How to Make Clear and Accurate Financial Predictions for Your Business
Creating clear and accurate financial forecasts for your business during the start-up stage is critical.
Most business owners complain that building accurate financial projects is time consuming and that time could be spent generating sales rather than planning. However, few investors will invest in your company without clear projections.
The right financial projections will help you create personnel and operational plans that take your business to the next level.
Here are some ways to help you create financial projections for your business.
Start with expenses
Is your company in the start-up phase? If so, it is easier to predict expenses than income. So, start with estimates for common expenses such as rent, utility bills, phone bills, legal fees, advertising, cost of goods sold, materials, and cost of customer service. .
Double your marketing and advertising estimates because they tend to exceed expectations. Triple insurance and legal fees because they are difficult to predict.
Check key ratios to make sure your projections are accurate
Don’t forget about expenses, especially after making aggressive income predictions. Most entrepreneurs focus on meeting income goals and assume they can adjust expenses if income doesn’t materialize. Positive thinking might help you improve your sales, but it’s not enough to pay the bills.
By using key ratios, you can reconcile your forecast of income and expenses. Here are some ratios that can serve as a guide for making an accurate forecast:
This is the ratio of total direct costs to total revenue for a given period. Keep in mind the assumptions that could increase your gross margin from 10% to 40%. For example, if your sales and customer service expenses are low now, they could be high in the future.
Operating profit margin
The operating profit margin measures the profit a company makes on a dollar sale, after paying the variable cost of production, such as wages and raw materials, and before paying interest or taxes. Expect to see a positive move from this relationship.
As your revenue increases, overhead costs should be a small proportion of your total cost, so your operating profit margin should increase. Most entrepreneurs make a mistake by predicting breakeven too early and assume they won’t need funding to get to this point.
Total staff per client
Are you a sole proprietor planning to grow your business on your own? So, pay close attention to this ratio.
Divide the number of employees in your company (only one if you do everything on your own) by the total number of customers you have. Then ask yourself if you’ll want to manage all of those accounts in five years when the business has grown. If not, you should reevaluate your assumptions about payroll or income or both.