Financial Forecasting 101

In business terms, a financial forecast is a projection of the potential revenue, expenses and cash on hand that, your business could expect over a period of time.

As a new business owner, this type of data is not only a key component of your business plan, but it can also help you do the following:

Financial forecasts allow you to make informed decisions regarding your business and financial needs. For example, forecasting may help you determine how much inventory you’ll need to get your business off the ground.

Financial forecasts capture different hypothetical scenarios to help you plan ahead and see the impacts of each one. For example, how a volatile economy may affect your business and how you can be prepared to weather that scenario.

A thorough financial forecast typically includes 3 financial statements: 

1. Income statement 

To reveal how well your company is operating and whether it’s profitable, use the income statement template (XLS, 25 KB) . It records 4 key components — revenue, expenses, gains and losses — over a specific period of time. The resulting calculation is your net income. 

2. Balance sheet 

To check your business’ financial health for a specific period of time, use this balance sheet template (XLS, 35 KB) . It shows what the company owns versus what it owes, as well as the amount invested by its owners. The 3 key components are assets, liabilities and shareholders’ equity.

3. Cash flow statement 

To summarize the amount of cash entering and leaving your company, use the cash flow statement template (XLS, 25 KB) . It measures how well your company manages its cash position, meaning how well it generates cash to pay its debt obligations and fund its operating expenses.

Step 1 – do your homework to develop realistic projections 

As a new business, it’s a bit of a guessing game since you don’t have any historical data to use as a benchmark. There are a few ways you can obtain similar businesses sales and industry averages data:

Capture market research 

Do your research and learn more about your industry and target audience including spending habits, household income as some examples. You can access statistical data provided by the Government of Canada through the census program Opens in a new window..

Leverage a support network 

There are many resources and services that can provide guidance and tools to help you build projections offered through organizations such as the Canadian Chamber of Commerce Opens in a new window..

Ask an expert 

An accountant who works closely with the industry, a mentor or a business owner running a similar business can provide you with their expert opinion based on their experience.

Step 2 – create your sales and spending projections 

The building blocks of financial statements are your company’s sales and spending projections.

Sales projections 

Provide a forecast of your revenue by capturing how much in sales your company expects to generate monthly and annually.  

Spending projections 

List the key expenses you’ll need to get your business off the ground and to maintain ongoing operations. This includes both fixed and variable expenses including rent, payroll, utilities, taxes, professional fees (legal, accounting, insurance), marketing, supplies and other operational costs.

Step 3 – develop your financial statement forecasts 

Use the data you collected in step 1 and the sales and spending projections from step 2 to build your financial statement forecasts.

To help you create an income statement and balance sheet, use their templates or leverage a variety of tools that can be found online.

A cash flow statement can then be derived from items within your balance sheet and income statement. The cash flow statement is one of the most important elements of your business plan and can also be one of the more difficult documents to prepare, so consider engaging the help of a professional accountant. If you’re a CIBC client, you can create your cash flow projections if you sign up for Quickbooks Online .

If your projections reveal that you’re running short on cash or awaiting payments from customers, you may want to consider making changes to your business model or seek financing. Are there areas where you can cut down on expenses? Or should you consider raising your prices to cover the true costs of the expenses? 

On the flip side, a significant cash surplus may also flag an opportunity for improvement. Could this additional cash flow be re-invested into the business to accelerate its growth?  

To learn some best practices on cash flow management, see our article on Creating Constructive Cash Reserves for your business.

Best practice is to capture your financial projections at least for your first 2 years. Update your forecasts at least monthly, and track actual events against the plan to see how close your projections are. Take any lessons learned, and incorporate them going forward. Your forecasts should be a living plan; providing an up-to-date picture of your business.   

Once you have a full year of business under your belt, you can change your projections to quarterly or annually going forward.