Many small business owners do not know what they do not know when starting out.
One aspect of starting a small business that can lead to early success for entrepreneurs is accurate forecasting of both revenue and expenses.
Especially in the first year, forecasting how much cash you will need can make a big difference. Learning how to forecast first-year business expenses and establishing a revenue stream helps to take some of the guesswork out of the heady early days.
Here are a few tips to help determine accurate debits and credits on your balance sheets.
1. Focus on Expenses First
You need to have a clear sense as to what your fixed and operating costs are so you know how much revenue you will need to get into the black. These costs typically include:
- Fixed Costs. These are costs that are usually constant on a month-to-month basis. While there can be some variance, in general, they can be predicted for a lengthy period. These include:
- Rent or lease fees
- Utility costs (heating, cooling, electricity, water, and gas)
- Communications costs (phone, wireless access, internet connectivity, cable television)
- Bookkeeping or accounting fees (including additional costs for taxes)
- Legal fees
- Insurance (including business liability, professional services, worker’s compensation and any insurance coverage offered to employees)
- Technology (such as software licenses)
- Advertising and marketing
- Salaries and wages
- Ongoing franchise fees, if applicable
- Variable Costs
- Materials and supplies
- Cost of goods sold
- Customer service
- Credit card processing fees
- One-Time Costs
- Franchise fees, if applicable
- Equipment and furniture
- Security deposits
2. Create Variable Revenue Projections
Once you have determined the pricing for your products or service, you can begin to project revenue. It can be prudent to do both a conservative projection and an aggressive projection. Over time, once you have some actual sales data, you can adjust your revenue projections to reflect past precedent.
How you project revenue will be based on certain variables. How many units or services you can sell in a given period can depend on the following factors:
- How much advertising you have on which channels.
- Whether your sales staff is fully hired.
- Variable pricing, such as having basic and premium charges.
One thing to factor when making your projections is that some revenue factors create additional expenses, such as additional shipping, packaging, and credit card costs.
3. Know the Margins
There are ratios that can be calculated to keep better track of revenues and expenses. Here are a couple:
- Gross Margin. This ratio compares total direct costs to total revenue during a month, quarter or year.
- Operating Profit Margin. This is the ratio of total operating costs (direct costs and overhead (but not financing) to total revenue. As revenue increases, the overhead costs will represent a smaller portion of overall costs. Your operating profit margin will improve.
Benetrends has been helping entrepreneurs navigate the complexities of small business funding for more than three decades. For more information about how Benetrends can help with your small business needs, leverage our handy calculator to calculate how much you need to start your business.