Projections for your new business - « back to Articles
If you are considering starting a new venture and would like to know if it makes financial sense to do so the preparation of a Cash Flow Forecast is beneficial. A projected Cash Flow will assist you to identify the sources of revenue and expenses you can expect during the first year of operation.
Projecting your first year of business on paper can help you determine whether the business is viable. Analyzing your Cash Flow forecast can determine weaknesses and whether a profit or loss is likely to occur. Your Cash Flow Forecast will demonstrate to lenders or outside investors that your new venture is profitable and money invested will not be in jeopardy.
Profit and Growth
The purpose of your first forecast is to indicate how your new business can generate sufficient profit to support itself. As your new business may not have an operating history on which to base projections you will need to answer some questions before you can consider that first forecast.
Questions you will need to consider and the area they apply to:
- Is the market growing?
- Who are your target customers?
- Would a new product or service be more attractive?
- Demographics, where are customers located?
- Why are they purchasing the product or service?
- How much will they order/purchase?
- When will they place their order or make their purchases?
- Who and where are they?
- How large are they?
- How are they likely to respond to you, the new competitor?
- How would you respond if your competitors used aggressive marketing techniques to win your clients?
Your Facilities and Equipment
- What are competitors prices?
- Do your competitors offer discounts or specials?
- What price must you charge to make a profit?
- What additional equipment or facility do you require?
- What are the related costs?
- Should you lease or buy these additions?
- Is what you have adequate?
- What are your limitations?
Consultants can Help
- Are there employees with the right skills available?
- Wages and benefits, what will you have to pay?
- What kind of relationship does the competitor have with their employees?
Professional Consultants or Business Counsellors can help you determine what information is required for your projections and forecasts.
A Cash Flow Forecast entails the following calculations:
- Cost of Goods Sold
= Gross Margin
- Operating Expenses/Disbursements
This is the most important but often most difficult figure to calculate realistically. You will need to translate your projected market share into a dollar figure.
This dollar figure is dependant on the type of business. Some factors that will influence it are:
Cost of Goods Sold
- your capacity to produce a finished product
- seasonal time
- selling price (often is based on competitors' prices)
Your product costs will depend on sales. To calculate the cost of goods sold take your averaged markup figure and relate it to your projected sales.
- if your averaged markup is 100 percent and you expect sales of $100,000 you know the cost of goods sold will be $50,000.
This is the difference between your sales and cost of goods sold.
Once you have determined your projected sales volume, the operating expense figure is relatively easy to calculate. List your expenditures, include wages and benefits, depreciation, utilities, equipment maintenance and repairs, delivery charges, advertising, insurance and taxes, rent, and loan interests. Plan for error or contingency by allowing an additional margin of 10 to 15 percent.
Once you have your operating expense figure, calculate your profit by subtracting your operating expenses from your gross margin.
A Cash Flow Forecast will not ensure you to avoid all the potential problems in business but it can inform you on how to select a direction. For example, if your projection indicates that the business will be unprofitable, double check your calculations. If they prove to be accurate, you should reconsider beginning this business at all or make some needed changes that will improve the bottom line.