When I first started running my own business, around 12 years ago, my business mentor said to me: OK, show me your budgets and forecasts? I stared at him blankly and he stared at me knowingly and said: this is business 101! Well, I was a freelancer and only working for and with myself for clients and I said that that meant I didn’t really need them, it’s a hard game to predict. It wasn’t long from him explaining their benefit to me learning how to do it. Starting a business in Germany certainly needs to have budgets and forecasts. Despite the heavy systems of rotating paperwork, the system does lay out a lot of fixed costs to work with, and predictive costs you can apply to your finances. Budgets and forecasts ultimately determine what a healthy version of our business should look like - and keeping to these goals can only help you as you navigate the life of a freelancer or self-employed person.
Let’s with some active defining! A budget is an estimate of income and expenditure for a set period of time. A forecast is an estimate of future financial outcomes for a company, persons or entities.
Together, this is financial forecasting, a huge component of financial controlling. Financial forecasts assist you to meet your business goals. They are a future prediction of your business finances, as compared with statements, which provide details of actual results or progress. Predicting the financial future of your business is not easy, especially if you’re starting a business and don’t have a trading history. However, forecasting and making adjustments frequently will enable you to become more accurate.
Monthly or weekly forecasts may be necessary when starting your business, experiencing rapid growth, or having financial difficulties. Regular forecasts allow you to closely monitor your finances and develop strategies to fix problems before they become major issues. Monthly or quarterly forecasts may be more appropriate for a stable, established business. If you’re just starting out, it is suggestable to do monthly, quarterly and yearly forecasts. This is because you do not have a trade history as a freelancer or self-employed person yet.
Of course, if this really isn’t your strong point, do seek professional advice. It is not expected you will be the one bespoke jewellery maker expat in Germany that knows the ins and outs of business, so you can also find courses online or via your chamber of commerce that can help you LEARN the skills you need to complete any kind of financial control. Like all good things, this takes time but being fully in control of your finances and business will help you to keep enjoying the freedoms of working for yourself. This guide is certainly an introduction and overview, and not a specific ‘how to’. This should be determined on a case by case basis!
Generally, what goes into financial forecasting, as a start?
1. Start Up Costs
There are a series of costs associated with starting a business that every person will incur:
- legal or accounting fees
- insurance costs
- furniture, equipment, supplies or fit-out
- cash required to fund the business until you start collecting payments from customers
- staff wages
- leasing costs of property, plant and equipment
If you already are running your business, factor the maintenance of these costs into your future plans as they pertain to what you have already paid. Most of this information can be gotten by enquiring with respective agencies to provide quotations. You’ll be needing them anyway, so get a few quotes before you decide on one provider!
Estimating the income you or your business will generate over the forecast period can be difficult. If you are starting a new business you can base your estimates on market research and industry benchmarks. For an established business, take into account previous sales data over the same time period. You will also need to consider the current market and other economic conditions.
Kontist entwickelt für deine Selbstständigkeit genau so ein Geschäftskonto.Erfahre jetzt mehr
An expenses forecast estimates your ongoing operational costs over a period of time. If you are starting a new business, base your forecast on market research and industry benchmarks. If you are already operating a business, use records from previous years to assist you. Make sure you allow for any likely changes, such as an increase in costs. Just remember, in Germany your expense related record keeping must be impeccable. Kontist have gone into detail on this topic.
4. Costs of Goods Sold
If you sell physical products you will need to forecast how much it costs to produce or stock them. For example, you might be a painter. You would need paint, brushes, canvases and so forth. This would be you COGS. The COGS forecast relates to your sales forecast. If you are forecasting an increase in sales, the cost of producing the goods will also increase (you will need to purchase more components or stock). To forecast COGS you will need to include all the direct costs associated with production and preparation for sale. These may include:
- the wholesale cost of buying completed goods, raw materials or parts
- freight and freight insurance
- commissions paid on sales
- direct labour costs used to manufacture the product
5. Cash Flow
It is important to review your cash flow forecast regularly against actual results. A forecast can provide warning signs that may help you to avoid future financial problems. Watch out if your cash payments are more than cash receipts – you will run out of money.
Be Flexible With Forecasting
Rigid forecasts and budgets aren’t very useful, especially in your first years in business. Things change as the year progresses, and you need to be able to factor in those changes and how they will affect you financially. Continuing to base decisions on the best guesses made months prior can lead to faulty and costly decisions, and appropriation of monies needed elsewhere. Building flexibility into your budgeting and forecasting will allow for more accuracy and better results in your business. This means constant attentiveness in the beginning phases of your business, until you can really rely on your system and workflow stability, similarly, cash flow stability.
… but be strict with budgets
Have a plan in place and ingratiate your budget to it. Budgeting to your plan means you should never spend more than you have allotted. Such spending should come with scrutiny about necessity. Instead of spending and dealing with it later, budgeting to your plan forces you to deal with the potential impact any expenditures will have on the business. Implementing this method of handling your budget is really helpful in addressing opportunities that weren’t a part of the original budget.
Use the Forecast To Create Goals, and stick to them
The purpose of forecasting is to predict your company’s financial future. Forecasting aids in the making of business decisions and in understanding their impact before you implement them. Being pragmatic about the potential of our revenue and business dealings is the best way, because of course, we all want to believe we will be successful - otherwise, we wouldn’t be doing it. But, in business, the numbers will be louder and your indication of sustainability. Therefore, you should have a clear understanding of what’s driving your forecasting predictions; otherwise, they are just random guesses not grounded in the goals of your company. Understand where every part of your business is working within the entire machine, and the financial attachments that come with that.
Get The Right Tools in place
There are lots of templates freely available on the Internet, but often, they do not help you to understand the mechanisms of managing your financials from day to day. Often, the best sources of information are blogs like the one run by Kontist. Reasonably, this is because these resources are focussed on your circumstances. That you are, likely, an SME owner or a freelancer. These nuances often make a difference in the platform and tools you use to work on these budgets and forecasts. Thankfully, a great number of attached services like Fastbill or Debitoor also offer automated accounting services that can lay all the information you need - out very clearly. Some of them even have tools or guides to assist you. 2018, what a time to be alive. So, engaging with the services interlinked to your business and financial purposes, is a streamlined resource to help you get ahead. Use them and get the right tools in place, and you’re already a huge step further to complete financial literacy when it comes to your business.
After a long day doing what you really want to be doing, the last thing that can be appealing is working on the nuts and bolts of mundane financials. However, this is what most people feel the most insecure and isolated when it comes to self-employment. The harsh realities of business are yours, along with all the freedoms. The good thing is, this can only help you! It will never hurt (unless you go crazy and project 1 million EUR in artisanal candle sales) and will always put you more in touch with your business and finances.