Financial forecasting doesn’t have to be daunting for small business owners. By starting small and focusing on practical, simple methods, entrepreneurs can gain insights into their business and ensure they’re prepared for challenges and growth opportunities.
Our recent Financial Success Series webinar explored Forecasting and Financial Planning for Small Businesses. Our guest, Chris Yeung, founded Convos Method and Lateral Thought Inc. and is a marketing expert and business consultant with over 20 years of experience in multiple industries.
Chris pointed out that 63% of small business owners struggle with financial challenges due to insufficient financial literacy. Introducing a few structured financial planning techniques can address these challenges.
Forecasting: predicting the financial future
Forecasting involves projecting future financial performance, allowing businesses to anticipate challenges and plan accordingly. Key components include:
- Revenue projection: Based on historical data, market trends, and seasonal fluctuations.
- Cost of goods sold (COGS): Estimating product production costs.
- Expense mapping: Accounting for fixed and variable costs, including inflation or cost-of-living adjustments.
For example, a retail store forecasting growth might calculate whether doubling revenue is feasible or requires additional financing for expansion.
Fixed and variable expenses: building the foundation
Chris explained that understanding and categorizing expenses is crucial for effective financial management:
- Fixed expenses are predictable costs that remain constant, such as rent, software subscriptions, and salaries.
- Variable expenses fluctuate based on business activity, including sales commissions, marketing costs, and shipping fees.
“For example, if you as a small business owner notice that your fixed costs like rent are increasing or software subscriptions are becoming more expensive, you must account for them in financial projections,” he said.
Similarly, variable costs, like promotional campaigns, should align with revenue forecasts to maintain profitability.
Rethinking the traditional income statement
Small business owners often view their income statement as a simple subtraction exercise (subtracting costs from revenue to calculate profit). This approach can lead to reactive rather than strategic financial management. Chris suggests considering your income statement as a pie chart that must equal 100%. This perspective shift allows you to:
- Start with your desired net profit and work backward
- Better understand industry benchmarks (e.g., retail businesses typically aim for 2-5% net profit, while professional services target 15-25%)
- Make strategic decisions about resource allocation
- Plan more effectively for growth
Example: A retail business with $200,000 in annual revenue and $50,000 in fixed expenses can use the pie method to visualize allocations. If the business aims for a 10% profit margin, it can identify whether current costs align with that goal or need adjusting.
Cash flow mapping
Chris urged entrepreneurs to think of cash flow as a river, helping them track when money flows in and out of their businesses.
“It’s not just about volume but when and how it flows because even profitable businesses can face financial difficulties if their payment schedules don’t align with their expenses.”
A simple cash flow map can help you:
- Track when money enters and leaves your business
- Identify potential cash shortages before they occur
- Better manage payment terms with suppliers and customers
- Make informed decisions about investments and expenses
A basic Word document or Excel spreadsheet tracking incoming and outgoing cash flows can provide valuable insights into your overall business health at any given time.
Download ATB’s cash flow template here.
Adaptive budgeting: make your numbers work for you
Today's business landscape changes quickly. Adaptive budgeting simply means creating a financial plan that can flex and change with your business needs rather than being set in stone.
For your business, this means watching for signs that things are changing - like when costs start creeping up or sales patterns shift - and having plans ready to respond. This puts you ahead of competitors who might be stuck with rigid plans that can't adapt when market conditions change.
For example, a restaurant owner noticed food costs rising steadily. Instead of just accepting lower profits, they:
- Reviewed their menu pricing
- Talked with suppliers about better deals
- Adjusted portion sizes while keeping value for customers
- Created new dishes with better profit margins
The key is setting up warning signs that tell you when to act. It could be when profits drop by 25%, or costs rise above a certain percentage. With these triggers, you can respond quickly before minor issues become big problems.
Q&A Highlights
What tools are recommended for financial planning and forecasting?
Chris expressed that while more sophisticated software exists, like Quicken or Plan Guru, and they work well for companies with daily bookkeeping needs and detailed reporting, they aren’t necessary for many small businesses.
Spreadsheets might be more appropriate for startups tracking basic income and expenses and entrepreneurs with straightforward needs.
How do I handle revenue projections for a new business?
Business owners can find industry benchmarks from sources like Statistics Canada or industry-specific associations. Use these averages as a starting point to estimate your potential revenues.
Take action to build better financial habits
Like a fitness routine is necessary to improve physical health, consistent attention is the key to success in financial management. Chris recommends adopting this schedule:
- 15 minutes weekly for basic bookkeeping
- 30 minutes monthly for financial review
- Half-day monthly for planning and forecasting
Starting with basic tracking and gradually building more sophisticated systems as your business grows will help ensure long-term success.
Learn more about financial forecasting in the full Financial Forecasting and Planning for Small Businesses webinar.
