A Simple Guide To Making Financial Forecasts For Your Business

Running a business, whether it’s a seven-figure company or a weekend side project, benefits from having a clear picture of its future finances. A simple financial forecast can show where money might come from, how much you’ll likely spend, and how cash flow could unfold over time. This planning helps you set goals, prepare for challenges, and make confident decisions.

Investors and lenders often expect financial projections when you apply for funding. They review forecasts alongside your business plan before deciding whether to invest or extend credit.

The good news is you don’t need a finance degree to get started. With some basic numbers and realistic assumptions, any business owner or self-employed professional can put together a useful forecast. Keep reading to see how simple it can be.

What Is a Financial Forecast?

A financial forecast is a projection of how a business might perform financially over a set period. It draws from past data, current trends, and reasonable expectations about the future. This kind of forecast typically includes key elements such as revenue, expenses, earnings, cash flow, and overall financial position.

Think of it as a roadmap for your company’s money. It gives you a clearer picture of where the business could be headed and helps you plan ahead, set milestones, and make smarter choices. 

📝 Note: Forecasts aren’t 100% accurate. They’re built on assumptions and estimates, not guesses. They work best when updated regularly to reflect new information or changing conditions.

The Different Methods of Creating a Financial Forecast

There are several ways to build a financial forecast. Some are more technical than others, but all aim to give a clearer picture of where your business might be headed. If the terms below seem complex, don’t worry. This is just an overview. A simpler method is shared further down.

1. Percentage of Sales Method

This approach applies a percentage growth rate to historical sales to project future sales and related expenses. It assumes that past trends may continue.

Best for businesses that:

✅ Have limited historical data
✅ Need a quick, straightforward forecast
✅ Operate with stable sales-expense relationships

2. Time Series Analysis

This method studies past data to identify patterns, trends, or seasonality. Techniques such as moving averages, exponential smoothing, or regression are used to project future numbers.

Works well for businesses that:

✅ Have plenty of historical data
✅ Experience cyclical or recurring patterns in their finances

3. Regression Analysis

Regression analysis examines how one financial variable changes in response to another. For example, it could predict sales based on advertising spend, economic conditions, or customer demographics.

Helpful for businesses that:

✅ Want to quantify relationships between different factors
✅ Depend on specific variables, like marketing spend or customer behavior, to influence outcomes

4. Scenario Analysis

Scenario analysis builds multiple forecasts based on different hypothetical situations. Examples include best-case, worst-case, and moderate-case scenarios to show a range of possible outcomes.

Useful for businesses that:

✅ Face high uncertainty
✅ Are engaged in strategic planning or major decisions

5. Cash Flow Forecasting

Cash flow forecasting predicts the timing and amount of money coming in and going out. It focuses on whether a business will have enough cash to meet obligations or invest in opportunities.

Essential for businesses that:

✅ Have seasonal or fluctuating cash flows
✅ Need to manage liquidity closely

6. Budget-Based Forecasting

This method builds forecasts directly from the company’s budget, keeping numbers aligned with set targets. It makes it easier to track actual results versus planned performance.

Ideal for businesses that:

✅ Want their forecasts to reflect budget goals
✅ Use budgets as a primary planning tool

7. Market Research and Trend Analysis

This approach uses external data to anticipate changes in demand, market share, or pricing. Examples are customer preferences, industry trends, and competitor activity.

Valuable for businesses that:

✅ Operate in fast-changing industries
✅ Need to account for market shifts or evolving customer behavior

📝 Note: These methods are not mutually exclusive. Many businesses combine two or more approaches to get a more complete view of future performance.

The Simplest Way to Make a Financial Forecast

If you’re looking for a simple way to track monthly profit, CPA Lorilyn Wilson’s approach from Taxes & Accounting Foundations For Business Owners is especially effective for smaller businesses.

Here’s how it works.

Step 1. Start With Your Net Profit Goal

Instead of starting with revenue, begin at the bottom with net profit. Ask yourself: at the end of each month, how much money do you want to make?

✏️ Hypothetical Example: 

If your target is $10,000, then your forecast should focus on reaching that goal. Every revenue and expense decision will aim to help you achieve this number.

Step 2. List Your Products and Services

Identify all revenue streams. What generates money in your business?

✅ One-off products or services
✅ Retainers or recurring contracts
✅ Additional opportunities, like brand deals or side projects

✏️ Hypothetical Example:

A marketing and design agency might have revenue from design projects, consulting, retainer editing work, and brand deals on a YouTube channel.

Step 3. Calculate Variable Costs

Determine the costs directly tied to delivering each product or service.

✅ Software or tools needed
✅ Employee or contractor wages
✅ Materials or production costs

✏️ Hypothetical Example:

A brand deal on your YouTube channel might have minimal costs if you already own the equipment. Design work, on the other hand, could require dozens of employee hours to deliver.

Step 4. Identify Fixed Costs

Fixed costs are expenses you’ll incur regardless of sales.

✅ Rent or office space
✅ Utilities and bank fees
✅ Ongoing overhead (e.g., office supplies, subscriptions, meals)

✏️ Hypothetical Example:

Monthly rent and utilities remain the same whether you make $1,000 or $10,000 in revenue.

Step 5. Adjust the Numbers to Hit Your Goal

Compare your current numbers to your net profit goal. If the forecast doesn’t reach your target:

✅ Can you increase prices?
✅ Can you reduce costs without affecting quality?
✅ Can you improve efficiency in production or delivery?

Keep tweaking until your forecast aligns with your net profit goal.

✏️ Hypothetical Example:

If your costs are too high, you might increase prices for certain services or reduce unnecessary overhead to hit your $10,000 monthly target.

Step 6. Plan Your Runway and Funding

If your business is just starting, determine where the money will come from.

✅ How much capital do you need to reach your goal?
✅ Will you have revenue from day one, or need to spend to get started?
✅ Will you fund it yourself, take a loan, or raise money from friends and family?

✏️ Hypothetical Example:

You may need $15,000 upfront to cover expenses for the first three months before reaching profitability.

Step 7. Forecast Cash Flow

Timing is critical. Many businesses fail despite being profitable on paper because they run out of cash.

✅ Map out when money comes in for each project
✅ Track when expenses are due
✅ Use this information to plan spending and maintain liquidity

✏️ Hypothetical Example:

Even if your forecast shows $10,000 profit, delays in client payments could create a cash shortfall. Planning the timing helps you avoid gaps.

Step 8. Update Your Forecast Regularly

Your forecast is never truly finished. New data arrives each week or month, and assumptions may change.

✅ Update revenue projections as new contracts or sales occur
✅ Adjust expenses if you hire employees or purchase new tools
✅ Treat it as a rolling forecast to keep your plan accurate and actionable

✏️ Hypothetical Example:

If a new client brings in additional revenue, update the forecast immediately to see how it affects your profit and cash flow.

Master the Fundamentals of Business Accounting

Financial forecasts help a business plan its operations and provide a clearer picture for investors or lenders about expected financial outcomes. They help you:

They’re not guarantees, but they’re powerful tools to guide your business toward profitability.

If you want to dive deeper, courses like Taxes & Accounting Foundations For Business Owners cover key topics such as choosing the right business entity, setting up accounting systems, bookkeeping basics, taxes and deductions, and strategies to reduce audit risk.

You’ll also gain access to practical resources, including a financial forecasting template and additional workbooks, to support your planning and decision-making.

📌 You can learn more about the course here.

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