Business Forecasting 101: A Guide for Beginners
Starting a business is a big decision.
Although it’s becoming easier for entrepreneurs to get started in the world of business today, thanks to the arrival of online selling, that doesn’t mean that anyone can become a successful business owner overnight. You’ll need a solid strategy for what you’re going to sell, a good idea of the kind of products that will appeal to your customers, and an insight into how you can keep your finances on track.
Since finances are often at the heart of a successful business, one of the first things you should do before you jump into your new life as an entrepreneur, is to learn the basics of financial forecasting. That also means coming to terms with the basics of business budgeting. Fortunately, we’ve got an introduction to budgeting here to get you started.
What Is a Business Budget?
Let’s start with the basics. A business budget is an insight into how cash flow is going to be handled in your business. Your budget shows everyone from investors to the people who provide loans, how money is going to come into your business and go out over time.
The money in your business budget might include things like everyday earnings, revenue from sales, or even just money from personal and business loans. On the other hand, the cash that goes out of your company will go towards things like rent, inventory, advertising, and even staff wages.
Like a personal budget, a business budget will help you to keep an eye on your finances and how everything works for your organisation. Most budgets will focus on keeping spending to a minimum, while ensuring that your company can benefit from as much incoming cash as possible too. Budgets also help you to plan to make a profit by showing:
- How much money you need to start your business
- How many sales you need to cover expenses
- When you can afford to hire extra staff
- How much you can invest in your business
The main purpose of budgeting is that it will show you where you’re making money, and where your cash is going each month. Once you know the answers to those questions, you can try to make more and spend less.
Why Is a Cash Flow Budget Helpful?
A cash flow budget gives you an insight into how things are moving in your company. It includes insights into your balance sheet and profit/loss statement. These show whether you’re making money, or not. Your cash flow forecast predicts how much money you’ll have in your bank at any given time based on when you expect to pay your bills, and when you expect invoices to be paid.
All of these things come together to give you a valuable overview of the changing nature of your business finances. A lot of new companies can end up running out of capital at one point, and a budget that also includes cash flow will help you to forecast when dry spells in your revenue might be on the horizon.
If you know that you’re going to have limited money one month, you might organise a new loan, take out a line of credit, or hold off on buying equipment.
Budgeting also gets easier the more you do it. You’ll find that after a year running your business, you can use the experience that you’ve gained and the information that you’ve gathered to make projections about the year ahead. This means that you don’t have to figure out how much you’re likely to make and how much you’re likely to spend using nothing but guesswork.
Profit and Loss Budgeting
Once you know how much your company spends and how much it earns, you’ll also be able to create something called a profit and loss budget, which you can use with your accountant’s help to plan a strategy for your company’s growth. You can use this budget to determine whether your company is likely to make more money than it spends. If it will, then you know that you’re going to be profitable this year.
The more time you spend running your own business and learning about the different kind of budgeting strategies available to you, the easier it will be. Keeping track of your finances and planning your cash flow might not be the most exciting part of running your own business, but it’s something that you need to become confident with if you want to be successful in this fast-paced world.