Steps to Growth Capital Self-Study GuideStep 1

1.4 Forecast Your Financial Needs

Your investment proposal must include forecasts that show how your company will operate as it grows. Once you know your current financial situation and have defined your vision (by setting your growth objectives and producing a business plan), then you can start projecting your financial needs.

Why Forecast?

Your financial statements indicate past performance. This information will certainly interest potential investors. What's more important, they'll look to your company's projected financial statements to see whether your business is a good investment: one that will generate a return on their investment.

Two types of projected financial statements are usually prepared to give investors a clear understanding of where your business is heading:

• annual projections for a period ranging from one to five years; and
• a detailed monthly cash budget for the first year.

Annual Projections

Detailed annual projections are predictions about your future cash flow. These predictions or forecasts are based on your financial statements. Here are some projections that New Tech used to forecast its financial situation. The company will be asking investors to help finance the building of a new facility - that's an extra $1.1 million in fixed assets.

This example (forecasts from New Tech's income statements) shows how revenue and expenses are expected to change over the next two years.

This example (forecasts from New Tech's balance sheets) shows the need for funds for additional fixed assets and indicates the expected growth in accounts receivable.

See a detailed example of a set of financial statements including forecasts: New Tech's Financial Statements.

Monthly Cash Budget

The monthly cash budget identifies your cash balances for each month during the forthcoming operating year. This information will help you decide how much money to keep in the bank for month-to-month expenses and help in negotiating a line of credit.

For an example of what a monthly cash budget looks like, see New Tech's detailed cash budget projection.

Making Reliable Financial Forecasts

Trust is something that is earned, not given. You have to build a relationship with investors, even before they invest in your business. You do this, partly, by presenting reasonable and credible forecasts. Show that you understand and are comfortable with your forecasts.

Financial forecasting must be based on your company's vision, moderated by the experience and insight of your management team. And your forecasts must be supported by reasonable assumptions.

Here is an overview of the process:

• Review your past operating results.
  
• Analyse expected future market conditions for your various products or services.
  
• Estimate your future sales volume, price and revenue for each product.
  
• Estimate future costs based on forecast sales volume and expected cost relationships.
  
• Deduct income taxes.
  
• Make accounting adjustments, such as depreciation and amortization.
  
• Deduct what you expect you will spend on fixed assets, working capital, and financing.
  
• Include the proposed investments in the forecast.

If you have some experience with accounting and are interested in a more detailed description of the forecasting process, select: How to Make Reliable Financial Forecasts.

Make Your Assumptions Reasonable and Explicit

The assumptions used to prepare your projected financial statements must be stated clearly, reasonably and consistently. Be sure that:

• the working capital needs, production capacity and personnel requirements you predict are consistent with the level of growth you forecast;
  
• the growth rate you forecast is reasonable for the market you are in; and
• you can really achieve any gains in market share that you forecast.

For a closer look at how financial assumptions enter into forecasting, see New Tech's Key Assumptions.

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