Part 1

Forecast of revenue, expenses and operating capital requirements

It’s no secret that you will need capital — money — to launch your new business. In fact, many entrepreneurs struggle to get their businesses off the ground because they’re unable to secure adequate funding. The good news is that billions of dollars are available to fund small business ventures like yours. Before you begin the process of securing capital, you will need a written business plan that defines your business, management team, market, products and services, competitive advantage and the financial forecast and analysis that determines the proper amount and type of financing.

Commercial lenders will almost always ask for a forecast of revenue, expenses and operating capital requirements.

List, on a monthly basis, projected sales revenue based on your market research and marketing plan. Be sure to include the assumptions on which your sales projection is based and build your forecast out at least 36 months from your launch date. For businesses that have longer development cycles, you may need to forecast up to 60 or even 72 months. Forecasts beyond 72 months, however, generally are impractical because of changing market conditions. To determine monthly cash inflows, your revenue forecast should be broken down by cash sales (including credit card sales) and credit sales (sales made on trade terms) because days of accounts receivable outstanding will be a key input to determine operating capital needed. Now compile a list of monthly expenses, including product costs, salaries, rent, utilities, insurance, software subscriptions, travel, interest on loans, credit card processing fees and any other significant expenses (except depreciation). To forecast your cash outflows, add to your monthly expenses any non-financed fixed asset purchases, product purchases that remain in inventory and principal payments on loans. The difference between your monthly cash inflows and your monthly cash outflows will determine how much operating capital you will need until you reach a positive cash flow position or break-even point. This process is known as cash flow forecasting.