4.03 – Forecasting For Success
Starting a new business requires careful financial planning. It’s crucial to ensure you can raise enough money and reach breakeven in a reasonable timeframe. This lesson will guide you through estimating start-up costs and forecasting sales, essential steps for turning your business idea into a successful venture.
Estimating Start-Up Costs
Setting up a business involves initial expenses for rent, materials, equipment, and other essentials. It’s vital to have enough money to cover these costs until your business starts generating consistent income. Effective financial management is key, as many businesses fail due to insufficient day-to-day cash flow.
Start by identifying all possible costs and categorizing them into one-off, fixed, or variable expenses:
- Fixed Costs: These are expenses you incur regardless of sales volume, such as rent, utilities, and some staff salaries.
- One-Off Costs: Initial purchases like vehicles or computers that are not repeated once the business is running.
- Variable Costs: Expenses that fluctuate with sales volume, including raw materials and production costs.
Your financial requirements should be clearly outlined in a cash-flow forecast, which tracks the money received and paid out on a monthly basis. According to the British Business Bank’s 2021 Small Business Finance report, the average start-up loan to UK entrepreneurs is £8,671. Bank lending to smaller businesses surged to a record £25 billion, with £8.8 billion of equity invested in UK SMEs in 2020.
If you can fund the project from your own resources, it can be advantageous. This way, you retain all the rewards of success. However, external financing options may involve sharing the rewards and potentially imposing restrictions on your operations.
Forecasting sales
Accurate sales forecasting is critical, though all forecasts come with a degree of uncertainty. Your projections must demonstrate thoughtful consideration of various factors that influence performance and show how you can achieve satisfactory results even in adverse conditions. This information is vital for your comfort and for investors and employees to evaluate risks and potential outcomes.
Guidelines for Making Sales Forecasts
Credible Projections
Your forecasts must be believable. Investors and lenders have extensive experience with similar business proposals and will compare your projections against historical data.
Customers Analysis
Identify potential customers and estimate how much they might buy. Use data from customer interviews, press releases, advertisements, and trade shows to base your sales projections.
Seasonal Factors
Consider seasonal variations that may impact sales. This is particularly important for cash-flow projections. Align your seasonal forecast with your capacity to meet demand.
Desired Income
Incorporate your financial goals into your forecasts. Ensure that your business strategy aligns with achieving these goals. This approach is more relevant for mature companies but still important for start-ups to signal viability.
Market Guidelines
Utilize accepted formulas in certain industries to estimate sales. For instance, retail businesses often rely on location studies, traffic counts, and population density.
Market Share
Understand the market size and growth rate for your product or service. An entry market share of more than a few percent is unusual, so avoid making unsubstantiated claims about capturing a large market share quickly.
Your ultimate goal is to reach breakeven and start making a profit as soon as possible. This involves setting the right price for your products or services, considering both fixed and variable costs.
Example: To determine the appropriate price, you need to account for fixed costs (e.g., rent, salaries) and variable costs (e.g., raw materials, production). For instance, if running a shop, the rent and rates are fixed, while the cost of goods sold varies with sales volume. You can find more details on pricing and cost analysis in Chapter 13.
Effective financial forecasting and management are essential for any start-up. By carefully estimating start-up costs and projecting sales, you can create a solid foundation for your business and increase your chances of long-term success.
