How to Create Your First Financial Forecast With No Historical Data

Creating a financial forecast with no historical data can feel intimidating and exhausting. 

As a new business owner, you’re starting from scratch and likely thinking things like: 

• Where do I even start?
• How do I know the numbers are correct?
• Do I even have time to create a forecast?

Well, I’m here to tell you that forecasting doesn’t have to be complicated, perfect, or time-consuming. By following the same process I teach to my MBA students, you can create a working forecast without any historical data in as little as two hours.

Who is this guide for?

A business owner who is just getting started, has no real-world financial data, and is worried about managing their numbers.

A few tips before you start forecasting…

• Don’t worry about perfection: Your forecast will be wrong, and that’s OK. As our CEO Sabrina Parsons states, “Accurate is different from right. A good forecast needs to represent your business, not predict the future.”
• Set a time limit: You want to feel a bit rushed to avoid getting hung up on the details. I recommend limiting yourself to 30-45 minutes, and see how far you get. 
• Break up the work: You will likely need more than 30 minutes to finish your forecast. So, schedule 3-4 half-hour sessions in advance. Stepping away, living life, and returning to your forecast will make the process much easier.
• Get feedback: Even if your forecast isn’t complete, have someone you trust review your work and provide feedback as you go.
• Talk about your business: It may be numbers, but you’re really developing a narrative about how your business will perform and what you need to do to make it happen. 
• Play with the numbers: Successful forecasting requires exploration and experimentation, so please mess around with your numbers. Don’t worry, you won’t break anything.

Session 1: Ideas and educated guesses

Goal: Get comfortable making guesses and create your first draft of revenue and expense forecasts.

1. Figure out how you will make money and what you will pay for

Before you start crunching numbers, you need to know what your revenue and expense categories are. These will be the individual line items you will end up forecasting.

Don’t overcomplicate this exercise; just spend a few minutes listing potential revenue streams and expenses. If you’re having trouble, try using an AI tool like our LivePlan Assistant to generate ideas.

In the end, you should have 3-6 revenue categories and 3-6 expense categories. 

If you have more than 6, then work on grouping similar revenues and expenses together. Sticking to this smaller number will give you far less to manage and make adjusting your forecasts much easier. 

Example

Let’s say you plan to sell phone cases in various colors—blue, red, green, and metallic magenta. In your revenue forecast, you wouldn’t list these individually but group them into one category called “phone cases.” 

This also applies to expenses. If you have electricity, insurance, and a water bill, you will group them all under utilities. 

2. Make your best guesses

With forecast categories in place, let’s add your numbers.

To make this easier on yourself, don’t tackle all of your revenue and expense categories at once. Instead:

1. Start with either revenue or expenses
2. Pick one category and add your numbers
3. Move on to the next category

Only after you have finished forecasting for all revenue or expense categories should you move on to the other half of your forecast. Remember, these are educated guesses for each month; they are not meant to be perfect, and you will change them.

Should you start with revenue or expense forecasts?

I recommend starting with revenue because it tends to be more exciting. It’s how you will make money, after all. The anticipation of bringing in revenue can be exactly what you need to propel you through building a forecast.

My colleague and LivePlan COO Noah Parsons recommends starting with expenses, arguing that “it can be easier to figure out what you need to spend money on every month.”

There’s really no right answer, just pick the one you feel most comfortable with. You will have to do the other forecast anyway, so don’t get hung up on deciding.

Guessing for revenue (sales)

Think about forecasting revenue like goal setting for your business.

That means you don’t want to make the mistake of starting with the size of the entire market and saying you will capture some percentage of it. Noah warns in his sales forecasting guide, “This kind of guessing isn’t based on reality. It looks credible on the surface, but you have to dig deeper.”  

By starting with a large market number (like 40,000 people living within 10 miles of your business) you’re setting unrealistic expectations. Instead, you need to start with your own capabilities and actions as a business owner and work up from there. 

You can do this by answering the following questions: 

• How many potential customers can you contact?
• How many will respond or visit?
• How many do you believe will then purchase?
• What will they be willing to pay?

Example:

Imagine you are opening a new coffee shop in downtown Eugene, Oregon. Based on foot traffic and marketing outreach, you believe that within a month:

• 8,000 people will hear about your business.
• 8% (640) will end up visiting.
• Of those in the store, 85% (544) will purchase.
• On average, each customer will spend $10

Guessing for expenses

For your expense forecast, simply list how much and when you expect to pay for each expense category.

Here are a few tips to get you started:

• Don’t worry about expense types yet: You will eventually group specific expenses under fixed, variable, or cost of goods sold (COGS)—but at this stage, that adds unneeded complexity.
• Include your own salary: Even if you don’t plan to pay yourself at first, mark down when and how much you think you will eventually earn.
• Forecast personnel separately: If you plan to hire anyone, list their wages in a category called “personnel” or “payroll.”

3. Repeat the process

Once you have your first guesses for either revenue or expense numbers, repeat the process with the one you haven’t done yet. If you’ve been doing this for more than 30-45 minutes, step away and finish up in another session.

Session 2: Make the numbers fit your business

Goal: Adjust your revenues and expenses to fit the “story of your business.” 

Come to this session with a willingness to play with the numbers. You’re still not finalizing your forecast, just determining if your initial guesses actually fit your expectations. 

To get in the right mindset, I recommend you try verbally explaining what is happening with your business. Just talk about your business like you would to a friend, family member, or future investor. 

If you’re not sure where to start, try answering these questions:

• What do you intend to do this month, next month, this year?
• What results are you expecting? Are they realistic?
• Do your current numbers reflect this?

Repeat this for each month. If your current numbers don’t fit the narrative, try increasing and decreasing individual revenue streams or expenses. By the end, your guesses will start to look like a working forecast that better represents your vision.

Tips for telling your business story with your forecast

• Connect to a graph or chart: Visualize the impact of your adjustments instead of staring at a sea of numbers. If you’re a LivePlan user, you can actually adjust your forecasts using the graph instead of changing numbers.
• Watch out for wild performance: If expenses appear lower than they should or your sales show an overly optimistic explosion in growth (the dreaded hockey stick graph), revisit your numbers to ensure they’re actually realistic. 
• Pay attention to profits: While it’s totally fine to have more expenses than sales at the start, you want to see improvements over time to show that your business model will work.

Session 3: Get specific

Goal: Make your revenue and expense forecasts work with standard financial statements.    

You’re almost there! All that’s left is to organize your revenue and expense categories into the appropriate types (so the numbers fit in your financial statements) and make any final adjustments. 

Again if you’re using LivePlan to create your forecasts, your financial statements will also be generated as you add information. No additional work on your part.

Revenue considerations

With revenue, there are really just three things you need to ask:

Are materials and labor directly used to produce your product?

If you answered yes, you must account for direct costs, also known as the cost of goods sold (COGS). If you run a service-based business, you can likely skip this step.

Isolating these costs from your other expenses will help you understand how efficient your business is. If you spend too much to get the products out and leave very little revenue to cover other expenses, you’ll struggle to achieve profitability. 

Tip: If you can, try making these costs a percentage of the specific revenue stream they help produce. That way, as you adjust your revenue, your COGS will automatically increase or decrease.

Will customers make recurring purchases?

This is really only relevant if you offer a subscription-based product or service. In this case, customers will automatically be charged either monthly, quarterly, or annually. 

So, your forecasts need to account for recurring revenue and the possibility of customers “churning” or canceling their subscriptions.

Churn may impact your estimates for monthly growth. Depending on the timing and value of subscription renewals, you may have a sudden spike in revenue in a few months. But if churn is higher than expected, you suddenly have less revenue than expected.

Tip: Don’t overwhelm yourself trying to account for churn. Pick a number and use that as the percentage of customers you’ll lose each month, and adjust as you get real results. Check out this churn rate guide from Stripe to get an idea of what number to use.

Will you see seasonal changes?

Some businesses will experience fluctuations in sales depending on the time of year. 

Halloween stores, like Spirit, for example, experience a dramatic upswing from August through October, followed by a steep decline shortly after Halloween. While your seasonality likely isn’t as obvious, it’s worth considering if you expect any spikes or declines in sales throughout the year.

It will become easier to predict seasonal demand as you operate and can reference real-world performance. But for now, use a resource like Google Trends to see if interest in your industry or product shifts at different times. 

Considerations for expenses

Aside from separating out COGS, you’ll want to break your expenses down into the following categories. 

• Fixed Costs: Expenses that largely remain the same such as rent and insurance.
• Variable Costs: Expenses that change monthly, such as marketing and utilities.
• Personnel Costs: While these may be fixed or variable expenses, separating them will help you understand your staffing needs and each employee’s return. 
• Assets: A big purchase (like a vehicle or heavy piece of machinery) should be classified as an asset. You’re still “spending”, but it’s not technically an expense. In this case, an asset purchase will show up on your balance sheet and cash flow statement, but not on your profit and loss statement. 

Don’t overthink your expense types. If you’re unsure, you can always make adjustments or even skip separating some expenses for now.

Session 4: Understand your cash (and funding) needs

Goal: Determine whether you have enough cash to cover expenses.

It’s time to talk cash. If you look at your current forecast, there’s a good chance you’ll see negative cash flow. That’s not necessarily a bad thing, and I even encourage you to have it this way. 

You’re just starting out. Up to now, you didn’t know how much cash you need to start and run your business. That’s why you’re creating a forecast.

Now, use this step to determine how much cash you need and where it will come from.

1. Drop in your starting cash

This is the money you plan to invest in your business. It could come from your own savings, a bank loan, an initial investment from friends or family, or some combination of these.

If you aren’t using any personal cash or haven’t taken out a loan yet, don’t add any starting cash to your forecast.

2. Review your cash position and runway

Now start looking ahead. As you do, ask yourself a few questions:

• Is this starting cash enough to cover expenses until you generate revenue?
• How much cash are you burning through each month?
• Even if you generate revenue, will you run out of cash? If so, when?

You’re basically trying to figure out whether you’ll have enough cash to cover your expenses until you become cash flow positive (when you bring in more cash than you use). If not, then it’s a sign that you need additional cash from somewhere to extend your cash runway. 

3. Figure out what it will take to not be “cash negative”

Think of financing as your cash “band-aid.” It helps fill the gap in your cash flow until your business can bring in enough revenue.

The simplest way to figure out your funding number is to add up all of your expenses until you become cash flow positive. Then account for a cash “buffer” if things don’t go as expected.

4. Decide if additional funding is something you want

Look at the number you arrived at and ask yourself, “Do I feel comfortable taking on that much debt?” 

If the answer is no, revisit your revenue and expense forecasts to explore other ways to start without needing this much extra cash. If the answer is yes, then start exploring your funding options and consider what loan terms or other details you’re comfortable with.

Bonus: If you’re feeling really ambitious, copy your current forecast and create an additional financial scenario where you get the funding that you need. How do your financials look now? If the funding is a loan, how will you pay it back?

You’re already better at financial forecasting

According to our recent survey of small business owners, businesses that forecast are more confident in their business’s direction. However, over 42% of business owners do not have a working budget or forecast. 

So, by taking that first step and creating your first financial forecast, you are setting yourself up to make informed and confident decisions for your business.

Remember, no one knows your business better than you, and you are the best person to do this work. The more you make predictions, review your results, and adjust—the easier and easier financial forecasting will become. 

You can also use a financial forecasting tool, like LivePlan, to simplify the building, reporting, and update process. With LivePlan, you can connect to accounting software, explore multiple financial scenarios, and even get an AI-powered performance analysis every single month.

If you’re not quite ready to invest in a tool, but want to learn more about forecasting for your business, check out these resources:

• Manage your business better with a living forecast: Learn how to keep your forecasts alive by conducting a plan vs actual analysis.
• Tips for more accurate cash flow forecasts: Follow these five recommendations to get more out of your cash flow projections.
• Inform your forecasts with industry benchmarks: Learn how to use industry data to start your forecasts and check if your original estimates are on the right track.

Peter Thorsson

Posted in Financials