Can you just build us a forecast? This is one of the most common questions our outsourced accounting firm gets asked by small business owners when considering advisory support. While yes, we can send you a beautiful and functional template, it does not guarantee that it will be accurate, up-to-date, or functional. You see, many factors go into a successful three-year financial forecast, and a pretty template is only step one. To answer this burning question for the masses, allow us to share some important and effective areas to spend time on when seeking forecasting success.
It takes specific data inputs, in addition to active participation on your end to maximize your three-year forecast.
Ensuring your data is supportive of the narrative of your business plan is key, in addition to active engagement with the forecast, and your accounting team. Outside of the standard sales and expense projections, are some aspects to growing your business that you may not have considered before, like the type of employee (1099 versus W2), research and development expenses associated with new product development, and the timing of when you will need to purchase inventory in order to have it ready for a forecasted period, and more. To ease the confusion, we’ve outlined the details you need to consider below. Once you have all of these items gathered, be prepared to be engaged and collaborate with your accounting team to ensure you are getting the most out of your investment into the forecast.
It’s easy to dream up a world where sales are booming and your business is in year three with massive revenue flowing. The hard, and most important part is assessing where your efforts will be best spent to maximize an increase in sales. This may be expanding upon current sales channels, or branching out into new markets.
You will need to grasp new sales channels to branch out to and how these may earn new customers. Quick pro-tip on new sales channels: make sure to have an understanding of the changes in margins across all channels. Making aggressive moves into an area that may eat up cash in added fees or advertising may not be a great move on the road to profitability.
On the flip side, maybe you have a solid foundation for your business sales channels and will need to bolster existing areas to earn more growth. For example, you may have a solid wholesale relationship but may see additional wholesale accounts or seek to expand your dealer network.
If so, do we have the cash on hand (or coming from investors) to sustain the lower margins?
For wholesale partnerships and distributors, especially in the CPG world, deductions can become a big cash-suck. You will need to be prepared for the potential cash flow changes if this is a factor. You will also need to be prepared to ask for this as part of your investment. You should also be prepared to invest money in a team that can help you manage deductions and mitigate surprises.
We have a deductions specialist on our team that can assist in helping you decipher the often muddy world of deductions.
As your business grows, there will inevitably need to be growth on the employee side to sustain multiple facets of the business. Depending on which type of hires you make, there are additional tax and cash considerations that may or may not benefit the long-term goal.
Accounting for additional expenses related to a W-2 employee may make the difference between focusing on a few key hires or staying relatively conservative with additional employees. Your goal will help narrow down what makes the most sense for achieving success in three years.
Inventory-based businesses bring along some of the most complicated cash management challenges. Planning for big purchases and the timing between the inventory being made and sold means a lot of planning ahead. This is why a forecast is especially important for CPG businesses.
Answering these questions will help you decide how to best move forward in each area:
Change will bring changes to your business’s fixed costs. To get to your goal, you will need to consider the adjustments that may need to be made. Fixed costs include things that don’t necessarily increase or decrease based on producing more sales. Think along the lines of rent, utilities, insurance, salaries, and certain types of taxes like business licenses.
To support a successful increase in sales, will most likely apply an increased investment in marketing and advertising efforts. You will need to have a realistic grasp on what percentage of your marketing expense will translate to support the increase in sales.
Keep in mind that this could be a host of campaigns, focused on increasing sales into each channel, product, or an overall increase in brand awareness.
Especially in an inventory-based business, growth may come at the expense of additional products brought to the market. With these will likely come research and development to ensure they are a success.
To match the timeline and revenue of the forecast, you will need to consider the time and expense required to bring any new product to the market.
Even an enhancement to an existing product will take R&D time and cost. Note any trends or quick turnarounds within that time frame, too. It may require an increase in time and expense to bring a product to market while capitalizing on market trends in a timely fashion.
The basis of a functional three-year forecast is more than just entering data in a template. It is the culmination of thinking ahead on multiple fronts; from new sales channels to hiring strategies, to new product development timelines. All of this data will need to be aligned with your ultimate goals, whether that is to stay on track for a specific change in revenue, or gain investment and show how the money will be spent, and to what outcome. It takes a professional advisory team paired with ongoing engagement from a business to accomplish the objectives set in the forecast. Only when the data and participation match the forecast’s goal, is your time and money well spent.
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