Business Forecast: How and Why to do it?
Business Forecast: How and Why to do it?
The business forecast is an essential document prepared in preparation for the launch of a business; or for an existing business development project. Making a forecast makes it possible to translate the economic model of the company into figures.
What Is A Financial Forecast?
Making a financial forecast is necessary in order to measure the profitability of the project. But also to determine the financing need, and the capacities of the future company to repay a possible loan. Generally produced over three years, this document consists of the following elements:
- Projected Income Statement ;
- Adequacy Report ;
- Cash Plan ;
- Financial Plan ;
As well as the calculation of financial indicators (working capital requirement, cash flow, etc.), banking institutions request this type of document to analyze the viability of the project as well as the relevance of funding.
Why Make One?
The forecast is of capital use for the entrepreneur. From a personal point of view, it allows the project leader to measure financially if the project is interesting. Externally, the financial forecast is necessary to convince potential investors to commit financing in the future business.
The forecast is a tool that helps structure the project. And also to clarify all the points of the economic model of the company. It is therefore useful for:
- Request financing , in particular from a banking institution;
- Attract investors other than those from the banking sector;
- Assess the risks associated with your business creation project;
- Set quantified targets to compare over the entire period evaluated;
- Prevent the risk of business failure;
- Manage the different phases of the project evolution, from start-up to expansion;
- Better negotiate rates with different suppliers;
And finally fix the prices and the terms of payments intended for the private individuals. In most cases, the purpose of executing a financial forecast is to request financing from a banking establishment. But the forecast can also have as recipient:
- The project leader himself;
- Any partners;
- The various investors;
- As well as future suppliers and customers of the company.
How to Do It?
Before embarking on the development of a financial forecast, it is necessary to have good knowledge of accounting and taxation. Also, upstream, you will need to make sure you have the market study of your sector of activity on hand; as well as defining business strategies. The entrepreneur must also be able to situate himself by analyzing the volume of activity generated by direct competitors.The financial forecast consists of a set of information added in a specific order.
The Provisional Income Statement
The objective of the forecast income statement is to give a precise overview of the financial year over a given period. For this, the profit and loss account summarizes all of the products (forecast turnover, financial income, etc.) and projected costs of the project.
The projected costs of the project are:
The operating expenses: they often represent the bulk of expenses of the company. They are distinguished into two types: (1) Fixed charges and (2) Variable charges.
The personnel costs: they include all expenses related to hiring staff. Like for example the payment of wages, the payment of the corresponding social contributions, etc.
As well as taxes: this delicate step requires the expertise of an accountant. Thanks to his experience and know-how, the chartered accountant is the only one who can guarantee error-free forecast of taxes.
Generally carried out over a period of one year, the provisional income statement makes it possible to highlight whether the company will be able to create value or if it will lose it.
The Forecast Balance Sheet
The second stage of financial forecasting, the forecast balance sheet summarizes the company's assets and liabilities:
Company Assets: assets are tangible elements that bring value to the company. These goods, which belong to the company, can be tangible or intangible.
Liabilities: Liabilities represent all of the company's debts. Liabilities are the resources that have enabled the business to acquire the assets.
The Provisional Financing Plan
A financing plan is a document which presents the financial needs of a company at its beginnings then over several years and the financial resources dedicated in return. The provisional financing plan is presented in the form of a table in 2 parts:
- The first part informs the needs to finance to start the activity;
- The second part describes the financial resources allocated to finance these needs.
The needs to be financed are investments necessary for the creation of the activity and the need for working capital at the start of the project. They can take the form of license purchase, purchase of equipment, acquisition of offices or leasehold rights, etc. The funds, however, may consist of a loan taken, contribution to capital or contribution account associated current.
The Forecast Cash Budget
Also in the form of a table, the provisional cash budget aims to give a global vision of the incoming and outgoing cash flows of a company over a given period of time. This anticipation tool is therefore necessary to analyze the activity of a company month after month. This cash flow table consists of an inventory of receipts and a list of disbursements.
The inventory of receipts: The aim is to identify all the cash receipts from which society is benefiting or will benefit over the coming months. This includes, among other things, customer invoices, subsidies or auxiliary aid. But also bank loans or VAT credit.
The list of disbursements: conversely, disbursements constitute cash outflows comprising fixed charges and variable charges.
Indispensable, the financial forecast needs to be carried out with the greatest of attentions. For that, do not hesitate to entrust its drafting to an experienced chartered accountant, like AHW, one of the best accountants in High Wycombe!
