Financial forecasts

Financial forecasts are estimates of the figures a business expects once it is trading, such as the sales income it will receive and the costs it will pay. A business plan should include forecasts of revenue, costs and profit so the owner can estimate whether the idea could actually be profitable.

What each forecast shows

• Forecast revenue — the income the owner expects from sales, worked out as the selling price multiplied by the number of units expected to be sold.
• Forecast costs — the money the business expects to spend to make and sell the product, such as materials, packaging, wages and rent.
• Forecast profit — what is left when forecast costs are deducted from forecast revenue. If costs are expected to be higher than revenue, the forecast shows a loss instead.

Worked example

Amir plans to make scented candles and sell them at weekend craft markets. Before he buys any wax or books a stall, he sets out his forecasts.

Seeing that £1,100 on paper lets Amir test the idea while it is still only a plan. If the forecast profit looked tiny, or the figures showed a loss, he could raise his price, find a cheaper jar supplier or choose a different product — all before any money is committed.

Forecasts are only estimates, though. Customers may buy fewer candles than expected and costs may rise, so a forecast profit does not guarantee a profit. A profit forecast is also different from a cash-flow forecast, because it compares revenue with costs.