Financial forecasting for small businesses
Lagos has been the hub of financial and commercial nerve center of Nigeria, many small businesses are part of the engine room of commerce and need to be primed to survive in the business world of today. One of the tools needed in this circumstance is financial forecasting for the future, which is a necessary but not an easy exercise.Small business owners must develop the talent to plan ahead. It is one of the essential talents needed for business success.
In order to do a good job of financial forecasting for the small business firm, the owner should develop a comprehensive set of projected financial statements. These projected financial statements, help forecast future levels of balance sheet accounts as well as profits and anticipated borrowing. These financial statements are the small business owner’s financial plan. It is important for the small business person to realize that profit is not the only important variable. A comprehensive financing plan for the future is equally important.
Why Do Small Businesses Need Financial Statements?
Having financial statements allows the owner to track actual events against the financial plan and make adjustments as the year passes. This is invaluable to the owner in order to keep the business out of financial trouble in a changing economic environment.
Small businesses can develop their financial statements for varying time periods. The most common time periods are either six months or one year. In order to prepare a comprehensive financial plan, the best method to use is to first prepare an income statement, then, a cash budget and, finally, a balance sheet. Here is an overview of each of these statements.
lncome Statement
The income statement provides a projection of how much the business anticipates earning over a given time period. Generally, the small business owner follows four steps to develop the income statement:
- Establish a sales projection
- Set up a production/ purchase schedule
- Calculate other expenses
- Determine forecasted profit
After using the sales projection as a starting point, the production/purchase schedule is used to determine cost of goods sold if the business is selling a physical product, but if it is selling a service, then a value should be placed on the service as cost of goods sold.
Other expenses that can be subtracted from sales include general and administrative expenses and interest expenses (if capital is a loan). At this point, the business arrives at a gross profit estimate, which is the goal for establishing the income statement.
Cash Budget
Small business owners can’t just assume that just because they can show a forecasted profit for their business that all is well. Profit is not the same as cash in the till. Cash on hand is necessary to operate day to day operations. As a result, small business owners also must develop a projected cash budget in order to assure that they will have adequate cash in the future to operate their business.
Cash budgets are usually done on a monthly basis. Cash receipts or inflows, which are usually sales revenue, are projected based on the sales projections from the projected income statement. Cash expenditures or outflows are similarly projected. The difference between them is the net cash flow. The business owner has to take into consideration whether or not he allows customers to pay on credit and control for that when calculating when cash inflows are received.
Each month, the small business owner then calculates if there will be enough cash to meet the minimum cash balance and the firm’s cash needs for the month. If not, the owner will have to borrow. Ifthereisexcesscash,theowner can repay past loans or keep as savings. In this way, the business owner can keep a good handle on the cash position of the firm.
Balance Sheet
After developing the income statement and the cash budget, the small business owner now has all the information necessary to develop the balance sheet. The balance sheet shows the cumulative changes in the firm over time.
The owner also needs information from the prior year’s balance sheet. The amount of each line item on the balance sheet can be obtained from one of these two documents. Some of the accounts on the balance, possibly long-term debt will remain unchanged.
If the firm’s assets increases from the previous time period, then the business owner has to look at the liability side of the balance sheet and find where the decrease is in liabilities to support the increase in assets.
In conclusion
It does not matter whether you sell from a shop or the booth of your car, whether you are at OkeArin, Oshodi or Victoria Island, a good idea of how your finances stand at every given point in time, will help you know whether you are progressing or retrogressing in the business, and if the latter is the case, how to re-strategize, but if the former, then more grease to your elbow.
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