Financial Forecasting for Your Online Business

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Financial forecasting is a matter of making educated guesses as to how much money you’ll take in and how much you’ll need to spend — and then using these estimates to calculate whether your business will be profitable. Financial projections simply predict the amount of sales revenue you can expect from your online business, the expenses you will incur, including the cost of the products you are selling, and the profit you can anticipate. If your online business is not already off the ground, your projections will help determine how much you’ll need to invest or borrow to get it started. Forecasting is always easier if you’ve been in business for a little while, because you have months (or years) of actual revenue and expenses upon which to base your forecasts. If you do not have any operating history, financial software such QuickBooks can help you get started. Business people use different types of financial projection analysis and tools, all meant to give them information and help in making decisions about the future. Below are common examples.

Break-Even Analysis.

Using a break-even analysis, you calculate how much revenue you’ll need each week or month to break even — that is, not lose money. To calculate your break-even number, you need to know two pieces of information: your "overhead" and your "profit percentage.” Overhead includes expenses that don’t vary much each month, such as rent and insurance — you must pay these expenses no matter what is happening in the business.

To determine your profit percentage, start by calculating the total cost of a typical product. For example, if you sold bicycles, the cost would be the price you paid for a bicycle plus any shipping charges or the value of any labor that you spent to repair or tune it up. Let's say that the total cost is $75. Next, subtract that total cost from the selling price of the bicycle. So, if you sold it on at your online store for $125, you would subtract $75 (cost) from $125 (selling price), and the difference would be $50. That's your gross profit.

To determine your profit percentage, divide your gross profit ($50) by the selling price ($125). Your profit percentage would be .40 or 40%. If you sell several different types of products, or make different amounts on each one, you need to average the various profit percentages to determine your business’s overall profit percentage. To improve your accuracy you should weight your results. For example, if you sell twice as many children's bikes as adult one, you'll need to reflect that in your average. You can also save yourself some time and just work with the lowest or most conservative profit percentage.

Calculate your break-even by dividing your monthly overhead expenses by your profit percentage . For example, if your online bicycle store has fixed monthly costs of $500, and your profit percentage is 40%, then you need sales of $1,250 a month to break even ($500 divided by .40). If this amount is below your anticipated sales revenue, then you’re facing a loss — and you’ll need to lower expenses or increase sales to break even.

Profit and Loss Forecast

In your profit and loss forecast, you refine the sales and expense estimates that you used for your break-even analysis into a formal, month-by-month projection of your online business’s profit for one or two years of operation. It’s basically a spreadsheet that details your expected monthly expenses and revenue. If you have a spreadsheet program that can read Excel (.xls) spreadsheets, we provided a fillable spreadsheet is provided to help you prepare Monthly Sales Revenue.

To determine estimated profits, you plug in your estimates of monthly revenue and of  expenses such as phone service, depreciation, and shipping. If you have a spreadsheet program that can read Excel (.xls) spreadsheets, we provided a fillable spreadsheet to help you prepare a Profit and Loss Statement.

Cash Flow Projection

Simply put, the money that comes in and goes out of your online business is your cash flow. Where the other types of projections predict long-term profitability, the cash flow projection focuses on day-to-day operations. Can you survive in those in-between times when you must pay bills but there are no online sales for that week? For example, the cash flow for the first few months of any? business is often negative. In order to survive, you may need to borrow money during that period. Cash flow projections are useful for every business, but they’re particularly helpful if you have not yet opened.

To make your cash flow projection, you’ll have to prepare a spending plan, setting out items your business needs to buy and expenses you will need to pay. You then feed these numbers, along with information from your profit and loss forecast, into a spreadsheet. If you have a spreadsheet program that can read Excel (.xls) spreadsheets, we provide a fillable spreadsheet is provided to help you prepare Cash Flow. A business plan guide can also help you with this task — for example, Mike McKeever’s How to Write a Business Plan (Nolo), can simplify this procedure. If you have more money to spend on financial projections ($200 to $1,000), you may want to consider paying a bookkeeper with small business experience to help you polish your forecasts.

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