The future can feel very uncertain when you’re an entrepreneur. Predicting cash flow for the startup small business can seem like a guessing game.
This is especially true in the first few years of any business, but particularly now when we’re faced with so many external uncertainties that could hamper growth. This makes business forecasting a critical entrepreneurship tip for starting and maintaining your business. This article will help you understand financial forecasting as a tool to provide some stability and planning for your future.
Benefits of Financial Forecasting
One of the best tips for starting a business is learning early on how to plan ahead for market shifts, economic downturns, labor shortages, and supply chain disruption. If you can plan for trouble early on, you’ll be more likely to be able to handle it well.
Financial forecasting is a critical entrepreneurship skill for the small business owner. At its core, financial forecasting will help you respond appropriately during challenging times when cash flow is a problem. Long-term forecasting can help you plan your resources proactively. It won’t eliminate the need for reactionary decision-making against short-term disruption, but it will help you reduce expenses and potentially create more cash on hand. Here’s how it works.
How to Create a Financial Forecast
The goal of the financial forecast is to create a comprehensive set of projected financial statements. These pro forma income statements help with forecasting your balance sheet and planning for the future. With these tools, you will be able to match existing events with your planning document and make changes that will keep your business moving inexorably toward its goals. These statements will come in handy if you seek out working capital funding down the road. The pro forma financial statement should include:
- Sales projections for an established timeframe
- A production schedule for your products
- Current and projected expenses
- Expected or predicted profit
This document will help inform your cash budget sheet, which should be completed monthly. It should reflect sales revenues or cash coming into the business as well as outflows. The difference between the in and out cash flow is your net cash flow. That’s a critical number for small business owners that will determine if you need to accrue some debt to keep the lights on.
The final step after developing the financial pro forma income sheet and the cash budget is to create the pro forma balance sheet. This is your long-term financial roadmap with each month mapped. It will show what assets increased from the prior year and will help you spot trends to which you can respond proactively.
Why is this all so important to the small business owner? If you believe your business is ready to scale, you’ll need these tools if you want working capital funding.
Planning Ahead with Small Business Funding
It’s critical that entrepreneurs seeking small business funding have a current balance sheet to help investors understand the trends affecting the stability of your business. But it’s also important for the small business owner to help them proactively plan for what’s ahead.
Small business funding starts with the balance sheet. For traditional loans, funding institutions look at cash on hand against debt as well as your working capital. Working capital is everything that you can convert to cash quickly. Lenders also review your debt ratio against your business equity.
There is another solution that doesn’t require a lender’s approval; ROBS (Rollovers as Business Startups) funding. Your qualified retirement funds can be used without upfront taxes or early withdrawal penalties to fund a small business. Benetrends is the innovator of 401(k) rollover funding. To find out more, download The Definitive Guide To 401(k)/ROBS Business Funding.