How to Make Financial Forecasts for Your Business

|| For Freelancers & Entrepreneurs |

Businesses need to make financial forecasts in order to be on the right track to success. Otherwise, conducting a business without reasonably drawn financial forecasts is like navigating an unknown terrain without a map. 

In the parlance of the finance sector, forecasts are called Pro Forma Financial Statements. Pro Forma Financial Statements represent the business owner's financial plan. Particularly, a Pro Forma Financial Income statement is a document relating projected expenses and income for a given future period. It helps business owners, business analysts, creditors, and investors assess the profitability of a particular business. To prepare a carefully and reasonably drawn Pro Forma Income Statement, you should establish the sales projection for your business, impute all production, sales and other expenses, and determine profit margins.

For both expenses and sales, align your projections by answering key questions such as how much revenue can be realistically generated next year and how much it will cost to produce the product or service. Taxes, salaries, and bank borrowings should also be considered.

The easiest way to go about it without the constant help of a certified public accountant is to simply create a budget and sales forecast. A budget forecast is a list of costs related to items and resources that you need in order to keep your business operating normally. If you have been operating a business for a while, that should be easy to accomplish. Just review your previous records and determine which items utilized your operational funds.

On the other hand, forecasting sales is a bit more complicated. To be safe, prepare two sets of sales forecasts--one extremely conservative and another portraying a robust market scenario. One is necessary to keep you grounded in reality and the other for fuelling your path towards phenomenal success. Doing both is a healthy practice that can lead to actual growth. 

To conclude, every business of any scale needs to establish reasonable financial forecasts as a means of assessing its performance in the market. Not doing so is like embarking on a voyage without a compass.