How to create a financial forecast for a café?
Creating a financial forecast for your café, and ensuring it stays up to date, is the only way to maintain visibility on future cash flows.
This might sound complex, but with the right guidance and tools, creating an accurate financial forecast for your café is not that hard.
In this guide, we'll cover everything from the main goal of a financial projection, the data you need as input, to the tables that compose it, and the tools that can help you build a forecast efficiently.
Without further ado, let us begin!
Why create and maintain a financial forecast for a café?
In order to prosper, your business needs to have visibility on what lies ahead and the right financial resources to grow. This is where having a financial forecast for your café becomes handy.
Creating a café financial forecast forces you to take stock of where your business stands and where you want it to go.
Once you have clarity on the destination, you will need to draw up a plan to get there and assess what it means in terms of future profitability and cash flows for your café.
Having this clear plan in place will give you the confidence needed to move forward with your business’s development.
Having an up-to-date financial forecast for a café is also useful if your trading environment worsens, as the forecast enables you to adjust to your new market conditions and anticipate any potential cash shortfall.
Finally, your café's financial projections will also help you secure financing, as banks and investors alike will want to see accurate projections before agreeing to finance your business.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
What information is used as input to build a café financial forecast?
A café's financial forecast is only as good as the inputs used to build it.
If you are creating (or updating) the forecast of an existing café, then you mostly need your accounting information, key historical operating non-financial data, and your team’s input on what to expect for the coming years.
If you are building financial projections for a café startup, you will need to have done your research and have a clear picture of your competitive environment and go-to-market strategy so that you can forecast sales accurately.
For a new venture, you will also need a precise list of the resources needed to keep the café running on a day-to-day basis and a list of the equipment and expenditures required to start the business (more on that later).
Let's now take a closer look at the elements that make up your café's financial forecast.
The sales forecast for a café
From experience, it usually makes sense to start your café's financial projection with the revenues forecast.
The inputs used to forecast your sales will include the historical trading data of your café (which can be used as a starting point for existing businesses) and the data collected in your market research (which both new ventures and existing businesses need to project their sales forward).
Your café's sales forecast can be broken down into two key estimates:
- The average price
- The number of monthly transactions
To assess these variables accurately, you will need to consider the following factors:
- Menu Changes: You may introduce new menu items or change prices of existing ones, which can affect your average price per transaction and the number of transactions. For example, adding expensive specialty drinks may increase your average price, but may also decrease the number of transactions if customers are not willing to pay for them.
- Seasonal Demand: Your sales may be affected by seasonal demand, with higher sales during the summer months and lower sales during the winter months. This can also affect your average price, as customers may be more willing to pay for cold drinks in the summer compared to hot drinks in the winter.
- Competition: The presence of other cafes in your area can affect your average price and number of transactions. If there are many cafes nearby, you may need to keep your prices competitive to attract customers. On the other hand, if you are the only cafe in the area, you may be able to charge higher prices.
- Economic Conditions: Changes in the economy, such as a recession or a booming economy, can have an impact on your sales. During a recession, customers may be more price-sensitive and willing to spend less at your cafe. In a booming economy, customers may be more willing to splurge on expensive items, increasing your average price per transaction.
- Local Events: Events happening in your local area can also affect your sales. For example, if there is a festival or concert nearby, you may experience a surge in sales as people stop by your cafe before or after the event. This can also affect your average price, as you may offer special event-themed items at a higher price.
Once you have a sales forecast in place, the next step will be to work on your overhead budget. Let’s have a look at that now.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
The operating expenses for a café
The next step is to estimate the expenses needed to run your café on a day-to-day basis.
These will vary based on the level of sales expected, and the location and size of your business.
But your café's operating expenses should include the following items at a minimum:
- Staff costs: This includes the salaries and benefits of your employees, such as baristas, kitchen staff, and managers.
- Rent or lease: You will need to pay rent or lease for your café space, which can vary depending on location and size.
- Utilities: This includes expenses for electricity, water, and gas to keep your café running.
- Inventory: You will need to purchase ingredients, supplies, and other items for your café, which can include coffee beans, food items, and packaging materials.
- Marketing and advertising: To attract customers, you may need to spend money on marketing and advertising efforts, such as social media ads, flyers, and promotions.
- Accountancy fees: You may need to hire an accountant to help with bookkeeping, taxes, and other financial matters.
- Insurance costs: To protect your business, you will need to pay for insurance coverage, such as liability insurance and property insurance.
- Software licenses: You may need to purchase licenses for software programs to help with tasks like scheduling, inventory management, and point-of-sale systems.
- Banking fees: You will need to pay fees for banking services, such as transaction fees, monthly account fees, and ATM fees.
- Repairs and maintenance: As with any business, you may need to budget for repairs and maintenance of equipment, furniture, and the physical space of your café.
- Cleaning services: You may need to hire a cleaning service to keep your café clean and sanitary.
- Licenses and permits: Depending on your location, you may need to pay for licenses and permits to operate your café, such as a food service license or health inspection fees.
- Training and development: You may need to budget for training and development programs for your employees, such as barista training or customer service workshops.
- Waste management: You may need to pay for waste removal and recycling services for your café.
- Credit card processing fees: If you accept credit card payments, you will need to pay fees for each transaction.
This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small café might not have the same level of expenditure as a larger one, for example.
What investments are needed to start or grow a café?
Once you have an idea of how much sales you could achieve and what it will cost to run your café, it is time to look into the equipment required to launch or expand the activity.
For a café, capital expenditures and initial working capital items could include:
- Café Equipment: This includes items such as coffee machines, blenders, refrigerators, and ovens. These are essential for the daily operations of a café and can be a significant expense for a new business.
- Furniture and Fixtures: This category includes tables, chairs, display shelves, and other furniture needed to set up the café. These items not only serve a functional purpose but also contribute to the overall aesthetic and atmosphere of the café.
- Renovations and Remodeling: If you are starting a new café or taking over an existing space, you may need to make renovations or remodel the space to fit your vision. This can include things like painting, flooring, lighting, and other changes to create a welcoming and inviting environment for your customers.
- Point of Sale System: A modern and efficient point of sale system is crucial for a café to track sales, manage inventory, and process payments. This can include hardware, software, and any necessary training to ensure smooth operations.
- Signage and Branding: Creating a strong brand identity is essential for the success of a café. This can include designing and installing exterior signage, menu boards, and other branding materials to attract customers and establish your brand in the community.
Again, this list will need to be adjusted according to the specificities of your café.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
The financing plan of your café
The next step in the creation of your financial forecast for your café is to think about how you might finance your business.
You will have to assess how much capital will come from shareholders (equity) and how much can be secured through banks.
Bank loans will have to be modelled so that you can separate the interest expenses from the repayments of principal, and include all this data in your forecast.
Issuing share capital and obtaining a bank loan are two of the most common ways that entrepreneurs finance their businesses.
What tables compose the financial plan for a café?
Now let's have a look at the main output tables of your café's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your café's expected growth and profitability over the next three to five years.
A financially viable P&L statement for a café should normally show:
- Sales growing above inflation
- Stable or expanding (ideally) profit margins
- A net profit
This will of course depend on the stage of your business: a new venture might be loss-making until it reaches its breakeven point in year 2 or 3, for example.
The projected balance sheet
The projected balance sheet gives an overview of your café's financial structure at the end of the financial year.
It is composed of three categories of items: assets, liabilities and equity:
- Assets: are what the business possesses and uses to produce cash flows. It includes resources such as cash, buildings, equipment, and accounts receivable (money owed by clients).
- Liabilities: are the debts of your café. They include accounts payable (money owed to suppliers), taxes due and bank loans.
- Equity: is the combination of what has been invested by the business owners and the cumulative profits to date (which are called retained earnings). Equity is a proxy for the value of the owner's stake in the business.
The projected cash flow statement
A projected cash flow statement for a café is used to show how much cash the business is generating or consuming.
The cash flow forecast is usually organised by nature to show three key metrics:
- The operating cash flow: do the core business activities generate or consume cash?
- The investing cash flow: how much is the business investing in long-term assets (this is usually compared to the level of fixed assets on the balance sheet to assess whether the business is regularly maintaining and renewing its equipment)?
- The financing cash flow: is the business raising new financing or repaying financiers (debt repayment, dividends)?
Cash is king and keeping an eye on future cash flows is imperative for running a successful business. Therefore, you should pay close attention to your café's cash flow forecast.
If you are trying to secure financing, note that it is customary to provide both yearly and monthly cash flow forecasts in a financial plan - so that the reader can analyze seasonal variation and ensure the café is appropriately capitalised.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Which tool should you use to create your café's financial forecast?
Using the right tool or solution will make the creation of your café's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your café's projections
The modern and easiest way is to use professional online financial forecasting software such as the one we offer at The Business Plan Shop.
There are several advantages to using specialised software:
- You can easily create your financial forecast by letting the software take care of the financial calculations for you without errors
- You have access to complete financial forecast templates
- You get a complete financial forecast ready to be sent to your bank or investors
- You can easily track your actual financial performance against your financial forecast, and recalibrate your forecast as the year goes by
- You can create scenarios to stress test your forecast's main assumptions
- You can easily update your forecast as time goes by to maintain visibility on future cash flows
- You have a friendly support team on standby to assist you when you are stuck
- It’s cost-efficient and much cheaper than using an accountant or consultant (see below)
If you are interested in this type of solution, you can try our forecasting software for free by signing up here.
Calling in a financial consultant or chartered accountant
Outsourcing the creation of your café financial forecast is another possible solution.
This will cost more than using software as you can expect as your price will have to cover the accountant’s time, software cost, and profit margin.
Price can vary greatly based on the complexity of your business. For a small business, from experience, a simple three-year financial forecast (including a balance sheet, income statement, and cash flow statement) will start at around £700 or $1,000.
Bear in mind that this is for forecasts produced at a single point in time, updating or tracking your forecast against actuals will cost extra.
If you decide to outsource your forecasting:
- Make sure the professional has direct experience in your industry and is able to challenge your assumptions constructively.
- Steer away from consultants using sectorial ratios to build their client’s financial forecasts (these projections are worthless for a small business).
Why not use a spreadsheet such as Excel or Google Sheets to build your café's financial forecast?
You and your financial partners need numbers you can trust. Unless you have studied finance or accounting, creating a trustworthy and error-free café financial forecast on a spreadsheet is likely to prove challenging.
Financial modelling is very technical by nature and requires a solid grasp of accounting principles to be done without errors. This means that using spreadsheet software like Excel or Google Sheets to create accurate financial forecasts is out of reach for most business owners.
Creating forecasts in Excel is also inefficient nowadays:
- Software has advanced to the point where forecasting can be done much faster and more accurately than manually on a spreadsheet.
- With artificial intelligence, the software is capable of detecting mistakes and helping decision-making.
Spreadsheets are versatile tools but they are not tailor-made for reporting. Importing your café's accounting data in Excel to track actual vs. forecast is incredibly manual and tedious (and so is keeping forecasts up to date). It is much faster to use dedicated financial planning tools like The Business Plan Shop which are built specially for this.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Use our financial projection templates for inspiration
The Business Plan Shop has dozens of financial forecast templates available.
Our examples contain a complete business plan with a financial forecast and a written presentation of the company, the team, the strategy, and the medium-term objectives.
Whether you are just starting out or already have your own café, looking at our financial forecast template is a good way to:
- Understand what a complete business plan should look like
- Understand how you should model financial items for your café
Takeaways
- Having a financial forecast enables you to visualise the expected growth, profitability, and cash generation for your business over the next three to five years.
- Tracking actuals vs. forecast and keeping your financial projections up-to-date is the only way to get a view on what your café future cash flows may look like.
- Using financial forecasting software is the mordern and easy way to create and maintain your forecasts.
This is the end of our guide on how to build the financial forecast for a café, we hope you found it useful. Don't hesitate to contact us if you want to share your feedback or have any questions.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Also on The Business Plan Shop
- Example of financial forecast
- How to create a sales forecast for a business?
- Example of financial forecast for business idea
Know someone who owns or is thinking of starting a café? Share our forecasting guide with them!
Founder & CEO at The Business Plan Shop Ltd
