How to create a financial forecast for a chemical manufacturer?
If you are serious about keeping visibility on your future cash flows, then you need to build and maintain a financial forecast for your chemical manufacturing business.
Putting together a chemical manufacturing business financial forecast may sound complex, but don’t worry, with the right tool, it’s easier than it looks, and The Business Plan Shop is here to guide you.
In this practical guide, we'll cover everything you need to know about building financial projections for your chemical manufacturing business.
We will start by looking at why they are key, what information is needed, what a forecast looks like once completed, and what solutions you can use to create yours.
Let's dive in!
Why create and maintain a financial forecast for a chemical manufacturing business?
The financial projections for your chemical manufacturing business act as a financial blueprint to guide its growth with confidence and ensure its long-term financial viability.
To create them, you will need to look at your business in detail - from sales to operating costs and investments - to assess how much profit it can generate in the years to come and what will be the associated cash flows.
During challenging market conditions, maintaining an up-to-date financial forecast enables early detection of potential financial shortfalls, allowing for timely adjustments or securing financing before facing a cash crisis.
Your chemical manufacturing business's financial forecast will also prove invaluable when seeking financing. Banks and investors will undoubtedly request a thorough examination of your financial figures, making precision and presentation essential.
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 needed to build a chemical manufacturing business financial forecast?
The quality of your inputs is key when it comes to financial modelling: no matter how good the model is, if your inputs are off, so will the forecast.
If you are building a financial plan to start a chemical manufacturing business, you will need to have done your market research and have a clear picture of your sales and marketing strategies so that you can project revenues with confidence.
You will also need to have a clear idea of what resources will be required to operate the chemical manufacturing business on a daily basis, and to have done your research with regard to the equipment needed to launch your venture (see further down this guide).
If you are creating a financial forecast of an existing chemical manufacturing business, things are usually simpler as you will be able to use your historical accounting data as a budgeting base, and complement that with your team’s view on what lies ahead for the years to come.
Let's now zoom in on what will go in your chemical manufacturing business's financial forecast.
The sales forecast for a chemical manufacturing business
From experience, it usually makes sense to start your chemical manufacturing business's financial projection with the revenues forecast.
The inputs used to forecast your sales will include the historical trading data of your chemical manufacturing business (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 chemical manufacturing business'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:
- Changes in global demand for chemical products: Fluctuations in demand for certain chemicals in the global market can impact the average price and number of monthly transactions for your business. For example, an increase in demand for a particular chemical could lead to higher prices and more transactions, while a decrease in demand could result in lower prices and fewer transactions.
- New regulations and restrictions on chemical usage: The introduction of new regulations or restrictions on the use of certain chemicals can affect the availability and cost of raw materials, which in turn can impact the average price and number of monthly transactions for your business. For instance, if a chemical used in your manufacturing process becomes restricted, it may be more difficult and expensive to obtain, leading to higher prices and potentially fewer transactions.
- Technological advancements in the chemical industry: Advancements in technology can lead to the development of new and improved chemical products, which may impact the demand for and prices of existing products. For example, the introduction of a more efficient and cost-effective method for producing a certain chemical may result in lower prices and higher demand, leading to an increase in monthly transactions for your business.
- Natural disasters or supply chain disruptions: Natural disasters or disruptions in the supply chain can have a significant impact on the availability and cost of raw materials for your business. This can result in changes in the average price and number of monthly transactions for your products. For instance, a hurricane or earthquake in a region where your raw materials are sourced from could lead to shortages and higher prices.
- Changes in exchange rates: If your business operates in multiple countries or sources raw materials from overseas, changes in exchange rates can affect the cost of materials and ultimately impact the average price and number of transactions for your products. For example, a decrease in the value of the currency used to purchase raw materials could lead to higher costs and prices for your products.
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 chemical manufacturing business
The next step is to estimate the costs you’ll have to incur to operate your chemical manufacturing business.
These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.).
But your chemical manufacturing business's operating expenses should normally include the following items:
- Staff Costs: This includes the salaries, wages, and benefits for all employees, from production workers to administrative staff, as well as any training and development costs.
- Raw Materials: This expense covers the cost of purchasing the chemicals and other materials needed for production, including any shipping and handling fees.
- Utilities: The operation of a chemical manufacturing business requires a significant amount of energy and water, resulting in high utility costs.
- Rent/Lease: Whether you own or lease your manufacturing facility, you will have to pay for the space and any associated fees, such as property taxes and maintenance.
- Insurance Costs: As with any business, chemical manufacturers need to protect themselves from potential risks and liabilities, resulting in insurance costs for property, liability, and workers' compensation.
- Accountancy Fees: You will likely need to hire an accountant to manage your financial records, file taxes, and provide financial advice, resulting in fees for their services.
- Marketing and Advertising: To attract customers and promote your products, you may incur expenses for marketing and advertising campaigns, such as trade shows, print and digital ads, and brochures.
- Maintenance and Repairs: As with any equipment, the machinery and facilities used in chemical manufacturing will require regular maintenance and occasional repairs, resulting in ongoing expenses.
- Software Licenses: To manage production processes, track inventory, and handle other business operations, you may need to purchase software licenses, resulting in ongoing fees.
- Packaging and Labeling: Packaging and labeling materials are necessary for shipping and selling your products, resulting in ongoing expenses for these supplies.
- Banking Fees: As a business, you will likely have a business bank account and incur fees for services such as wire transfers and overdraft protection.
- Transportation and Logistics: Depending on your business model, you may need to transport raw materials and finished products, resulting in expenses for shipping, trucking, or other transportation services.
- Safety and Regulatory Compliance: Chemical manufacturing is a highly regulated industry, and you will need to comply with safety standards and regulations, resulting in expenses for training, inspections, and compliance fees.
- Taxes: As a business, you will be responsible for paying various taxes, including income taxes, property taxes, and sales taxes.
- Office Supplies: To keep your business running smoothly, you will need to purchase office supplies such as paper, ink, and other essentials.
This list is not exhaustive by any means, and will need to be tailored to your chemical manufacturing business's specific circumstances.
What investments are needed to start or grow a chemical manufacturing business?
Creating and expanding a chemical manufacturing business also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for a chemical manufacturing business could include elements such as:
- Machinery: You will need to purchase various types of machinery to manufacture your chemical products. This includes equipment such as reactors, distillation columns, and mixers.
- Facility Renovations: Depending on the condition of your manufacturing facility, you may need to make renovations or upgrades to ensure that it meets safety and regulatory standards. This could include installing new ventilation systems, upgrading electrical systems, or making structural improvements.
- Raw Materials Inventory: As a chemical manufacturer, your products will require a significant amount of raw materials. You will need to budget for the purchase of these materials and ensure that you have enough inventory to meet production demands.
- Packaging and Labeling Equipment: In order to package and label your products, you will need specialized equipment such as filling machines, labeling machines, and packaging materials. These are essential for ensuring that your products are properly packaged and comply with regulations.
- Transportation Vehicles: To deliver your products to customers, you may need to invest in transportation vehicles such as trucks or vans. This will allow you to transport your products safely and efficiently to their final destinations.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your chemical manufacturing 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.
The financing plan of your chemical manufacturing business
The next step in the creation of your financial forecast for your chemical manufacturing business 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 chemical manufacturing business?
Now let's have a look at the main output tables of your chemical manufacturing business's financial forecast.
The projected profit & loss statement
The projected profit & loss shows how profitable your chemical manufacturing business is likely to be in the years to come.
For your chemical manufacturing business to be financially viable, your projected P&L should ideally show:
- Sales growing above inflation (the higher the better)
- Profit margins which are stable or expanding (the higher the better)
- A net profit at the end of each financial year (the higher the better)
This is for established chemical manufacturers, there is some leniency for startups which will have numbers that will look a bit different than existing businesses.
The projected balance sheet
The projected balance sheet gives an overview of your chemical manufacturing business'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 chemical manufacturing business. 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 cash flow projection
The cash flow forecast of your chemical manufacturing business will show how much cash the business is expected to generate or consume over the next three to five years.
There are multiple ways of presenting a cash flow forecast but from experience, it is better to organise it by nature in order to clearly show these elements:
- Operating cash flow: how much cash is generated by the chemical manufacturing business's operations
- Investing cash flow: what is the business investing to expand or maintain its equipment
- Financing cash flow: is the business raising additional funds or repaying financiers (debt repayment, dividends)
Your cash flow forecast is the most important element of your overall financial projection and that’s where you should focus your attention to ensure that your chemical manufacturing business is adequately funded.
Note: if you are preparing a financial forecast in order to try to secure funding, you will need to include both a yearly and monthly cash flow forecast in your chemical manufacturing business's financial plan.
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 chemical manufacturing business's financial projections?
Building a chemical manufacturing business financial forecast is not difficult provided that you use the right tool for the job. Let’s see what options are available below.
Using online financial forecasting software to build your chemical manufacturing business's projections
The modern and easiest way is to use an online financial forecasting tool 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 projection software for free by signing up here.
Hiring a financial consultant or chartered accountant
Hiring a consultant or chartered accountant is also an efficient way to get a professional chemical manufacturing business financial projection.
As you can imagine, this solution is much more expensive than using software. From experience, the creation of a simple financial forecast over three years (including a balance sheet, income statement, and cash flow statement) is likely to start around £700 or $1,000 excluding taxes.
The indicative estimate above, is for a small business, and a forecast done as a one-off. Using a financial consultant or accountant to track your actuals vs. forecast and to keep your financial forecast up to date on a monthly or quarterly basis will naturally cost a lot more.
If you choose this solution, make sure your service provider has first-hand experience in your industry, so that they may challenge your assumptions and offer insights (as opposed to just taking your figures at face value to create the forecast’s financial statements).
Why not use a spreadsheet such as Excel or Google Sheets to build your chemical manufacturing business's financial forecast?
Creating an accurate and error-free chemical manufacturing business financial forecast on Excel (or any spreadsheet) is very technical and requires both a strong grasp of accounting principles and solid skills in financial modelling.
Most entrepreneurs lack the expertise required to create an accurate financial forecast using spreadsheet software like Excel or Google Sheets. As a result, it is unlikely anyone will trust your numbers.
The second reason is that it is inefficient. Building forecasts on spreadsheets was the only option in the 1990s and early 2000s, nowadays technology has advanced and software can do it much faster and much more accurately.
This is why professional forecasters all use software. With the rise of AI, software is also becoming smarter at helping us detect mistakes in our forecasts and helping us analyse the numbers to make better decisions.
Finally, like everything with spreadsheets, tracking actuals vs. forecasts and updating your forecast as the year progresses is manual, tedious, error-prone, and time-consuming. Whereas financial forecasting software like The Business Plan Shop is built 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 chemical manufacturing business, 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 chemical manufacturing business
Takeaways
- A financial projection shows expected growth, profitability, and cash generation for your business over the next three to five years.
- Tracking actuals vs. forecast and keeping your financial forecast up-to-date is the only way to maintain visibility on future cash flows.
- Using financial forecasting software makes it easy to create and maintain up-to-date projections for your chemical manufacturing business.
You have reached the end of our guide. We hope you now have a better understanding of how to create a financial forecast for a chemical manufacturing business. Don't hesitate to contact our team if you have any questions or want to share your experience building forecasts!
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 projections
- How to create a sales forecast for a business?
- Financial forecast for a business idea
Know someone who runs or wants to start a chemical manufacturing business? Share our financial projection guide with them!
Founder & CEO at The Business Plan Shop Ltd
