The Importance of Forecasting Your Revenue and Expenses
Whether a business is big or small, a big part of its success rate depends on the forecasting, research, and planning that went into it. All three of these have their place in many different aspects of business, but they are especially prevalent and needed when thinking about both the potential revenue of a business and the expenses that the business will have. One of the top reasons that businesses fail is because they didn’t properly forecast their revenue and expenses. So, it is extremely important that you take the time to forecast. Let’s dive a little deeper into why this is true.
WHAT ARE REVENUES AND EXPENSES
First, let's talk about what exactly revenue and expenses actually are. Revenue is the amount of money your company is bringing in. This amount is before any expenses or costs are taken out. Expenses are the things you have to pay to keep your business running. Some expenses are office rent, supplies and materials, advertising, employee salaries, taxes, and more.
It is important to separate your Cost of Goods Sold. What is that? Cost of Goods sold are the expenses directly related to the sale of a product and/or service. This can tell a very different story on your financials. If unclear whether or not an expense falls under COGS, simply ask: "Would this expense have emerged even if no sales were generated?" If the answer is "yes," then this expense isn't part of COGS. For example, with a warehouse packed with inventory, COGS includes the money spent creating the goods and transporting them to the warehouse. Contrarily, the costs of keeping that warehouse running, such as rent and utilities, are operational expenses
REVENUE, EXPENSES, AND CASH FLOW
Cash flow goes hand in hand with revenue and expenses. What exactly is cash flow? It is the amount of money that is flowing in and out of your bank account. Your revenue is the money flowing into your bank account and your expenses are the money flowing out of your bank account. By knowing what your revenue and expenses will look like throughout the year, you will also know and will be able to control what your cash flow is going to look like.
CREATES A GOOD FINANCIAL PLAN
Properly forecasting the revenue and expenses of your business will help you create a strong and safe financial plan. Knowing at any given time the amount of money you will have to work with, helps you plan out what risks you can take in your business and when to plan for the production of your products.
SECURES LOANS AND CREDIT
A solid understanding of what your revenue and expenses are going to look like for the year and years to come will help you secure loans and credit for your business. Banks and other lenders want to know what the risk and reward will be for them, so you must have a solid financial plan. Make sure to back up your forecasting with research and facts. The more you can actually prove to a potential lender to be true, the more likely you will get a loan or credit from them.
HELPS WITH MARKET RESEARCH
Needing to forecast for the potential revenue of your business forces you to do market research. You will have to learn all about your customers, what their likes and dislikes are, when they are likely to buy, and how much money they are likely to give you. Doing this kind of research not only helps you predict what your revenue is going to be but also gives you helpful information you can use in marketing tactics. The better you know your customer, the better you are able to market to them. Being able to market to your customer in a way they respond to will bring you in more revenue.
DON'T WAIT TO FORECAST
It is extremely important that you don’t wait to forecast for your revenue and expenses. This kind of forecasting is what helps you create a solid financial plan for your business, and in turn creates a comfort in your numbers and business viability!
If you have any questions regarding financial forecasting or other accounting topics, please do not hesitate to reach out to us!