How to do a financial forecast for your small business

Financial forecasting for the future is never easy, and has become much more difficult, because the economic environment has become much more volatile. However, the basics of financial forecasting will always remain the same. Small business owners must develop the skills to plan ahead. The reality is that this is essential, if your business is to succeed. It is the savvy business owner that understands that profit is not the only important variable. You will have to develop a comprehensive financing plan, for the future in order for a small business to profit in the long-term.

In order to do an effective job of financial forecasting, for the small business firm, the business owner should develop a comprehensive set of projected financial statements. These projected financial statements, are also called pro forma financial statements. They help forecast future levels of balance sheet accounts, as well as profits, and anticipated borrowing. These pro forma financial statements are what becomes, the small business owner's financial plan.

Small business owners can benefit from having this financial plan, because it allows the owner to track actual events, against the financial plan, and make adjustments as the year passes. This can become invaluable to the owner, in order to keep the business out of financial trouble, in a changing economic environment. In addition, if the business needs a bank loan or other financing, these pro forma financial statements are usually required. If the business seeks other forms of financing, venture capitalists and angel investors also require pro forma financial statements. It is important to note that small businesses can develop their pro forma financial statements, for varying time periods. The most common time periods are either six months or one year.

In order to prepare a comprehensive financial plan, the best method to use is to first prepare a pro forma financial statement. Then, you can prepare a cash budget which can help you develop formal budget. Here is an overview of the statements you will need before developing your formal budget.

• Pro Forma Income Statement-This statement provides a projection of how much profit the business anticipates earning, over a given time period. Generally, there are four steps to develop the pro forma income statement. They are-

1. You must establish a sales projection
2. You will set up a production schedule
3. You must calculate your other expenses
4. You must determine your forecasted profit
After using your sales projection as a starting point, you can then use your production schedule, to determine your cost of goods sold, if you are selling a physical product. If you are selling a service, then you will need to place a value on your service, and substitute that value for cost of goods sold.

Other expenses that you subtract from sales will include: general and administrative expenses taxes, dividends, and interest expenses. Finally you arrive at your gross profit estimate, which is your goal for the pro forma income statement.

• Cash Budget-It is important to remember that profit is not the same as cash.Because of the necessity of cash small business owners must develop a projected cash budget, in order to assure that they will have adequate cash, in the future to operate their company. Cash budgets are usually done on a monthly basis. Cash receipts or inflows, (sales revenue), are projected based on the sales projections, from the projected income statement. Cash outflows are similarly projected. The difference between them is what is known as the net cash flow. The business owner also has to take into consideration whether or not he allows customers to pay on credit, and control for that, when calculating when cash inflows are received. Each month, the small business owner must then calculate, if there will be enough cash to meet the minimum cash balance, for the month. If not, the owner will have to borrow. If there is excess cash, the owner can repay past loans.