When embarking on a new business venture or considering the future trajectory of an existing business, it is likely that you will encounter the need for a financial forecast, particularly when seeking financing or developing a business plan. However, many entrepreneurs may wonder: how does one accurately project their business’s financial outlook?
To begin with, what exactly is a financial forecast? It is an estimate of a business’s future financial performance, informed by historical trading data, market trends, anticipated expenses, and projected revenue. A financial forecast provides valuable insight, allowing you to plan for growth, allocate resources effectively, and make informed decisions for your business’s future.
Financial Forecasts for Startups
For startups, creating a financial forecast is crucial, especially when seeking investment. A well-structured forecast aids in planning for expansion, securing funding, and avoiding potential cash flow shortages. To formulate a forecast for a new business, start by estimating your revenue based on market research, pricing strategies, and anticipated sales volumes. Next, list all your expenses, categorising them into fixed costs — such as leases, salaries, and software subscriptions — and variable costs, such as marketing. Finally, plot your forecast, ensuring you understand the timing of cash inflows and outflows. For example, in the case of a subscription-based business model, you can predict monthly revenue.
Cleaning Company Financial Forecast Example
Example of a Financial Forecast
Let us consider a cleaning company in County Durham, specialising in restaurant cleaning. In its first year, the business operates as a sole venture, with plans to expand in the second year by hiring additional employees. The following outlines a simple financial forecast for the first two years:
Year 1:
Revenue: The company can service a maximum of three restaurants per morning, working six hours per day at £26 per hour, six days a week. This equates to:
- Weekly revenue: £936
- Annual revenue: £48,672 (52 weeks)
Expenses:
- Insurance: £30 per month (£360 per year)
- Equipment: £100 per month (£1,200 per year)
- Fuel: £80 per week (£4,160 per year)
- Accounting software: £40 per month (£480 per year)
Total Expenses (Year 1): £6,200
Profit (before tax): £48,672 — £6,200 = £42,472
Year 2 Expansion:
Revenue: By hiring two additional cleaners, the company can expand its operations from three to nine restaurants per morning, tripling its revenue:
- Annual revenue: £140,016
New Expenses:
- Employee salaries: £21,000 x 2 = £42,000
- Insurance: £360 per year
- Equipment: £1,200 per year
- Fuel: £12,480 per year (tripled from Year 1)
- Accounting software: £480 per year
Total Expenses (Year 2): £56,520
Profit (before tax): £140,016 — £56,520 = £83,496
This example illustrates how a small startup can scale by strategically hiring staff to increase revenue, all while managing expenses effectively. The forecast is based on the market capacity available to the cleaning business owner.
Food Delivery App Financial Forecast
Food Delivery App Forecast
Consider the following financial forecast for a food delivery app aiming to scale over three years, targeting market share growth and demonstrating structured, profitable expansion.
Market Capacity & Key Assumptions:
Total market size: 190,000 takeaways in the UK
Market share growth targets:
- Year 1: 0.5% (950 takeaways)
- Year 2: 1% (1,900 takeaways)
- Year 3: 2% (3,800 takeaways)
- Average orders per takeaway per day: 14
- Average order value: £26
- Commission per order: 12% (i.e., £3.12 per order)
Year 1 Forecast (0.5% Market Share — 950 Takeaways)
Revenue:
- Total daily orders: 950 x 14 = 13,300 orders per day
- Revenue per order: £26 x 12% = £3.12 per order
- Total daily revenue: 13,300 x £3.12 = £41,496 per day
Annual revenue: £41,496 x 365 = £15,141,040
Estimated Expenses:
- Marketing Budget: £150,000
- Software Management Costs: £24,000
- Staff Salaries (Developers, Sales, Support): £1,200,000
- Operational Costs & Hosting: £300,000
Total Expenses: £1,674,000
Profit (before tax): £15,141,040 — £1,674,000 = £13,467,040
Year 2 Forecast (1% Market Share — 1,900 Takeaways)
Revenue:
- Total daily orders: 1,900 x 14 = 26,600 orders per day
- Total daily revenue: 26,600 x £3.12 = £82,992 per day
Annual revenue: £82,992 x 365 = £30,292,080
Estimated Expenses:
- Marketing Budget: £150,000
- Software Management Costs: £24,000
- Staff Salaries (Expanded Team & Support Staff): £2,500,000
- Operational Costs & Server Scaling: £750,000
Total Expenses: £3,424,000
Profit (before tax): £30,292,080 — £3,424,000 = £26,868,080
Year 3 Forecast (2% Market Share — 3,800 Takeaways)
Revenue:
- Total daily orders: 3,800 x 14 = 53,200 orders per day
- Total daily revenue: 53,200 x £3.12 = £166,368 per day
Annual revenue: £166,368 x 365 = £60,713,320
Estimated Expenses:
- Marketing Budget: £150,000
- Software Management Costs: £24,000
- Staffing & Expansion Costs: £5,000,000
- Operational Costs & Infrastructure Growth: £2,000,000
Total Expenses: £7,174,000
Profit (before tax): £60,713,320 — £7,174,000 = £53,539,320
Through these examples, you should now have a clearer understanding of how to build your own financial forecast. It is crucial to conduct thorough market research to ensure the accuracy and reliability of your projections. By aligning your forecast with market capacity, you can strategically plan for sustainable business growth while managing expenses effectively.
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