Creating clear and accurate financial forecasts for your company during the start-up stage is crucial.
Most business owners complain that building accurate financial projects is time-consuming, and that time could be used generating sales rather planning. However, few investors will invest in your company if don’t have clear projections.
Correct financial projections will help you create staffing and operational plans that will take your company to the next level.
Here are ways to help you build financial projections for your business.
Start with Expenses
Is your company in the start-up stage? If so, then it’s easier to predict expenses rather revenues. Therefore, start with estimates for the common expenses such as rent, utility bills, phone bills, legal fees, advertising, cost of goods sold, materials, and cost of customer service.
Double your estimates for marketing and advertising because they tend to escalate beyond expectations. Triple legal and insurance fees because these are difficult to predict.
Check the Key Ratios to Ensure Your Projections are Accurate
Don’t forget about expenses, especially after doing aggressive revenue predictions. Most entrepreneurs focus on reaching revenue goals and assume they can adjust expenses if revenue doesn’t materialize. Positive thinking could help you improve your sales, but it’s not enough to pay the bills.
By using key ratios, you can reconcile your revenue and expense forecast. Here are a few ratios that can guide to make an accurate forecast:
This is the ratio of total direct costs to the total revenue for a certain period. Note assumptions that could increase your gross margin from 10 to 40%. For instance, if your customer service and sales expenses are low now, they could be high in the future.
Operating Profit Margin
Operating profit margin measures the profit a business makes on a dollar sale, after paying the variable cost of production – like wages and raw materials, and before paying interest or tax. Expect to see a positive movement from this ratio.
As your revenue grows, overhead cost should be a small proportion of total cost, so your operating profit margin should increase. Most entrepreneurs make a mistake by predicting the break-even point too early and they assume they won’t require financing to get to this point.
Total Headcount per Client
Are you a one-person entrepreneur who plans to grow your business on your own? Then, pay a lot of attention to this ratio.
Divide the number of employees in your firm (just one if you do everything on your own) by the total number of customers you have. Then, ask yourself if you’ll want to be managing all those accounts in five years when the company has grown. If not, then you need to reassess your assumptions about the payroll or revenue or both.