Budgeting And Forecasting For Start-Ups

What Are Budgets and Forecasts?
They are predictions of future income and expenses and cash flow. They also predict future performance with financial forecasts and projections and with financial models.

Why Budget and Forecast?
Budgets and forecasts provide a feasibility analysis. They can help develop a business model, review your key assumptions, and identify resource and capital needs. Budgets and forecasts can be used to find funding. They demonstrate the potential of your business to investors and lenders. Budgets and forecasts can also be used as a management tool. They can help you establish milestones and require accountability for accomplishing the milestones. They can help identify risks and show benchmarks. This will help the small business owner make the necessary adjustments to avoid the risks, to reach the milestones, and to measure up to benchmarks.

Why Are Forecast Important?
A forecast can establish measurements to guide management, to facilitate planning, and to facilitate goal-setting.

What Areas Do You Need to Forecast?
It is critical that you forecast your start-up costs so that you know how much it will cost to open your doors. You need to prepare estimated start-up financial statements and estimated short and long-term revenue forecasts. As part of your forecasts, you will review key concepts and issues that will make a difference in your company’s survival. You also need to forecast the resources you will need and set up a schedule for using and replenishing your resources.

Do Investors Want to See Forecasts?
Yes, your forecasts will show investors that you know your business, that you are likely to succeed, and that you will make wise use of their money. You must have at least a five-year forecast that shows significant profit by year five, significant net income by year two, and that investors will earn approximately 10% return on their investment.

Do Lenders Want to See Forecasts?
Yes, your forecasts will show lenders that you know your business and the you will be able to repay the loan. Be sure you forecast for the entire period of the loan and use conservative financial ratios, because the lenders will. Also, you will need to collateralize and personally guarantee the loan.

The investors and lenders will want to see forecasts of your profit and loss and revenue. They will also want to see what drives income in your industry; for example, sales, distribution, advertising, internet search engines, referrals, location, price, or coupons or other discounts. You also must forecast the revenue cycle for your target customer. How much time will you need to start production, and how quickly will your product or service be accepted in the market?

What Other Forecasts Are Needed?
Another important forecast is the total personnel required to support your desired revenue. If your revenues result from sales, you should start with the desired revenue in year 5. From year 5 subtract 40% from each prior year. On the basis of your research, estimate the number of sales each sales person will make each year. From that you can calculate number of salespeople required.

After you make your forecasts, you should complete a sensitivity analysis by adjusting each major item estimated by 10% plus or minus. Examine the impact on revenues, profit, and cash needs. Remember that most operating expenses are roughly proportional to personnel headcount. These are your variable expenses such as salaries, benefits, employment taxes, furniture, computers, rent, supplies, utilities, training, travel, meals, training, and dues. Other non-variable expenses may or may not be proportional such as professional services, subcontractors, advertising, and trade shows. Use your forecasts to compare yourself to others in your industry by such things as revenue per employee, revenue per salesperson, gross margin, expense categories as a percentage of revenues, financial ratios, and inventory control. It is critical that you know your industry’s benchmarks and metrics and that your business forecasts are within these benchmarks and metrics. You can find this information by researching your industry.

Should You Hire a Business Consultant to Prepare Your Forecasts and Research Your Industry?
Yes! Unless you have a very strong finance and accounting background, you cannot create financials that will be acceptable to investors and lenders. You cannot do an acceptable business plan with a spreadsheet, and it will be difficult for your to be objective in developing your business model. Also, you are the entrepreneur and your efforts are better spent building and developing your business which is what you do best.

Capital Gains

In addition, from 6 April 2008, to complement these CGT changes, an entrepreneurs' relief is being introduced which will be available when an individual sells their business. This means that the first £1,000,000 will be charged to tax at 10% and gains in excess of the £1,000,000 limit will be charged to CGT at 18%.

The Treasury has announced that it doesn't see the need for a change to the taxation of insurance bonds as a result of the CGT changes. As a result, a policyholder is still subject to income tax at their marginal rate of tax on the event of a chargeable event gain.

Analysis

Even though the 18% flat rate of CGT, which would apply to collectives, looks more attractive than a potential income tax charge at 40% on a chargeable event gain with a bond, there are other factors to consider.

There would also be an annual income tax charge to consider on the dividend/interest distributions from collectives even if this is accumulated which would be 32.5%/40% in the case of a higher rate taxpayer. Investment bonds offer the policyholder tax deferral in that clients can access money through the 5% tax deferred allowance, without incurring an annual income tax charge.

Bonds are self-assessment friendly, as withdrawals within the 5% tax deferred allowance don't need to go on the tax return. Only chargeable event gains need to be put on the tax return.

Withdrawals within the 5% tax deferred allowance don't affect a client's entitlement to age allowance.

Investment bond holdings may be deemed excepted assets for means testing.

IHT planning - bonds are ideal assets for trustees to hold due to the administrative simplicity they offer. If trustees hold collectives, then they will have to consider the completion of annual tax returns and the associated professional costs.

It makes sense for everyone to have all policies and investments reviewed by an independent financial adviser to ensure that the charges are fair and the underlying investment performance is at least as good as the average performing funds. The consequences of not doing this can be extremely costly.