To create a financial model, start with these questions: What are your annual income goals? Where will your business revenue come from? Do you expect to expand your customer base? Will you sell more B2B products or services? How will your revenues affect cash flows?
All these are important questions you need to answer to effectively manage your income and cash flow. As you chart out your plan, be sure to create a financial model that will help you visualize where the money will be.
Read the Future by Looking at the Past
Financial models for a small business do not have to be rocket science, and you do not have to be a professional financial analyst to create them either. Look at your income records for the past three years. You can easily pull data from accounting software and use it to create a spreadsheet. Utilize chart functions in Excel to get a visual of how much revenue your business receives each particular month. Look for trends in growth or ebbing patterns.
Your past revenue patterns can help your financial forecasting by giving you quantifiable data. Your job is to analyze the historical data to find trends that allow you to prepare for your future income.
Identify Your Peak Business Periods
Are there times during the year when your revenue is at its highest? For instance, if you operate a flower shop, you may notice a very high spike in revenue around Valentine’s Day and Mother’s Day. Identifying your best performing business periods will help you prepare for the cash flow patterns.
Set Your Annual Income Goals
Look at the trends you find in your financial model. Are there ways you can increase revenues during peak times? What strategies could you employ in your financial model that would help increase revenues during slow periods? This is your time to determine not just where your business revenue will come from, but how you can increase and improve it. This will help you align your annual income goals with your business strategy.
Continuing with the floral shop example, you might think of special flower arrangement promotions during off-peak times to help sales. Make an advertising push for Administrative Assistant Day or Boss’s Day. Design arrangements that are color themed for other holidays like St. Patrick’s Day or Independence Day.
Create the Financial Model
Your small business financial model should clearly show you where your revenue will come from and what products or services will be sold to generate the income. Create a revenue/expense chart for each month for the year. Show when you will need to increase production to meet the expected demand. Include plans on how you will increase sales during certain times of the year.
Once you have all of these details outlined and determined, you should put it down on paper. You do not need to pull out your dusty Finance 101 book, however. You can easily find a financial forecasting spreadsheet online for free, and within minutes, you will have a customized business forecast for every year in your hand.
Your financial forecasting will improve as you continue your small business financial model practice year after year. If you haven’t planned for your income goals and models for the next 12 months, now is the time to do it. Cheers to a prosperous new year for your small business!