your money and how you will grow.
Business plans written for the purpose of raising capital are typically required to have a three-year projection of sales and profits. This provides investors with information about how they can expect return on their investment.
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Sales Forecast Template
Neither is particularly exciting—especially when you compare it to the idea at the core of your business. For external funding, financial projections help convince lenders and investors that your business will not only be profitable but also offer them a return on investment. Comparing your actual financial statements to your projections is referred to as variance analysis. Conversely, if your immediate revenue exceeds your pro forma income, then you may need to hire employees, expand your facility, or seek financing sooner than you expected. To establish credibility with prospective investors and lenders, pro forma statements should ideally show projections three years in advance. There are two key forecasts to put together.
How to create a sales forecast for your business
A sales forecast is an essential part of a business plan. It is also essential if you are looking to get a bank loan or investors. Our free Sales Forecast Template lets you analyze and forecast the unit sales, growth rate, profit margin and gross profit for your products and services. It provides a quick starting point for setting up your sales forecast and includes some sample charts. This Excel spreadsheet lets you compare and analyze multiple products and services by enter monthly units sold, unit price and cost of goods sold COGS. The template then calculates the total revenue, growth rate, margin per unit, and gross profit. Note: If your service is based on an hourly rate, you can enter the number of hours under Units Sold and the hourly rate under Unit Price. In a business plan or presentation, you should probably use a chart to help communicate your forecast. We've included a few sample charts, both for the first year's data as well as all 3 years.
Business forecasting requires time, research and thought.
This section relates directly to the market analysis, competitive edge, marketing plan and pricing sections see our guide to writing a business plan. Building a sales forecast is a double exercise. You first need to build the numbers using a bottom-up approach and then sanity check them using a top-down approach. If you are not familiar with these 2 methods of building financial estimates, these are explained in details in our article on how to do a market for a business plan.
How to create realistic financial projections for your first year in business
They often include different scenarios so you can see how changes to one aspect of your finances such as higher sales or lower operating expenses might affect your profitability. This financial projections template pulls together several different financial documents, including:. The template also includes diagnostic tools you can use to test the numbers in your financial projections and make sure they are within reasonable ranges. You may want to include a best-case and worst-case scenario to account for all possibilities. Make sure you know the assumptions behind your financial projections and can explain them to others. Financial projections are always educated guesses. To make yours as accurate as possible, do your homework and get help. Use the information you unearthed in researching your business plan, such as statistics from industry associations, data from government sources, and financials from similar businesses. An accountant with experience in your industry can be useful in fine-tuning your financial projections. Compare your projections to your actual financial statements on a regular basis to see how well your business is meeting your expectations.
How to Forecast Revenue and Growth
Creating financial projections for your startup is both an art and a science. Although investors want to see cold, hard numbers, it can be difficult to predict your financial performance three years down the road, especially if you are still raising seed money. Regardless, short- and medium-term financial projections are a required part of your business plan if you want serious attention from investors. The financial section of your business plan should include a sales forecast, expenses budget , cash flow statement , balance sheet , and a profit and loss statement. Be sure to follow the generally accepted accounting principles GAAP set forth by the Financial Accounting Standards Board, a private-sector organization responsible for setting financial accounting and reporting standards in the U. If financial reporting is new territory for you, have an accountant review your projections. As a startup business, you do not have past results to review, which can make forecasting sales difficult. It can be done, though, if you have a good understanding of the market you are entering and industry trends as a whole.
