Creating clear and accurate financial forecasts for your business in the early stages is key.
Most business owners complain that building specific financial projects takes a lot of time and can be used more than time to plan sales. However, few investors will invest in your company if they do not have a clear outlook.
Proper financial projections will help you create the staff and business plans that will take your business to the next level.
Here are some ways to help build financial projections for your business.
Start with expenses
Is your business in the start-up phase? If so, then it’s easier to predict expenses than revenue. Therefore, start with estimates of current expenses, such as rent, service bills, phone bills, legal fees, advertising, cost of goods sold, materials, and cost of customer service.
Double your calculations for marketing and advertising because they tend to go beyond expectations. Legal fees and triple insurance, which are difficult to predict.
Check the key ratios to make sure your projections are accurate
Don’t forget about expenses, especially after making an aggressive income forecast. Most entrepreneurs focus on achieving their income goals and believe that they can adjust their expenses if their income is not realized. Positive thinking can help you improve your sales, but not enough to pay your bills.
Using key ratios, you can combine your income and expense forecast. Here are some ratios that can guide you to make an accurate prediction:
This is the ratio of total direct costs to total income over a period of time. Consider hypotheses that can increase your gross margin by 10% to 40%. For example, if your customer service and sales costs are low now, they may be high in the future.
Operating profit margin
The operating profit margin measures the profit a business makes from selling dollars after paying a variable cost of production, such as wages and raw materials, and before paying interest or taxes. It is expected that a positive move will be seen from this ratio.
As your income grows, your overall cost should be a small proportion of your total cost, so your operating profit margin should increase. Most activists make a mistake because they announce the breakpoint too early and believe that they will not need funding to get to this point.
Complete staff for each client
Are you a single person entrepreneur who wants to grow your business on your own? Then pay close attention to this ratio.
Divide the number of employees in your company (only if you do everything yourself) with the number of customers you have. Then ask yourself if you want to manage all of these accounts within five years when the company wants to grow. If not, you need to reconsider your payroll or income assumptions or both.