Here’s the point where you should do a sales forecast, but not to impress an investor. You simply need to know if it is possible for your business to achieve its goals with the sales you realistically could make.
If your forecasting reveals that you need to sell 10,000 items to hit your profit goal – and it’s impossible for you to handle that many items acting on your own – then you know you have a problem on the way.
Forecasting is a great way to take a reality check. You should also look at cash flow. How much money will you need to take out of the business to live on in the next 6 to 12 months. Does that match up to when you are likely to be paid by customers and have to pay suppliers’ bills?
If you’ve never produced a cash flow forecast before, our guide on Why you need a cash flow forecast and how to produce one for your small business explains it all.
In general you can make three assumptions about money:
- Everything will cost more than you think
- You will sell less than you think
- Customers will pay more slowly than you think
If you take these factors into account (always anticipate the worst) and you are still confident you can make a good profit, then you probably have a viable business.
Having a good accounting system will really help you to manage your finances. With so many options to choose from, make sure you read ByteStart’s Guide to choosing the best online accounting software for your business to help you find the right one for you.
It’s vital to keep your business healthy. And that means seeing a route to grow it. You might not be able to answer exactly how you will do this at first, but if you have a vague idea of how you will grow, then you should write it down.
For example, you might see that a series of joint ventures will allow you to scale up quickly. It may not be clear who those joint ventures will be with yet, but if you know they must happen at some point you will find yourself constantly being on the lookout for potential partners.
Once you have answered these four questions, that’s it – you have an effective business plan that you can actually use to create a viable business.
Make sure you write the answers down somewhere. In your head it’s a dream… on a computer screen it’s a real plan you can keep coming back to.
Make sure you schedule an hour in your diary at least every three months to review your plan. Things change quickly in the first few years of your business and you need to change your plan to suit.