Forecasting financials for the next year can be a daunting task. Sometimes it feels like a guessing game or worse, pointless. But after following these steps of the best way to forecast revenue and expenses, you’ll have a roadmap to guide you to success the way you want it.
We have a free forecast template spreadsheet for you to use. The template is from my Wealth Building Framework, where I did a 4-day training to help small business owners build wealth. Forecasting revenue is one step of that framework.
That’s the exact forecast template tool we use in our business to forecast financials, and the steps are pretty simple. You’re going to look at your revenue and then you’re going to look at your expenses. That’s it! It doesn’t need to be more complicated than that.
Financial Forecasting Template
Notice the forecast template is formatted like a profit and loss statement.
On the left-hand column, list all your different income items first. Immediately underneath that is space for any costs of goods sold. The largest section on the left side is for expenses. We filled it with common expense categories for you and left space to list out more if needed. After that is a section for if you’ll have any loan payments. Then any assets you plan to purchase, followed by owner distributions. Each column represents each month.
So let me walk you through what I would do.
Best Way to Forecast Revenue
You are going to start with forecasting your revenue by month.
Very first thing is to list out all of the services and products that you currently sell or want to sell in the upcoming year in the template. I’ll show you an example in just a second.
Here are some questions to consider when thinking through what your revenue is going to be like for next year?
- Are you offering any new services?
- If you are, when will those be ready?
- Are you going to rearrange any type of existing services?
- Are you stopping them all together?
- How many units of each service do you think you’re going to need to sell?
- And what’s your price on those?
Let’s look at a simplified example.
With their services, the way they were set up, they’re pretty consistent at about one hundred thousand dollars a month in revenue. They decided they’re going to add a self-directed course, but it won’t be ready until August.
So they forecasted out the revenue for each month. You can see based on when your new service is going to start, you would put that in the appropriate month.
Best Way to Forecast Expenses
Next, you’re going to look at expenses. First, look at expenses directly related to revenue, just those expenses. If I was doing one hundred thousand dollars a month in services, and my current payroll is $25,000 a month, and it’s handling the existing service level, that’s probably going to stay the same. I would fill out that line before any other line.
Now looking at new revenue, think through what expenses are going to be leading up to that new revenue. With a digital course as in the example, there’s probably some contractor payments that maybe you’ll have before you actually ramp up.
It’s important to forecast these out in the months they will happen before you have the revenue so that you can see where your cash balance is. Because as you notice at the bottom of the template, you would put in your beginning cash balance and then based on how you forecast, you can determine if there are any months where, based on what you’re wanting to do, you have negative cash flow. Which means you need to readjust your forecast. That’s why forecasting is super important because we do it all on paper first.
After you’ve forecast expenses that are directly related to your revenue, it’s time to go back and look at your historic expenses. What I am not going to do is take an average of my historical expenses and put them in my forecast. That is not forecasting. That’s not even budgeting. That’s just not good. Don’t do it.
Look at each and every expense and take the time to determine if the expense helps you keep customers or helps you get new customers. That’s an idea I got from a book written by Keith Cunningham.
We have a list of 9 Questions that we often use to analyze expenses to determine if it is productive or not productive. But Keith Cunningham’s perspective of get customers, keep customers, I really like for simplicity purposes. So do that with your historical expenses and plug in the numbers.
That’s the best way to forecast revenue and expenses for the upcoming year.
Forecasting Financials is Worth Your Time
Proper forecasting does take time. And it’s going to be some of the most worthwhile time you put into running your business, because then you’ll have a roadmap of what you want to accomplish.
And don’t stop forecasting and making changes to your forecast until you’re happy with the result. Plan each month so you’re happy with the net income it’s going to offer, you’re happy with your take home pay, you’re happy with the growth.
Do all that on paper first, and now you have this roadmap so that each month you can compare how you did to what you wanted to do.
Take your finances to the next level and truly create wealth with our Wealth Building Framework. I walk you through an entire cash flow analysis, 12-month financial forecast, top KPIs, and more. Click the button below for a sneak peek video.
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