The 10 steps you need to follow to start your project / STEP 4: Why it’s important to test the feasibility & viability of your business project ?
The design of your project has enabled you to evaluate what you can sell and all the resources you require to start a new business. Translate all these components into figures and gauge a number of points that will confirm the viability and profitability of your project. This step will give you (or not) the “go”!
I. Why financial forecasts?
II. What is this study about?
III. Tips for a successful financial forecast.
I. Why make financial forecasts?
- Analyse the feasibility and viability of your business project
The preparation of these forecasts is an iterative process that gradually reveals all the financial obligations of your future business and the corresponding resource possibilities.
This step will allow you to move back and forth between the options adopted for your project, their translation into financial terms and their consequences on the financial equilibrium. Thus, gradually, you will check the financial consistency of your project.
To do this, you may have to make difficult decisions such as scaling back your ambitions on one option or another or, on the contrary, strengthening your equity capital.
- To convince your financial partners and bankers
Such forecasts will be essential if you use external financing.
It is essential to convince and reassure your partners by contributing quantified information.
Your financial forecasts will be an important part of your business plan.
II. What is this study about?
The choices made in the construction of your new design project (nature of products/services, marketing, etc.) are translated into human and material needs that must now be accurately assessed. For each function of the company (buying, storing, manufacturing, prospecting, selling, etc.), it is essential to match a cost. Does that strike you as confusing? Don’t know where to start? Follow some very simple tips, then apply the following method
The method we propose to you is composed of 5 main steps allowing you to answer the following
questions:
Question 1 – What is the capital required to launch the project? Can you get them together? The answer is in the initial financing plan, which compares the sustainable financing needs of your project with stable financial resources.
Question 2 – Will the company’s forecasting activity generate a sufficient amount of revenue to cover the costs incurred by the human, material and financial resources used?
The answer can be found in the projected income statement.
Question 3 – What is the minimum amount of sales/performance to be achieved in the first year to meet expenses and consequently for your project to start being profitable?
The answer is obtained by calculating the break-even point.
Note: the moment when the break-even point is achieved is called “the break-even point”.
Question 4 – Will the revenues generated by the company throughout the first year be adequate to cover expenses for the same period on an ongoing basis? The answer can be found in the cash flow plan, which highlights, month by month, the balance or imbalance between receipts and disbursements.
Question 5 – Will the company thus established be sustainable? Will the financial strength of the company built through the plan this initial financing continue as the business develops? The answer is given by the 3-year financing plan, which makes it possible to verify the company’s profitability over 3 years on the basis of reasonable assumptions.
III. Tips for a successful financial forecast
Do not overoptimistic in assessing revenues or costs: it is even prudent to minimize revenues and maximize costs to avoid unpleasant surprises.
If you notice a too large imbalance, do not hesitate to redesign your project, changing options, reducing your ambitions if necessary or pursuing other sources of financing.
And of course, get closer to a network of support for business creators or a chartered accountant to build your forecasts or to validate them. The external perspective of a specialist is valuable and will be useful to you in understanding the mechanisms of business management.
To identify the support networks that can help you at this level contact ESCEC INTERNATIONAL
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