Creating clear and accurate financial forecasts for your company at the start-up stage is crucial.
Most business owners complain that creating the right financial plans is time consuming, and that time can be used to create sales instead of planning. However, few investors will invest in your company unless you have a clear idea.
Accurate financial estimates will help you create the stuffing and operational plan that will take your company to the next level.
Here’s how to put one together for use with your business.
Start with cost
Is your company in the start-up stage? If so, it’s easier to predict expenses than income. So, start with estimates of general costs such as rent, utility bills, phone bills, legal fees, advertising, cost of products sold, materials, and customer service costs.
Double your estimates for marketing and advertising because they exceed your expectations. Triple the legal and insurance fees because they are difficult to predict.
Check the original ratio to make sure your guess is correct
Don’t forget about costs, especially after predicting aggressive revenue. Most entrepreneurs focus on achieving the revenue target and assume that they can adjust the expenditure if the revenue is not implemented. Positive thinking can help you improve your sales, but it’s not enough to pay the bills.
Using key ratios, you can adjust your income and expenditure forecasts. Here are some ratios that can guide you to make an accurate prediction:
It is the ratio of total direct expenditure to total revenue for a given period. Note the estimates that could increase your gross margin by 10 to 40%. For example, if your customer service and sales costs are lower now, they may be higher in the future.
Running profit margins
Operating profit margin measures the variable cost of production – such as wages and raw materials, and the profit that a business makes on selling a dollar before paying interest or taxes. Expect to see a positive movement from this ratio.
Overhead costs should be a small proportion of total costs as your income increases, so your operating profit margin should increase. Most entrepreneurs make the mistake of predicting a break-even point too early and assume that they will not need funding to get to that point.
Total headcount per client
Are you a one-man entrepreneur who plans to grow your own business? Then, pay close attention to this ratio.
Divide the number of employees in your firm (just one if you do everything yourself) by your total number of customers. Then, ask yourself if you want to manage all those accounts within five years of the company growing up. If not, you need to re-evaluate your estimates about salary or revenue or both.