Financial forecasting: how to make your profit projections as accurate as possible

Finance and legal

20 June 2016

There’s nothing more disappointing than seeing a good business idea ruined by bad maths. We’re not going to lie – projections aren’t easy. But if you’re starting a business, it’s important to be as accurate as possible with your financial planning, especially if you’re looking for investment.

We’ve all seen entrepreneurs on Dragon’s Den picked apart because of their unrealistic financial forecasts – so here’s what you can learn from their mistakes.

Curb your enthusiasm

Your idea is amazing, everyone’s going to love it and you’ll positively burst if you don’t launch it next week. If this sounds familiar, calm down. Take a few breaths and remember: you have all the time in the world. Financial planning is a huge part of launching a business and the more thorough you are, the more likely your project will meet (and exceed) expectations. Don’t rush your financial forecast – put as much time and effort into it as possible.

Have realistic goals

Imaginations can run rampant when market figures are involved. Thinking you could easily take a small slice of your rival’s business and become an overnight success is a major misconception. Remember that most businesses don’t make profit in their first year. Even if your product is truly revolutionary, it’s difficult to win clients without any previous customers vouching for you. Keep your expectations modest and realistic.

Plan for the worst-case scenario

Your business could be an overnight success and make millions in a matter of days, but don’t base your forecast on it. Murphy’s Law is a good mantra – everything that can go wrong, will go wrong. Work this into your financial planning and forecasting by doubling the amount of money you expect to spend and halving what you expect to earn. This gives you plenty of wiggle room.

Think about your margins

Calculate ratios such as gross (direct costs to total revenue), operating profit margin (operating costs to total revenue) and headcount per client (number of employees to number of customers). The last one isn’t as important when you first start out, but as your business grows you may need to take on staff to handle demand. You’ll need to pay them, adding another expense.

Streamline expenses

To make a profit in your first year, you’ll need to trim the fat. Forget salaries, office space, company cars and lavish meals for clients. Keep any business expenses to an absolute minimum – if you can do your job with an old laptop at your kitchen table, do it. You can buy a new computer once your company becomes profitable. Likewise, if you need to invest in a van, buy a second-hand one. Every penny counts towards your first-year profits – the more you save, the better they’ll be.

Don’t cut corners

Cutting spending doesn’t mean cutting corners. Some expenses are essential to help your business run smoothly. For example, marketing will be a huge expense in your first year as you’ll need to make people aware of your business. Public liability insurance and professional indemnity insurance are examples of small expenses that will protect your fledgling business as it gets off the ground.

Get protected

With AXA, you can insure your business quickly and easily. Find out more and get protected with business insurance from AXA.