Updated: May 17
Budgeting and forecasting are essential planning tools for your business. Typically, it is implemented by larger companies, but it is also useful for startups and growing businesses who are looking for funding. To create a financial projection, it must be linked to strategic objectives of your business and these are derived from your business plan.
The very first thing to understand is that revenue is a product of price and quantity. Take the opportunity to test different pricing, but keep in mind that price changes can affect the quantity your business can sell. Get a feel of the economic environment, take into consideration pricing changes and marketing effort to forecast the quantity of sales. Utilize historical data and a formula, such as the price elasticity of demand to test the effects of pricing on sales.
Cost of Goods Sold
Cost of goods sold is the direct cost of a product or service. To forecast the cost of goods sold, you must first determine whether the cost is fixed or variable. The fixed cost remains constant month to month, these are typically the cost of a warehouse to hold the inventory and variable cost is the cost of each specific unit sold. Cost of goods sold would be moving in the same direction as revenues at a declining rate as the number of units sold reaches economies of scale.
Selling, General and Administrative Expenses
SG&A are typically monthly expenses consisting of things like rent, utilities, subscriptions, employee salaries. Employee salaries should be driven by headcount, pay rate and tax rate. Marketing and Sales can be projected using historical percent of revenues.
After combining sales, cost of goods sold, selling, general and administrative expenses, you have and operating budget.
Balance Sheet and Cash Flow Projections
Balance sheet and cash flow projections require a more in depth understanding of accounting. Working capital items are projected using days sales outstanding, days payable outstanding and days inventory on-hand. Capital expenditures forecast is based on plans to purchase plant, property, and equipment. Theses changes in balance sheet will determine the cash flow forecast.
READ UNDERSTANDING FINANCIAL STATEMENTS FOR BUSINESS OWNERS
It is important to have clean historical financials before you perform any budgeting and forecasting. GFTs Accounting Services can help you get for financials ready for projections. GFTs Corporate Finance services will also ensure that your forecast is sound and ready for presentation.