Forecasting for the first year of business is crucial for securing any loans or investment. The Entrepreneur claims that forecasting in early stages of the business ‘is really more art than science’, but is it?
Starting a new business is definitely exciting, but can it be nerve-racking as well. Ultimately, starting a business from scratch can be one of the most rewarding career paths that will enable you to achieve all of your hopes and dreams. However, the reality can be harsh – opening a business is risky, and running a business is hard work.
There are so many issues associated with starting a business, the uncertainty of introducing the new product to the market, not knowing how consumers react to it, how much money is required to manage and maintain this business and so on. All of this can quickly overwhelm entrepreneurs and scare them off.
To add to the pressure in order to get investment or loans a business needs an appropriately set up business plan with in-depth market analysis, sales propositions and forecasts, and monthly operating expenses.
So to help you get the most confident investors, you need to put your time and effort into producing financial forecasts for your business. A standard 3-year forecast is important, but a first-year forecast will be the one everybody is going to judge your business on.
Here are some basic tips on where to start when you are ready to prepare your business plan and need a forecast.
Where to start
As a start-up you won’t have any historical data to predict the following year of your business. So you need to start with the basics. First of all, review all of your expenses, start with all of the costs you might encounter over the next year. This will help you estimate the required sales and set prices for your product or service.
When it comes to sales forecasting it can be a bit tricky. Previously we discussed how to forecast sales and what to avoid when forecasting sales and forecasting for the first year of business isn’t very much different. However, keep in mind that when you are running a forecast for a business that never had experienced the market or has never sold, you will be using all of your research skills.
In a typical business plan, you will need to complete an in-depth market and competitor research, and it is best that you look into more of their data that is easily available. Dig into their average monthly sales, product value and costs, try to estimate their running costs and how much profit are they making on average. Additionally, look at your overall industry, and any seasonality that might affect it. Use all of the tools you have available, something like Google Trends will help you estimate the demand for your product over the last 5 years or so.
Plan Plan Plan
The truth is no scenarios will ever be 100 percent accurate, so a key to a successful forecast is to ensure that you have multiple scenarios that estimate your ultimate performance and establishing your business goals.
Scenario planning captures a whole range of forecasts and possibilities in rich detail. By using trends and uncertainties that your business can face you can plan to accommodate your business growth and allocate fund better. Additionally, for the first year of your business, this will help you to ensure that you know about any potential scenarios that your idea can come to.
Forecasting for the first year of business will take time, but as you gain more experience, you wil get better at predicting your business future.