That’s it, you’ve analyzed everything: the market, your offer, your operational strategies, the legal and tax organization of your business… However, you still have one crucial step: you have to do a financial forcast, will your business be profitable? How will you be able to finance your investments and the first months of activity?
Depending on the result, if the answer is “yes”, start or review! Otherwise, you have to review the project: can you spend less? How to earn more? By changing targets? But, suddenly, it impacts the business model… In short, in this case, it is necessary to start everything from the beginning.
What is the financial forecast?
Let’s start with the most obvious and essential: the definition.
The financial forecast – which is often called more simply “forecast” – is an analysis which makes it possible to predict the inflows and outflows of money from the company. The objective is of course to measure the financial profitability. But it doesn’t stop there. The forecast also serves:
- to optimize its purchasing and investment policies;
- to estimate its financing needs;
- to ensure that the company will always have enough money to finance its expenses.
It is made up of several documents (income statement, break-even point, intermediate management balance, etc. detailed below and later in this chapter).
Very often, the financial forecast makes it possible to assess the results that the company can expect for the first three years of operation, beyond the calculation of the break-even point already achieved to obtain optimal financing.
This analysis must be carried out systematically when creating or taking over a business. Naturally, if the economic model is not stable, it is better to find out quickly: this avoids building on uncertain foundations.
Objectives of the “Financial forecast”
Reading this chapter will help you answer the following questions:
|Questions||Tools to answer|
|What resources are needed to launch the project and get it started? Is it possible to combine them?||Initial and 3-year financing plan|
|Will the project be profitable?||The forecast income statement|
|Will the revenue collected by the business throughout the year be sufficient to permanently meet the expenses for the same period?||The cash flow plan|
The six steps to make your financial forecast for business creation
The forecast in summary
As specified above, the financial forecast consists of several documents:
- the income statement;
- profitable level ;
- interim management balances (SIG);
- the initial and three-year financing plan;
- the cash flow plan;
- the balance sheet.
Each of these documents has a specific importance. The set allows you to have an overall view of the profitability and viability of your business in the near future. Note also that you build your business plan from these elements. Also, it is essential to familiarize yourself with these different terms. Before anything else, discover the financial forecast in summary.
1. Income statement
You will often find the income statement under the abbreviation CR. The purpose of this document is to give you a precise overview of your accounting year over a given period (usually a year) by summarizing your company’s expenses and income. In other words, we add up the income on one side, and the expenses on the other. Subtraction makes it possible to determine the profit… or the loss made by the company.
However, there are obviously subtleties to be aware of. What is called depreciation? Is it taken into account in the income statement? What are fixed charges? What about variable charges? Should payment terms be taken into account? In this article, we answer all these questions and give you the keys to creating your own income statement.
Income Statement Projection
|Line Item||2022 (Historical)||2023 (Projections)|
|Revenue||$86 000||$103 200|
|COGS||$22 000||$56 760|
|Gross Profit||$64 000||$46 440|
|Operating Expense||$9 000||$9 288|
|Operating Income (EBIT)||$55 000||$37 152|
|Interest Expense||$3 500||$3 500|
|Profit Before Tax||$51 500||$33 652|
|Taxes @22%||$11 330||$7 403|
|Net Income||$40 170||$26 249|
- Gross Profit = Revenue – COGS
- Operating Income = Gross Profit – Operating Expense
- Profit Before Tax = Operating Income – Interest Expense
- Taxes = Profit Before Tax * Tax Percentage
- Net Income = Profit Before Tax – Taxes
2. Intermediate Management Balances
the intermediate management balances (IMB) are indicators determined in cascade (Iacob C., 1996) in the form of money accumulation margins, designed to perform a specific function the remuneration of the factors of production and of financing of future activity, which highlights the stages of the formation of the net result of the accounting period in close connection with the structure of the incomes and expenses of the company activity.
Abbreviated as IMB, intermediate management balances are tools that allow the analysis of the company’s results. It’s about :
- the gross margin (or commercial margin);
- added value;
- gross operating surplus;
- operating profit;
- the current result before tax;
- of the result of the complete accounting exercise.
Like the income statement, they are calculated from expenses and income. The use of these indicators is important during the business creation phase. In this article on intermediate management balances, we come back to precisely what these elements are, their usefulness and how to calculate them.
3. Profitable level
The word speaks for itself. This data is the answer to the following question: “What turnover should I achieve to obtain a zero result?”. In other words, it is the level of sales that must be made for the company to earn zero profit. Of course, this is a very important point in your financial forecast. It is obtained from the charges (fixed or variable).
Naturally, in order to calculate it correctly, it is essential to distinguish between variable and fixed loads. This element of the financial forecast also involves other accounting concepts, such as the margin on variable cost and cash flow. In this article on the break-even point, we go back in detail on all these elements.
4. The financing plan
What capital do I need for my business? How (and with whom) can I collect them? The financing plan is the element of the forecast that makes it possible to answer these questions. For this reason, it is also referred to as a jobs/resources board. It simply allows you to check the balance of your company’s financing and detail how the money is obtained and spent.
This accounting item involves a few technical concepts that it is essential to know, in particular fixed assets (financial, tangible and intangible), working capital requirements and start-up cash. Step by step, discover all these elements, and how to use them, in this article on the financing plan.
5. The cash flow plan
What “mass” of money should come out of my cash box… and when? It is by carrying out the cash flow plan of your company that you can get the answer to this crucial question. Indeed, being in balance over a year does not necessarily mean that the revenue will arrive in time to cover each expense… hence the usefulness of this forecasting tool! This allows you to strategically manage your cash flow, by forecasting monthly receipts and disbursements.
However, be careful not to neglect certain items (VAT refund, capital contribution, etc.). In this article dedicated to the cash flow plan, we tell you everything about how to build and implement it.
6. The balance sheet
Everything else assimilated and ready? Well, it’s time to worry about the balance sheet! This is in a way a “snapshot” of the financial state of the company at a given moment. It is broken down into “assets” (the resources available to the company) and “liabilities” (employment than she does).
How to make this snapshot? How to build it? Why is it essential to your business forecast? These are the questions we answer in this article on the balance sheet.
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