How to Create a Financial Forecast For Startup?
Updated: Mar 4, 2020
The business world today is bursting with all kinds of startups. One of the major contributors to the success of a startup is a sound business plan which is done by preparing a financial forecast. Business plan financials and self projections are the weapons to keep track of your financial situations.
To establish credibility with prospective investors and lenders, it is essential to use pro forma statements using realistic market assumptions. The pro forma business plan should ideally display at least 5 years projections (min. 3 years in advance). There are several key forecasts that have been collected for better understanding:
1. Sales forecast
A good way to start off is to show a rational sales forecast. Project your sales revenue for at least three fiscal years. In that period, realistically ask yourself how many customers do you expect? How many units will be sold? What is the cost of goods sold? How will you price your products? A forecasted sales number can generate projected revenue for the business.
After accounting for all of your operating costs, subtract this from your gross profit to calculate your actual profit — otherwise known as net income (or profit). Operating expenses can be calculated based on your expense budget.
2. An expense budget
After projecting revenue and expenses, one can see a clear picture of how effective the business can be. Operating expenses are any expenses that businesses incur performing their normal business operations. These include fixed costs (i.e. rent for your location) and variable costs (i.e. marketing expenses), wage and salaries of your employees. An expense budget assists businesses limit their operating costs to the lowest possible limit.
3. Capital expenditures
Capital expenditures are commonly known as CAPEX, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, technology, or equipment. The assets cost is then put under depreciation expense over the useful life of the asset.
On the basis of the above financial projections for business plan, financial statements (Income Statement, Balance Sheet, Cash Flow Statement) are projected and Free Cash Flow Forecast is prepared. The Free Cash Flow is useful for determining the payback period, NPV, and IRR.