Your LivePlan Small Business Plan – Financial Forecast

PART OF PROPOSITION 2: DEVELOP A PLAN
Your entire LivePlan small business plan will culminate with this critical financial forecast section. Or, depending on how you develop it, you may start with your forecast and develop the rest of the plan based on it.
Your LivePlan Small Business Plan - Financial Forecast

Regardless, as you begin to develop yours, you’ll really experience the benefits of using LivePlan and why it is worth the money.

You can use spreadsheets or do it by hand, but the LivePlan software makes this forecasting process much easier.

Additionally, in LivePlan you can compare actual results to what you projected your results would be, which is key to active planning.

In this post I provide an overview of several of the things you need to consider when putting your financial forecasts together and briefly discuss how you can compare your projections to actual results.

More than any section of LivePlan, the financial forecast section causes people to feel overwhelmed because most people aren’t accountants or financial experts.

Fortunately for you, I have been working as a CPA for over a decade and have an MBA in finance and I have created some additional resources to help you through the process of developing your forecasts.

Regardless, as you begin to develop yours, you’ll really experience the benefits of using LivePlan and why it is worth the money.

You can use spreadsheets or do it by hand, but the LivePlan software makes this forecasting process much easier.

Additionally, in LivePlan you can compare actual results to what you projected your results would be, which is key to active planning.

In this post I provide an overview of several of the things you need to consider when putting your financial forecasts together and briefly discuss how you can compare your projections to actual results.

More than any section of LivePlan, the financial forecast section causes people to feel overwhelmed because most people aren’t accountants or financial experts.

Fortunately for you, I have been working as a CPA for over a decade and have an MBA in finance and I have created some additional resources to help you through the process of developing your forecasts.

If this post doesn’t provide enough guidance for you, request the free example plan here.

And for even more guidance, consider signing up for the next LivePlan Online Workshop here.

Overview

Profit and loss statements, balance sheets and cash flow statements can be intimidating if you don’t have experience working with them.

For these reasons, many business owners ignore developing an understanding of their business’s financial health.

But remember, a majority of businesses fail.

This is a major reason why.

Developing a financial forecast of expectations or goals is an important step in monitoring your business’s financial health.

I mention expectations or goals because if you are just starting out in your business you may not know exactly what to expect, which is understandable.

Instead of forecasting your expectations, you may consider reverse engineering your long term goals to create your financial forecasts.

Forecast Based on Expectations or Goals?
  • Forecasting based on expectations makes sense if you have been in business for a while or if you have a set of expectations based on other available historical data.
  • Develop your future forecast based on the past financial results data.
  • Likewise, develop the rest of your LivePlan based on available historical data.
  • Reverse engineering your forecast based on goals makes sense if you are just starting out and don’t have historical data.
  • Identify your long-term goals (see Part 1 of this guide) and reverse engineer what it will take to reach them (ie. If you want to sell your business for $1 million in 10 years and retire, how profitable does the business need to be each year leading up to that point?).
  • Complete the rest of your LivePlan with your reverse engineered financial forecast in mind and assess whether your goals are reasonable.

After reverse engineering your goals and determining what it will take to achieve them, you can analyze whether the financial forecasts you develop based on them are reasonable and achievable.

Following are some basic principles and guidance for forecasting your balance sheet, profit and loss and cash flows in LivePlan.

Profit and Loss

The profit and loss forecast is used to project the income and associated expenses you expect for the next 3 or 5 years, depending on how you set up your LivePlan.

The step by step process in LivePlan is relatively painless.

You start by identifying revenue streams and revenue types.

The next step will be determined based on your revenue type.

In this case, I chose “Revenue Only”, which allows me to input a forecasted amount of revenue for each month.

I could also copy and paste the amounts from an excel or google sheet if I set up a forecast there.

You continue in a similar fashion for your expense categories, naming them and identifying whether they are constant, varying, one-time or a % of revenue.
The result is a profit and loss forecast that looks nice and neat like this one.

You don’t need a whole lot of categories in your forecast.

Every business will vary, but it isn’t necessary for most small businesses to use more than 3-4 revenue categories and 10-12 expense categories.

You can get a detailed example in the free example LivePlan here.

Balance Sheet

A profit and loss forecast is like a movie, in that it has a beginning and an end.

It captures a period of time.

A balance sheet, on the other hand, is like a snapshot.

It presents a business’s assets, liabilities and equity as of a specific date.

In LivePlan, the forecasted balance sheet is mostly created on its own.

You set the starting balances for things like cash, accounts receivable and inventory (if applicable) and the information you input into the profit and loss forecast does the rest of the work.

You can also adjust your forecasted balance sheet by changing certain cash flow assumptions using LivePlan’s cash flow assumptions tool.

For example, if you will sell on credit or have inventory, you can experiment with how managing your A/R or inventory in different ways can impact your forecasted balance sheet and other financial statements.

Once you fill out the starting balances and make any of the other necessary adjustments, you will end up with an easy to read balance sheet forecast like this.

Cash Flow

It may be a hard idea to grasp, but many businesses are forced to go out of business during periods when they are profitable.

The reason this typically happens is that the profitable business does not properly manage their cash flow.

Cash is king!

So, if your small business is making a healthy profit of $100,000/ year but you are withdrawing $120,000 (or even if you are withdrawing $80,000 or $100,000 and not reinvesting in your business), you likely won’t stay in business.

If you are mismanaging your businesses receivables or payables, you likely won’t stay in business.

Or, if you go out and finance the purchase a bunch of high-dollar equipment that you can’t afford, you likely won’t stay in business.

These are the types of transactions that won’t necessarily be reflected on your profit and loss statement but that will drain your cash, which is a necessary asset for any business.

Fortunately, creating your cash flow forecast in LivePlan is also largely done based on your profit and loss data.

The cash flow assumptions and balance sheet additions mentioned in the balance sheet section above will also impact your cash flow forecast.

Once all of this information is adjusted accordingly for your plan, you end up with a cash flow forecast that looks like this.

Scoreboard

Creating a solid forecast is just the beginning when it comes to true active planning.

You have to compare your actual results to what you forecasted and adjust your plan accordingly on a regular basis for the process to be effective.

Fortunately, LivePlan offers the tools to do this easily.

Their Scoreboard offers a bunch of visual dashboards, which allow you to compare your forecasted expectations to your actual results.

And if you are using Quickbooks Online or Xero, the two most popular cloud-based accounting solutions, you can connect them to your LivePlan and do the analysis automatically.

The financial forecast and scoreboard tools in LivePlan are powerful but simple enough to use that most people can put together a plan that looks like it was prepared by a professional.

Next Steps

This brings you to the end of the Complete Guide to Creating a LivePlan.

But I still have more to offer you if you need additional help with creating yours.

If you haven’t already, check out this free example plan.

Then, join me and other like-minded current and aspiring small business owners in the next LivePlan Online Workshop by signing up here.

Thanks for checking out the guide. I hope it brought you some value and I wish you all the best as you start or continue to embark on your entrepreneurial journey.

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