In a previous blog, we talked about the essential ingredients of good Business Plan. In this post, we’re going to look at the financial projections that should go along with said plan.
It used to be that banks & investors would look for 5 year projections! That was back in the 90’s when the business world was a little bit more predictable and a lot less disruptive than it is today. Trying to figure out what will happen in 6 months, never mind 5 years, is hard enough given today’s markets!
However, if you’re writing your plan with a bank or investor in mind they will expect you to provide forecasts for the next 3 years. The key to this is making your assumptions very clear. They know, as well as you do, that this is crystal ball stuff, however they want to see that you’ve really thought this through and the assumptions you make are central to that.
In our experience, where people get it badly wrong, is in the forecasting of sales. And if the income is wrong then the whole thing falls apart. So take time to think through where your sales are going to come from, what the costs (people, sales, marketing, distribution) will be to achieve those sales, and what (if any) the stock-holding implications are for your business.
The other thing to think about in sales forecasts is the seasonality and / or growth of your business. Too often I’ve seen a sales forecast that says we’re going to turnover £1.2m, which is then split £100k per month. Eh, no you’re not! This has never happened. Ever. In the history of the world. Your sales will build up; you’ll have peaks & troughs; December might be quiet (or incredibly busy!). Think about it, and build that into your plan.
Costs are pretty easy to predict, but remember to include everything. People tend to forget Employers National Insurance, however at 12.8% of your salary bill that’s a big number. Go through your costs in detail. Think of everything. Then do it again. I guarantee you’ll have forgotten something.
The last thing to include, if you’ve been trading for a few years, is your previous years’ accounts. And if you have them, do a comparison summary – that will help to sense-check your forecasts.
My final piece of advice is to get professional help. As accountants we’re good at doing this sort of thing. It will still be your plan, but we know how to build financial projections, and can ask you the questions, based on our experience, that need to be answered. The plan will also hold more sway with the bank or investor if they know that your accountant has helped to prepare the numbers.
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