Compiling realistic forecasts

As part of your planning you will need to compile a minimum of two different financial forecasts:

• ˜ Cash flow forecast
• ˜ Operating budget

Depending on the size of your business proposition, you may also need to prepare balance sheet and profit and loss forecasts. Once again, you can utilise the help of your bank as they can supply you with blank forecasts that you can use. In some cases, the bank may provide you with free software that you can use on your computer. As an example, Nat West provide software but you also need to have Microsoft Office installed on your computer.

Cash flow forecast

As the name suggests, the cash flow forecast deals with the cash requirements that your business will need. The easiest way to start this forecast is not to include any cash injection that you propose to make. It is better to start from nothing and then establish where the total funding will come from. This aspect is considered in the next section.

Operating budget

The operating budget will look at the profitability of your business. Profit is essential to all businesses. Without profit you are gaining no return on your investment. You are spending money to stay employed rather than earning profit from which you can be paid. No business can survive on this basis.

When compiling your forecasts you must be realistic. The potential funder will need to have faith in your figures. It is very difficult to provide answers if the figures go wrong later. You need to think about a number of things that could affect your forecasts:

• ˜ Are my sales projections accurate?
• ˜ When will my customers pay me — cash or credit?
• ˜ How much credit will my suppliers give me — when will I pay them?
• ˜ What expenses will I have — how variable are they?

Throughout your forecasts you will be making assumptions. It is important that you are able to explain the reasoning behind whatever assumptions you make. You will also need to allow for contingencies. Things that could go wrong. It is better to have pessimistic forecasts rather than optimistic ones. Look at the worst-case scenario. If that does actually happen, at least you will be prepared for it.

You must appreciate that if a funder does lend money to you based on your forecasts, they will expect your financial performance to be close to what you have projected. If it is not, and you need to go back to obtain more funding, the lender may be more wary of your proposition.*