Business Planning

Guide to Getting Started on Your Business’ Financial Forecast

Many entrepreneurs struggle to put together the numbers, or financial forecast, for their business. However, understanding your business’ financial outlook is a critical component to making sound strategic business decisions; building relationships with potential team members, suppliers and funders; and relieving stress by planning for and managing peaks and valleys in cash flow.

A financial forecast serves as a guide for building any type of business. It can help a startup entrepreneur set goals and evaluate the viability of a business idea. It can also help established business owners and leaders gauge the financial health of their companies, measure progress and identify new investment opportunities. A well-designed financial forecast should align with the company’s mission and vision, and serve as a representation of the business’ values. And, the best financial forecasts are those which can scale with your business.

With that in mind, we’ve compiled a guide to help you through the emotional and practical aspects of getting started on financial forecasting for your business.

Understand Your Relationship with Money

I’ve seen a lot of entrepreneurs get stuck right at the beginning of financial forecasting with the word “money.”  It brings up all sorts of perceptions about what money is and can do for us (or to us). Fundamentally, money is a currency – an exchange of energy. Your experiences, assumptions, and habits with money can help or hurt the flow of energy to you and your business. The process of financial forecasting puts you face-to-face with any limiting beliefs and habits that hurt that flow of energy.  So, it’s important to work on acknowledging and releasing what’s holding you back. To support your understanding and redefining your relationship with money, we recommend a couple of resources. For a self-guided process, try reading The Energy of Money by Maria Nemeth. For a hands-on approach, try working with a money coach, such as Uptima graduate Sara J. Bronson & Associates.

Gather Financial History

If you’ve been operating your business or you’ve been spending money on startup costs, you have financial information to get started from.  Take some time to go through your computer and physical files to gather documents related to your past business income and expenses. Check for files in your accounting system, spreadsheets, bank and credit card statements, and receipts. Organize this data in a place where you can access it as you work on your forecast.

Get Your Business Plan

Often, I see entrepreneurs who have gone through the process of planning and writing their business plans, but when they get to the financial forecasting, they get so caught up in being overwhelmed that they forget they already have a plan to start from. In your business plan, you’ve created a narrative of how the business will unfold over the next few years. Your goal in developing a financial forecast is to support that story by translating the business plan narrative into numbers. So, it’s important that you have your business plan by your side and refer to it often as you work on the numbers. And, if you don’t have a business plan, now’s a good time to go through the process of creating one.

Start with Expenses

It’s easier to start with forecasting expenses, rather than sales – you have a lot more control over what resources you spend money on and when you spend money on them. First, write or type out a list of expenses. From your bank and credit card statements, identify resources you are currently spending money on. Then go through your business plan, and identify resources you plan to spend money on and the timeframe you plan to start paying them, such as next month or next year. Don’t get hung up on specific names of those resources – describe what you think you need in a way that you can understand it.  Next to each expense item, identify: (1) its cost; (2) how frequently you expect to pay it, such as when you produce the product or monthly; and (3) whether it’s a variable expense that fluctuates directly with sales of your product or service, or whether it’s fixed regardless of sales volume.  You can get this data from the bank or credit card statements you’ve gathered up, researching online, asking for vendor quotes, and talking to people who have started similar businesses. Once you have a complete list, you can start plugging numbers into a spreadsheet, creating an expense forecast.

Exhibit 1: Example Expense List

Resource When It Starts Cost Frequency Type
Website Hosting Paying now $10 Monthly Fixed
Accounting Software Paying now $20 Monthly Fixed
Materials Paying now $2 Per Piece Variable
Office Rent January 2018 $500 Monthly Fixed
Production Assistant April 2018 $20 Hourly Variable


Identify Factors Affecting Revenue  

Forecasting revenue is usually the most difficult part of creating a financial forecast.  Many of the entrepreneurs I work with compare creating revenue projections with looking into a crystal ball. They say it feels like they are making up numbers. But, forecasting revenue is really about making a series of logical assumptions about what you plan to sell and how you plan to sell it. As you created your business plan, you did a lot of research on who your customer is, what they need, where they find information, what their buying patterns are, and how many potential customers are in your market.  You also looked at how your product or service can deliver value to those potential customers. Through this market research, you have identified many critical factors that drive your revenue.

Clarify Revenue Streams

The most important assumptions in your revenue forecast are the revenue streams. These are what the customer is paying for, how much they are paying for it, and over what time period they are paying for it.  Before you start forecasting revenue, take the time to write or type out this information for each product or service you are selling or plan to sell. This information determines the formulas you will use to calculate revenue for each product or service.  Below are some common examples of revenue streams.

Exhibit 2: Common Revenue Streams

Revenue Stream How It Works How Revenue Is Calculated
One-Time Sales Single purchase by a customer (e.g., customer purchases physical products like food or clothing) Number of Units Sold x Price per Unit
Usage Customer is charged based on the usage of a product or service (e.g., customer pays for coaching service on a per hour basis) Amount Used x Price per Use
Subscription Customer receives a continuous service over a certain period of time (e.g., customer subscribes to digital magazine) Number of Subscribers x Subscription Rate
Lending / Leasing / Renting Customer is provided with the right to use a physical asset for a specified period of time in exchange for specified payments, with or without interest (e.g., customer rents a tool) May be calculated similar to usage or subscription revenue, with or without the addition of interest
Licensing Customer is provided with the right to use a protected intellectual property for a specified period of time in exchange for specified royalty payments (e.g., customer pays a franchise fee) May be calculated similar to usage or subscription revenue depending on the situation
Commission / Brokerage Customer pays a fee to an intermediary based on the sale of an asset (e.g., customer pays a fee to real estate broker for selling their house) Sale Value of the Asset x Commission Percentage


Determine Customer Acquisition Cost

To start putting numbers to your revenue streams, it’s helpful to understand the concept of customer acquisition cost. This is the cost of marketing and sales activities that are needed to “acquire” a customer.  Making assumptions around customer acquisition cost will enable you to tie your marketing and sales plans to your revenue forecast.  If you have been operating a business, you may be able to start by looking at historical data, dividing total marketing and sales costs by the number of new customers acquired, and then making some assumptions around improved efficiency over time.  If your business is in true startup mode, you can research online or ask people who have started similar businesses what their customer acquisition costs looked like.  Try to develop assumptions around customer acquisition cost for each product or service you are forecasting – this may mean you need to go back to your expense forecast and break down marketing and sales expenses by product and service as well.  Once you have these assumptions, you can go back to your spreadsheet and build your revenue forecast.

Balance Scale, Impact & Resources

Once you have developed a full financial forecast with both expenses and revenue, it’s time to look at how everything ties together and see if it looks reasonable. Look at the period-over-period revenue growth.  Does revenue growth reflect realistic scale over the next few years? Look at the changes in gross and operating margins. Does spending reflect the growth plans?  Look at the components of the spending.  Does resource allocation align with business’ mission, vision and values? You may need to go back and adjust the forecast and/or your business plan to balance scale, impact, and resource allocation.

Frequently Review Your Assumptions

Now that you have a financial forecast, don’t let it become static.  Financial forecasting is not something you should do and then forget about it. In your numbers, you set forth assumptions about how you will operate the business and what level of financial performance you expect to achieve from those operations. As you operate the business under your plan, you get data that allows you to see how close actual results come to what you planned. If you regularly review this information and use it to keep your business plan and financial forecast up to date, you will be in a better position to make informed strategic decisions about your business’ development.


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