Introduction:

''By failing to prepare, you are preparing to fail'' - Benjamin Franklin

Process Street’s Financial Planning Process is a guide to aid you through the process of producing a financial plan for your small business.

This Financial Planning Process should be used in conjugation with Process Street’s Financial Plan Template. The Financial Plan Template is for the actual production of your financial plan, this Financial Planning Process is to be used to gather the required information and data to produce the financial plan.

You should, therefore, complete this Financial Planning Process before you attempt the Financial Plan Template. 

Process Street’s Financial Planning Process has condensed the process of creating a financial plan into the following tasks:

  • State assumptions using your income statement 
  • State assumptions using your balance sheet 
  • State assumption using your cash flow
  • Project forwards for the income statement
  • Project forwards for the balance sheet 
  • Project forwards for the cash flow statement 
  • Sale forecasts 
  • Financial plan production

1963 marks the time when the first ever financial plan was produced. John Keeble and Richard Felder, founders of the Financial Services Corporation, were the parents of this first financial plan procedure.

Keeble and Felder certainly had the foresight to determine the benefits producing a financial plan could have.

As the majority of small businesses fail in the first five years, it is important you manage your small business to prevent this failure statistically stacked against you.

78% of small businesses fail due to the lack of a well-developed business plan, 77% fail due to incorrect pricing, and 79% fail due to starting out with too little money.

The above are failings which can be avoided with an effective financial plan. 

The aim of Process Street’s Financial Planning Template is to help you produce a financial plan for your small business, to prevent business failure, and to enable you to actively plan ahead.

In this template, you will be presented with specialized questions given as a form field. Different form fields are used, such as subtasks, dropdown menus, short answers, long answers, and weblinks.

You can populate each form field with your own specific data. 

Our stop task feature has been used to enforce task order when needed. 

In addition, our conditional logic task has been used as required to guide you through the correct process path specific for your entered data.

Record checklist details

In this Financial Planning Process, you will be presented with the following form fields, which you are required to populate with your own specific data. More information is provided for each form field via linkage to our help pages:

To begin the Financial Plan Template, enter the required details into the form fields below.

This is a stop task, which means you are unable to move onto the next tasks in this Financial Planning Process until all form fields in this section are complete.

State assumptions using your income statement:

Create the required financial statements

The first step of the financial planning process is to make sure you have created the required financial statements

Check off each task in the subtasks below on the completion of each financial statement.

The final task under this heading 'State assumptions using your income statement' is a stop task, you cannot move forward in this template until your assumptions are clearly defined as such.

  • 1
    Income (Profit and Loss) Statement process
  • 2
    Cash Flow Report
  • 3
    Balance Sheet Statement Preparation Checklist

Your assumptions made for your future forecasts can be added to the financial statements. Highlight what are forecasts and what are your actual current numbers so it is easy to distinguish the two when viewing your financial statements.

A financial model is defined as a tool used to forecast the financial future of a business into the future.

Assume your growth rate

Once you have completed the required financial statements, you can look at the data in these statements to make make your assumptions.

Assumptions are a key part of the financial planning process, to create your financial model, to project what will happen in the future.

Check off each task from the subtasks below on their completion. 

The dropdown form field provided presents a conditional step in this process. You will be directed to the relevant page based on your response selected.

Calculate your actual revenue growth 

  • 1
    Choose two time periods equal in length
  • 2
    Find the current revenue from that one time period
  • 3
    Find the revenue from the previous time period
  • 4
    Find the different in revenue between the two periods
  • 5
    Divide this difference by the revenue from the prior year and multiply by 100 to obtain a percentage value
Revenue Growth = [(Current Revenue - Previous Revenue) / Previous Revenue ] x 100

Calculate your average percentage growth rate 

  • 1
    Calculate the average growth rate
  • 2
    You obtain a value for the average growth rate for that specified time period and can us this to as a forecast growth rate for future time periods being considered.

There are other ways to calculate your average growth rate, the simplest has been considered above. The average annual growth rate does not account for the effects of compounding. Consider using compound annual growth rate to account for compounding effects.

Use your average percentage growth rate to extrapolate growth rates into the future 

  • 1
    Using your current revenue (the closing revenue of your most recent period being considered) and multiply this by (1+ percentage growth rate)

Revenue is defined as the money your business will receive during a specified period and is found on the income statement, also known as sales.

Calculating compound annual growth rate

Compound annual growth rate shows the progressive growth rate over time. Compound annual growth rate takes into account compounding effects.

See the below video which details how compound annual interest is calculated.

Assume your cost of goods sold

The next assumption to make in the financial planning process is the projected cost of goods sold.

The dropdown menu provided represents a conditional step in this process. You will be directed to the relevant stage in this process depending on your response given.

Calculate the cost of goods sold as a percentage 

  • 1
    Calculate your cost of goods sold as a percentage of your total revenue for that period
  • 2
    Do this for each period which actual data you are considering.
Cost of goods sold (% of revenue) = [ Cost of goods sold / revenue ] x 100

The cost of goods sold is defined as the costs directly attributable to the production of the goods sold or services provided.

Calculate the average cost of goods sold

  • 1
    Calculate the average cost of goods sold, as a percentage of revenue, for all periods under consideration.
  • 2
    Use this average as the cost of goods sold as a percentage of revenue for all future periods being considered.

Use the cost of goods sold as a percentage of revenue to calculate the assumed cost of goods sold

  • 1
    You have the average cost of goods sold as a percentage of revenue. Multiple your revenue forecasts by the percentage cost of goods sold. This value is your assumed cost of goods sold for the future period.
  • 2
    Calculate the assumed cost of goods sold for every period under consideration.

Calculating cost of goods sold

Cost of goods sold are the direct costs related to the delivery of a product or service. View the file we have uploaded to assist you through the process of calculating your cost of goods sold.

Your cost of goods sold should be present on your income (profit and loss) statement.

Alternatively, see our detailed template to be used as a guide, guidng you through the process of creating your profit and loss (income) statement, and thus finding the cost of goods sold.

See  Process Street’s Income (Profit and Loss) Statement Process

Assume your general and administrative expenses

Take your general and administrative expense values from your income statement for each period under consideration.

Find your general administration expenses as a percentage of your revenue 

  • 1
    Divide the total of your general administration expenses (SGA) by you revenue and multiply by 100, for each period, to obtain an SGA value as a percentage of revenue.
SGA as a percentage of revenue = [SGA/revenue] x 100

Find the average SGA as a percentage of revenue

  • 1
    Calculate an average SGA as a percentage of revenue value.
  • 2
    Use this average SGA as a percentage of revenue value for future periods being considered.

Use the SGA as a percentage of revenue to calculate the assumed SGA

  • 1
    Multiply your assumed revenue for each period by the average SGA as a percentage of revenue value

General and administrative expenses both expenses associated with selling and more general administrative expenses.

Assume depreciation

Depreciation is usually not revenue driven. Depreciation is usually as a percentage of net Property and Equipment (net PPE). 

Net PPE as a value can be found on your balance sheet for each period under consideration.

See  Process Street’s Balance Sheet Statement Preparation Checklist

You are presented with our dropdown form field which represents a conditional step in this process. You will be directed to the relevant stage in this Financial Planning Process dependent on your response.

Obtain your depreciation and amortization values

  • 1
    From you income statement, obtain the sum value for depreciation and amortization.
  • 2
    Obtain the net PPE value for the end of the period before the period under consideration.
  • 3
    Obtain the net PPE value for the end of the period under consideration.
  • 4
    Sum these two net PPE values and divide by two to obtain an average across the period under consideration.
  • 5
    Divide the sum depreciation and amortization by average net PPE.
  • 6
    Multiple by 100 to obtain a percentage value for depreciation.

The net PPE represents the net Property and Equipment value at the end of the year. Therefore you must take the sum depreciation and amortization values within the period under consideration and divide by the periods before sum depreciation and amortization.

Calculate an average percentage depreciation 

  • 1
    Calculate an average percentage depreciation as a percentage of net PPE using your historical data.
  • 2
    Use this average as an assumed depreciation as a percentage of net PPE value for future periods being considered.

Depreciation is defined as the reduction of tangible assets over time due to particular wear and tear.

Net Property and Equipment is the total value of land, furniture, buildings, machinery, and other physical capital.

Amortization is the process of spreading intangibles asset costs over the assets useful life. Amortization typically is an expensed on a straight-line basis, meaning the same value is deducted each time. The assets expensed using the amortization method typically do not have resale or salvage value. 

Calculate depreciation and amortization

Depreciation and amortization are costs incurred on your fixed intangible and tangible assets through use and time.

View the file we have uploaded to assist you through the process of calculating depreciation and amortization.

Depreciation and amortization should be present on your income (profit and loss) statement.

Alternatively, see our detailed template you can use to guide you through the process of creating your profit and loss (income) statement, and thus finding the cost of goods sold.

See  Process Street’s Income (Profit and Loss) Statement Process

Assume interest expense

Interest expense is driven by balance sheet values, such as long term debt and what your companies interest rate is.

Consult your financial statements 

  • 1
    Note your interest expense for each time period
  • 2
    Note your interest rate for each time period
  • 3
    Note how much debt you have for each time period

Calculate interest expense as a percentage of your total long term debt

  • 1
    Obtain a value for your total long term debt from your balance sheet for the end of the period before the period under consideration.
  • 2
    Obtain a value for your long term debt from your balance sheet for the end of the period under consideration.
  • 3
    Sum the two long term debt values
  • 4
    Divide the sum by two to obtain an average long term debt value across the period of time under consideration.
  • 5
    Divide the interest expense by this average long term debt value for each time period being considered

Calculate an average interest expense as a percentage of your total long term debts

  • 1
    Calculate an average interest expense as a percentage of your total earnings using your historical data.
  • 2
    Use this average interest expense as a percentage of your total long term debts for future time periods being forecast.

The interest expense is a non-operating expense shown on the income statement. The interest expense represents interest payable on borrowings such as bond or loans.

Assume unusual items

Unusual items include discontinued operation, extraordinary items and changes in the accounting principles. Unusual items should be found as an expense on your income (profit and loss) statement.

Calculate unusual items as a percentage of your revenue 

  • 1
    Consult your balance sheet for each time period to find the total expense for unusual items
  • 2
    Divide the total expense for unusual items by the revenue
  • 3
    Multiple by 100 to obtain the value as a percentage.

Assume unusual item expenses 

You can calculate an average for unusual item expenses and use this as the unusual item expense to project into the future, or you can set unusual item expenses to 0, assuming you will incur no unusual costs for the future time periods under consideration.

Assume tax rate

Your tax expenses can be found as an expense on your income (profit and loss) statement. Consult this statement to obtain a value for your tax expenses.

Calculate tax expense as a percentage of your earnings before taxes

  • 1
    Divide you tax expense by your earnings before taxes for each time period
  • 2
    Multiply by 100 to obtain the value as a percentage

Calculate an average tax expense 

  • 1
    Calculate an average tax expense using the historical tax expenses values as a percentage of earnings before taxes
  • 2
    Use this average tax expense as a percentage of earnings before tax for future time periods being considered.

Tax rate is the percentage at which a corporation is taxed.

Communicate your assumptions

You need to make sure you communicate your assumptions made.

This is a stop task, you cannot move forward in this template until your assumptions are clearly defined as such.

These assumptions made are basic assumptions to show you the process. Please note you can add your own methods to this template using our edit template feature for the specific assumptions you will make for your business.

  • 1
    You have clearly defined and outlined you assumptions

State assumptions using your balance sheet:

Assume accounts receivable

Accounts receivable depends on how much you are selling and is therefore dependent on revenue.

You can obtain account receivable values from the balance sheet. You will also require revenue values which you can obtain from the income statement.

The final task under this heading 'State assumptions using your balance sheet' is a stop task, you cannot move forward in this template until your assumptions are clearly defined as such.

Calculate accounts receivable as a percentage of revenue

  • 1
    Calculate an average of your accounts receivable for the time period being considered, that is, the average of the accounts receivable from the previous time period and the accounts receivable from the time period being considered.
  • 2
    Divide the accounts receivable value by the revenue for that time period. Obtain a revenue value from your income statement.
  • 3
    Multiply the value by 100 to obtain a percentage value. The value will be accounts receivable as a percentage of revenue.
  • 4
    Repeat the above steps for each time period being considered.

Calculate the average accounts receivable as a percentage of revenue

  • 1
    Calculate an average across all the time periods considered for accounts receivable as a percentage of revenue.
  • 2
    Use this average as a forecast for accounts receivable as a percentage of revenue, for future time periods being considered.

Accounts receivable is defined as the money owed to a company by its debtors.

Assume inventory

Inventory is presented as a percentage of the cost of goods sold.

Your inventory values can be obtained from your balance sheet. Your cost of goods sold values can be obtained from the income statement.

Calculate inventory as a percentage of cost of goods sold

  • 1
    Divide the inventory value by the cost of goods sold.
  • 2
    Multiple the output value by 100 to obtain a percentage value.
  • 3
    The percentage value is the inventory as a percentage of cost of goods sold.
  • 4
    Repeat the above tasks for each time period being considered.

Calculate the average inventory as a percentage of cost of goods sold

  • 1
    Calculate an average across all the time periods considered for inventory as a percentage of the cost of goods sold.
  • 2
    Use this average as a forecast for inventory as a percentage of the cost of goods sold, for future time periods being considered.

Assume other current assets

Current assets depend on how much you are selling and is therefore dependent on revenue.

You can obtain current assets values from the balance sheet. You will also require revenue values which you can obtain from the income statement.

Calculate current assets as a percentage of revenue

  • 1
    Divide the other current assets value by revenue.
  • 2
    Multiply this value by 100 to obtain a percentage value.
  • 3
    The percentage value represents current assets as a percentage of revenue. Repeat the above steps for each time period being considered.

Calculate the average current assets as a percentage of revenue

  • 1
    Calculate an average across all the time periods considered for current assets as a percentage of revenue.
  • 2
    Use this average as a forecast for current assets as a percentage of revenue, for future time periods being considered.

Assume accounts payable

Accounts payable is dependent on the cost of goods sold.

You can obtain account payable values from the balance sheet. You will also require cost of goods sold values which you can obtain from the income statement.

Calculate accounts payable as a percentage of the cost of goods sold

  • 1
    Divide accounts payable by costs of goods sold.
  • 2
    Multiply this value by 100 to obtain accounts payable as a percentage of costs of goods sold.
  • 3
    Repeat the above steps for each time period being considered.

Calculate the average current assets as a percentage of the cost of goods sold

  • 1
    Calculate an average across all the time periods considered for accounts payable as a percentage of the cost of goods sold.
  • 2
    Use this average as a forecast for accounts payable as a percentage of the cost of goods sold, for future time periods being considered.

Revenue ultimately drives every assumption so far considered.

State assumptions using your cash flow:

Assume your capital expenditure

Capital expenditures drive revenue forward.

The final task under this heading 'State assumptions using your cash flow' is a stop task, you cannot move forward in this template until your assumptions are clearly defined as such.

You must ensure capital expenditure values are negative, as they cost money in the cash flow statement.

  • 1
    Consult your calculated percentage growth rate.
  • 2
    If you are assuming x% growth, you assume your net PPE will grow by an equal % over the time period being considered.
  • 3
    You will consider the capital expenditures as a percentage of net PPE, use the same X% for this.
  • 4
    Consult the % depreciation and amortization. For capital expenditure to grow, the % growth of capital expenditure has to be greater than the % depreciation and amortization.
  • 5
    Adjust your % capital expenditure to fit the patterns in your companies data.

Capital expenditure is defined as the money spent by a business or an organization on acquiring fixed assets.

  • 1
    Adjust your % capital expenditure to fit the patterns in your companies data.

If you have a growth rate, and thus capital growth rate of 5% each year, but depreciation and amortization of 10% each year, your capital growth rate would have to be 15% each year to have an annual growth rate of 5%.

The above is a very basic way of forecasting your capital expenditure. If you are building a more complex model, consider alternative ways to forecast capital expenditure.

Assume your debt insurance

You can locate the net debt insurance/repurchase on the cash flow statement.

See  Process Street’s Cash Flow Report.

Consult the cash flow statement for all past time periods under consideration, and check off the tasks below.

  • 1
    Average the net debt insurance/repurchase
  • 2
    Use this average obtained from your historical data as a forecast for the debt insurance/repurchase for the future time periods under consideration.
  • 3
    Repeat for all future time periods being considered.

Assume you equity insurance

For simplicity, assume your equity insurance remains the same so set your forecast values to zero.

When producing a model, it is better to begin simple and to then build up the complexity with time as you receive more and more information. 

Assume your cash from dividends

For simplicity, assume your dividends remain the same so set your forecast values to zero.

Project forwards for income statement:

Calculate the gross profit

We have already obtained forecasts for revenue and cost of goods sold.

We can now use our assumptions made to make predictions for the remaining financial parameters on the income statement.

Firstly we can use our projected value for revenue and cost of goods sold to obtain gross profit projections for future years. 

  • 1
    Minus the projected cost of goods sold values from the projected revenue values.
  • 2
    Do this for each future time period being considered to obtain forecast gross profit values.
  • 3
    Add forecast gross profit to the income statement.

Forecast SGA costs

Your forecast SGA values were calculated as a percentage of revenue.

You can use your projected revenue values to project SGA costs.

Carry out the below steps to forecast the SGA costs.

  • 1
    Multiply the revenue by the 'forecast SGA as a percentage of revenue' values for each future time period being considered.
  • 2
    Add the forecast SGA values to the income statement.

Forecast depreciation and amortization costs

You have forecast deprecation and amortization costs as a percentage of net PPE. 

You can use your projected net PPE values to forecast depreciation and amortization.

Carry out the below steps to forecast the accounts payable.

  • 1
    Multiple your 'depreciation and amortization costs as a percentage of net PPE' by the most recent net PPE value, which can be found on your balance sheet.
  • 2
    Repeat for every future time period being considered.
  • 3
    Add the forecast values to the income statement.

Add forecast depreciation values to accumulated depreciation 

  • 1
    Add the negative signed forecast for depreciation and amortization cost to the previous time periods accumulative deprecation value from the balance sheet.
  • 2
    Repeat for all future time periods being considered.

Forecast long term debt

You estimated a forecast your debt insurance/repurchase values from the average historical debt insurance/repurchase values.

You can use your debt insurance/repurchase values to forecast long term debt

  • 1
    Take the debt insurance/repurchase from the most recent time period being considered and add forecast debt insurance.
  • 2
    Add the forecast debt insurance values to the balance sheet, projecting forward for each time period being considered.

Forecast net interest expense

To forecast net interest expenses you use the 'depreciation and amortization as a percentage of net PPE' values previously calculated and the long term debt values obtained from the balance sheet.

  • 1
    Multiply the 'depreciation and amortization as a percentage of net PPE' by the long term debt values for each future time period being considered.
  • 2
    Add forecast interest expenses to the income statement.

Forecast operating income

  • 1
    Consult your forecast gross profit values previously calculated.
  • 2
    Sum forecast SGA and Depreciation and Amortization costs.
  • 3
    Minus above costs from the forecast gross profit for each time period.

Operating income is defined as the profit realized from a business's operations.

Forecast unusual items

We previously assumed unusual item expenses would be equal to zero.

  • 1
    Add the unusual item expenses to the income statement as a value of zero.

Forecast earnings before taxes

Using our previously calculated operating income, we can calculate the forecasted earnings before taxes. 

  • 1
    Sum net interest expenses and unusual item costs (which is assumed to be equal to zero).
  • 2
    Minus these expenses from the operating income.
  • 3
    Perform the same calculation for each future time period under consideration.
  • 4
    Add the forecast earnings before taxes to the income statement.

Forecast tax expenses

You can then use your earnings before taxes value, and your previously calculated tax rate, to calculate your tax expenses

  • 1
    Multiply your tax rate as a percentage of tax expenses
  • 2
    Repeat this calculation for each future time period under consideration.
  • 3
    Enter the forecast tax expenses to your income statement

Forecast net income

We have forecast the earnings before taxes and the tax expenses, which means we can now forecast the net income.

  • 1
    Minus forecast tax expense from forecast earnings before taxes to obtain a forecast for net income.
  • 2
    Repeat this calculation for each future time period under consideration.
  • 3
    Add net income forecasts to the income statement.

Project forwards for the balance sheet:

Forecast capital expenditure

You have assumed an X% growth in net PPE, we need to find how much capital expenditure is needed.

  • 1
    Multiply the previous periods net PPE by X%.
  • 2
    Repeat the above for all time periods being considered in your future forecasts.

Use capital expenditure to forecast PPE costs  

  • 1
    Use your latest PPE cost to forecast your PPE cost into the future for the next time period under consideration.
  • 2
    Add your capital expenditure (which should be a negative value) to your latest PPE cost.
  • 3
    Repeat for all future time periods being considered.
  • 4
    Add the forecast net PPE costs to the balance sheet.

PPE cost differs from net PPE cost. PPE cost is the cost of Property and Equipment with depreciation accounted for.

Forecast accounts receivable

Your forecast accounts receivable values were calculated as a percentage of revenue.

You can use your projected revenue values to project accounts receivable.

Carry out the below steps to forecast the accounts receivable.

  • 1
    Multiply the revenue by the 'forecast accounts receivable as a percentage of revenue' values for each future time period being considered.
  • 2
    Add the forecast accounts receivable values to the balance sheet.

Forecast other current assets

Your forecast other current asset values were calculated as a percentage of revenue.

You can use your projected revenue values to project current assets.

Carry out the below steps to forecast the current assets.

  • 1
    Multiply the revenue by the 'current assets as a percentage of revenue' values for each future time period being considered.
  • 2
    Add the forecast current asset values to the balance sheet.

Forecast inventory

Your forecast inventory values were calculated as a percentage of the cost of goods sold.

You can use your projected the cost of goods sold values to project inventory.

Carry out the below steps to forecast the inventory.

  • 1
    Multiply the revenue by the 'inventory as a percentage of revenue' values for each future time period being considered.
  • 2
    Add the forecast inventory values to the balance sheet.

Forecast accounts payable

Your forecast accounts payable values were calculated as a percentage of the cost of goods sold.

You can use your projected the cost of goods sold values to project accounts payable.

Carry out the below steps to forecast the accounts payable.

  • 1
    Multiply the revenue by the 'accounts payable as a percentage of the cost of goods sold' values for each future time period being considered.
  • 2
    Add the accounts payable values to the balance sheet.

Project forwards for the cash flow statement:

Add the required information from the income statement to the cash flow statement

You have now finished a forecast income statement, which is one piece of the puzzle completed.

The next stage in this financial planning process is to complete a forecast of the cash flow statement.

  • 1
    Add your forecast net income values from the income statement to the cash flow statement for each future time period being considered.
  • 2
    Add your forecast depreciation costs from the income statement to the cash flow statement for each future time period being considered.

Forecast receivables

In the cash flow statement, we are looking at the change in receivables.

If the receivable value decreases then it is a source of cash, and if the receivable value increases then it is a use of cash.

You can use your forecasted accounts receivables from the balance sheet to forecast the receivables in the cash flow statement.

You need to consider the receivable values in the balance sheet from the current time period being considered and the former time period.

  • 1
    Minus the most recent receivable value from the former receivable value.
  • 2
    Repeat for each future time period being considered.
  • 3
    Add the forecast receivables to the cash flow statement.

Despite the fact receivables are an asset to the business, you do not want a high receivable value as this indicates there is money owed to your business. 

Forecast Inventory

If the inventory goes up then this is a use of cash

You can use your forecasted inventory values from the balance sheet to forecast the inventory in the cash flow statement.

You need to consider the inventory values in the balance sheet from the current time period being considered and the former time period.

  • 1
    Minus the most recent inventory value from the former inventory value.
  • 2
    Repeat for each future time period being considered.
  • 3
    Add the forecast receivables to the cash flow statement.

Forecast account payable

You can use your forecasted account payable values from the balance sheet to forecast the inventory in the cash flow statement.

You need to consider the payable values in the balance sheet from the current time period being considered and the former time period.

  • 1
    Minus the most recent account payable value from the former accounts payable value.
  • 2
    Repeat for each future time period being considered.
  • 3
    Add the forecast receivables to the cash flow statement.

Forecast other items

Other items such as 'other cash flow operations' or 'other financing activity' are assumed to remain at zero for simplicity.

  • 1
    Forecast 'other items' as zero

Forecast cash flow from operations

Sum the following forecasts for each time period under consideration to forecast the cash from operations.

  • 1
    Net income
  • 2
    Depreciation
  • 3
    Receivables
  • 4
    Inventory
  • 5
    Accounts payables
  • 6
    Other

Forecast cash from investing

To forecast the cash from investing, you need to account for the previously forecasted capital expenditure.

  • 1
    Sum the capital expenditure with other items

Forecast cash from financing

To find the forecast cash from financing value, sum the following forecast values:

  • 1
    Net debt insurance/repurchases
  • 2
    Net Equity insurance/repurchase
  • 3
    Dividends
  • 4
    Other financing activity

Forecast pre-forward transactions change in cash

To calculate the forecasted pre-forward transactions change in cash, calculate the sum of the following:

  • 1
    Cash flow from operations
  • 2
    Cash flow from investing
  • 3
    Cash flow from financing

Repeat the above calculation for each time period being considered. 

Forward transactions adjustment

For simplicity, assume this is zero.

A forward transaction is a purchase or a sale of a good or service at a certain price for the delivery on a future date.

Forecast net change in cash

Because we assumed the forward transaction adjustments were equal to zero, the net change in cash is equal to the pre-forward transactions change in cash already forecasted.

Project forwards for the balance sheet continue:

Forecast other current liabilities

No change is assumed for simplicity. 

Use the actual 'other current liability' value from the most recent time period as a forecast for all future time periods under consideration.

Forecast total current liabilities

Use your already forecasted accounts payables values and the forecasted other liabilities values to calculate the forecasted total current liabilities.

  • 1
    Sum the forecast accounts payable with the forecasted other liabilities.
  • 2
    Repeat for each time period under consideration.

Forecast other long term liabilities

Assume other long term liabilities stay the same for simplicity.

Use the actual 'long term liabilities' value from the most recent time period as a forecast for all future time periods under consideration.

Forecast total liabilities

Use your already forecasted long term debt values and the forecasted other long-term liabilities values to calculate the forecasted total current liabilities.

  • 1
    Sum the forecast long term debt with the forecast other long-term liabilities and the forecast total current liabilities.
  • 2
    Repeat for each time period under consideration.

Forecast other long term assets

Assume other long term assets stay the same for simplicity.

Use the actual 'other long terms assets' value from the most recent time period as a forecast for all future time periods under consideration.

Forecast cash

To forecast the cash flow for all future time periods under consideration in the balance sheet, you need to use the net change in cash obtained from the cash flow statement and the most recent actual cash value.

  • 1
    Sum the most recent actual cash value with the net change in cash

Forecast total current assets

To find the forecast for the total current assets, sum the following forecast values:

  • 1
    Cash
  • 2
    Receivables
  • 3
    Inventory
  • 4
    Other current assets

Repeat for each future time period under consideration.

Forecast total assets

To find the forecast for the total assets, sum the following forecast values:

  • 1
    Other long term assets
  • 2
    Net PPE
  • 3
    Total current assets

Repeat for each future time period under consideration.

Forecast stock per capita

This value is highly unlikely to change.

Use the actual 'stock per capita' value from the most recent time period as a forecast for all future time periods under consideration.

Forecast retained earnings

To calculate the retained earnings, use the net income which can be obtained from the income statement.

  • 1
    Use last years retained earnings plus the net income.
  • 2
    Repeat for each future time period under consideration.

Forecast minority interest

No change is assumed for simplicity. 

Use the actual 'minority interest' value from the most recent time period as a forecast for all future time periods under consideration.

Forecast total equity

To calculate a forecast for total equity, find the sum of the below values.

  • 1
    Stock per capita
  • 2
    Retained earnings
  • 3
    Minority interest

Repeat for each future time period under consideration.

Forecast total liability and equity

To calculate a forecast for total liability and equity, find the sum of the below values.

  • 1
    Total current liabilities
  • 2
    Total liabilities
  • 3
    Total equity

Repeat for each future time period under consideration.

Check to see if your forecast balance sheet is balanced

The sum of your companies assets, liabilities and equity should always balance to zero. If your balance sheet is not balanced, then you need to check your data. 

Make sure all calculations you have made are correct.

  • 1
    Check to see if your forecast balance sheet is balance

Sale forecasts:

Ask yourself key questions

Your sale forecasts should be consistent with the sales used in your profit and loss statement. 70% of businesses fail because they are too optimistic about the sales achievable.

You have created forecasts of key parameters in your financial statements which can act as a first draft model to refine as you obtain more and more data. This next stage of the financial planning process is to refine your model to make it more accurate in predicting your financial future.

By consulting your historical data, you now have estimates for the following performance measures:

1) Net income 

2) Revenue

These are key indicators defining the success of your business and are impacted by sales of your service or product.

You can now take the time to carefully consider your sale forecasts to refine these indicators for the better prediction of your businesses future financial situation.

Before building an in-depth sales forecast, ask yourself the below key questions.

  • 1
    What type of market am I working with?
  • 2
    Is there precedence to what I am doing?
  • 3
    Is the data I've extrapolated accurate?
  • 4
    Have I tested different models?
  • 5
    Which model best fits my sales process?

The next steps of the financial plan template will explore these questions in more detail.

Sale forecasts are projections or forecasts of what you think you will sell in a given period. A year to three years is the common time period considered when undertaking sale forecasts.

Determine your market segment

You will need to define the specific market segment your product or service delivers to. This step of the sales forecast process is to guide you through to process of defining your market segment.

Define your broad playing field

Without properly defining the broad playing field in which you operate, you risk undervaluing your actual market share.

Characteristics 

The next stage of defining your market segment is to consider the below particular characteristics.

What is the market you are operational in like? Is the market growing with a steady increase, or is the market relatively new, openly volatile an full of unpredictability? 

Are there certain times of the year where you will sell more than other times? For example, seasonal changes in weather, holidays. 

How do your prices compare to your competitors? Are you undercutting your competitor prices and the average market price, or are you substantially higher? How your prices compare to the market average will impact the volume and the value of your product or service.

Are there upcoming changes that could impact your business? Technological advances, changes in government legislation and environmental changes are examples of factors to consider. For example, the design of electric cars to mitigate against air pollution will impact the automotive industry.

See Process Street's Environmental Accounting Internal Audit 

Perform quantitative sales forecasting

When forecasting the values for your financial statements, you need to play around with your model to obtain different possible output scenarios.

You have produced a simple basic starting model that can now be refined with more in-depth assumptions.

The three most popular sale forecast techniques to be considered have been outlined below

Exponential Smoothing 

Exponential smoothing is a statistical technique, that can detect significant changes in your historical data, and ignore fluctuations that are irrelevant to your purpose. The technique gives older data progressively less weight and newer data progressively more weight.

You can use the exponential smoothing method to forecast the key parameters in your financial statements. You can compare the outputs from this model to your previous assumed parameters to refine your values

Trend analysis 

Trend analysis is a technique that attempts to predict the future based on the recently observed data. It is assumed that a similar trend from past data will continue into the future. For example, are theretrending fluctuations in your data you have not yet considered?

You can use the trend analysis method to forecast the key parameters in your financial statements. You can compare the outputs from this model to your previous assumed parameters to refine your values

Simple moving average 

This is an easy to understand technique used to extrapolate data from a dynamic set period of time. This method has been used in the previous steps to forecast some of your financial statement parameters. Some more information about this technique is provided in the video below. 

Perform qualitative sales forecasting

Qualitative sale forecasts are subjective forecasts that rely more on the opinion of market experts or surveys. 

These are the best ways to conduct your sales forecasts, especially if you have little historical data. 

Delphi Method

This involved employing an unbiased team of market experts to conduct a sale forecast for the time period under consideration. 

Market Survey 

You can ask corporation partners and customers to obtain their opinion in regards to your product or service and their expectations. This will give you a rough idea of what to expect in terms of the market growth in your industry.

Ask your sales team

Asking your sales team as a method works best if you have a large ticket value for a small number of customers. You can ask your sales team, who are in regular contact with your customers. Your sales team can give you the information in regards to the customer accounts, how frequently they purchase and their budget size.

Consider the below questions to ask your sales team:

  • 1
    Walk me through our sales process.
  • 2
    Who is our demographic?
  • 3
    What makes a good lead, 'good'?
  • 4
    Where do the majority of our leads come from?
  • 5
    How much do customers generally purchase?
  • 6
    What is the average budget of our customers?
  • 7
    What is the average frequency a given customer purchases our product or service?

Financial plan production:

Get ready to produce your financial plan

With the information obtained from this financial planning process, you have a good overview of key trends in your business and estimate future trends based on your assumptions made. 

This information is important for the production of a financial plan. The next stage in this process is to produce this financial plan.

See Process Street's Financial Plan Template.

Using Process Street's Financial Plan Template, you will test and review your forecasts and carry out key financial measures to eventually identify current and future warning signs and areas for improvements. Identification of such is key for you to implement required action to ensure business success.

Sources:

Sign up for a FREE account and
search thousands of checklists in our library.

Sign up for a FREE account and search thousands of checklists in our library.