How to create a financial forecast for a computer engineering company?
Creating a financial forecast for your computer engineering company, 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 computer engineering company 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 computer engineering company?
The financial projections for your computer engineering company 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 computer engineering company'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.
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What information is used as input to build a computer engineering company financial forecast?
A computer engineering company'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 computer engineering company, 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 computer engineering company 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 computer engineering company 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 computer engineering company's financial forecast.
The sales forecast for a computer engineering company
From experience, it is usually best to start creating your computer engineering company financial forecast by your sales forecast.
To create an accurate sales forecast for your computer engineering company, you will have to rely on the data collected in your market research, or if you're running an existing computer engineering company, the historical data of the business, to estimate two key variables:
- The average price
- The number of monthly transactions
To get there, you will need to consider the following factors:
- Technology Trends: As technology is constantly evolving, new products and innovations may enter the market, causing fluctuations in your average price and number of monthly transactions. For example, the release of a new and more advanced computer chip may increase the average price of your products, while also potentially increasing the number of monthly transactions as customers upgrade to the latest technology.
- Competition: The presence of competitors in the market can also impact your average price and number of monthly transactions. If a competitor releases a similar product at a lower price, you may need to adjust your prices to remain competitive. This could potentially lead to a decrease in your average price and an increase in the number of monthly transactions as customers are drawn to the lower prices.
- Economic Conditions: Economic conditions, such as a recession or economic boom, can also affect the computer engineering industry. In times of economic downturn, customers may be more price-sensitive and opt for more affordable options, leading to a decrease in your average price. Conversely, during an economic boom, customers may be more willing to invest in higher-priced products, resulting in an increase in your average price.
- Product Lifecycle: The stage of your products' lifecycle can also impact your average price and number of monthly transactions. In the early stages, when a product is new and in high demand, you may be able to charge a higher price. However, as the product matures and becomes more widely available, the average price may decrease, and the number of monthly transactions may increase as more customers purchase the product.
- Customer Demographics: The demographics of your target market can also play a role in your average price and number of monthly transactions. For example, if your products cater to a niche market with a higher income, you may be able to charge a premium price. On the other hand, if your target market is more budget-conscious, you may need to offer more affordable options to maintain a high number of monthly transactions.
Once you have an idea of what your future sales will look like, it will be time to work on your overhead budget. Let’s see what this entails.
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The operating expenses for a computer engineering company
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your computer engineering company on a daily basis.
Expenses normally vary based on how much revenue you anticipate (which is why, from experience, it is always better to start your forecast with the topline projection), and where your business is based.
Operating expenses for a computer engineering company will include some of the following items:
- Staff Costs: This includes salaries, benefits, and any other expenses related to your employees such as training and recruitment costs.
- Accountancy Fees: As a computer engineering company, you may need to hire an accountant to manage your finances and taxes, which will incur fees.
- Insurance Costs: You will need to invest in insurance to protect your company from any potential liabilities or damages.
- Software Licences: Since your business revolves around computer engineering, you will need to purchase software licences for various programs and tools.
- Banking Fees: This includes charges for maintaining a business bank account, wire transfers, and other financial transactions.
- Rent/Lease: You may need to rent or lease office space, equipment, or other assets for your business operations.
- Utilities: This includes expenses for electricity, water, internet, and other utilities necessary for your business operations.
- Marketing and Advertising: To attract clients and promote your services, you may need to invest in marketing and advertising efforts.
- Travel Expenses: If your business requires you to travel for client meetings or conferences, you will need to budget for travel expenses such as airfare, lodging, and meals.
- Office Supplies: This includes expenses for basic office supplies such as paper, pens, printer ink, and other necessary items.
- Professional Memberships: As a computer engineering company, you may need to join professional organizations to stay updated on industry trends and network with other professionals.
- Legal Fees: You may need to hire a lawyer to handle contracts, intellectual property rights, or other legal matters related to your business.
- Training and Development: To keep up with the constantly evolving technology industry, you may need to invest in training and development programs for your employees.
- Maintenance and Repairs: This includes expenses for maintaining and repairing office equipment, computers, and other assets necessary for your business operations.
- Taxes: As a business owner, you will need to pay various taxes such as income tax, sales tax, and property tax.
This list will need to be tailored to the specificities of your computer engineering company, but should offer a good starting point for your budget.
What investments are needed to start or grow a computer engineering company?
Once you have an idea of how much sales you could achieve and what it will cost to run your computer engineering company, it is time to look into the equipment required to launch or expand the activity.
For a computer engineering company, capital expenditures and initial working capital items could include:
- Computer hardware: This includes things like desktop computers, laptops, servers, and other equipment needed to run your computer engineering company. These are essential fixed assets that will contribute to your company's overall productivity and success.
- Software licenses: As a computer engineering company, you will need to invest in various software licenses to support your operations. This includes licenses for operating systems, development tools, and other software necessary for your company's services.
- Network infrastructure: In order to connect all your devices and systems, you will need to invest in a reliable network infrastructure. This includes routers, switches, cables, and other networking equipment.
- Data center equipment: If you plan to host your own servers, you will need to invest in data center equipment such as racks, cooling systems, and backup power supplies. These are essential fixed assets that will ensure the smooth operation of your company's services.
- Testing and measurement equipment: As a computer engineering company, you will need to constantly test and measure the performance of your products and services. This may require investing in specialized equipment such as oscilloscopes, signal generators, and logic analyzers.
Again, this list will need to be adjusted according to the specificities of your computer engineering company.
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 computer engineering company
The next step in the creation of your financial forecast for your computer engineering company 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 computer engineering company?
Now let's have a look at the main output tables of your computer engineering company's financial forecast.
The forecasted profit & loss statement
The profit & loss forecast gives you a clear picture of your business’ expected growth over the first three to five years, and whether it’s likely to be profitable or not.
A healthy computer engineering company's P&L statement should show:
- Sales growing at (minimum) or above (better) inflation
- Stable (minimum) or expanding (better) profit margins
- A healthy level of net profitability
This will of course depend on the stage of your business: numbers for an established computer engineering company will look different than for a startup.
The projected balance sheet
The projected balance sheet gives an overview of your computer engineering company'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 computer engineering company. 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 computer engineering company 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 computer engineering company'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 computer engineering company 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 computer engineering company's financial forecast?
Creating your computer engineering company's financial forecast may sound fairly daunting, but the good news is that there are several ways to go about it.
Using online financial forecasting software to build your computer engineering company'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.
Calling in a financial consultant or chartered accountant
Enlisting the help of a consultant or accountant is also a good way to obtain a professional computer engineering company financial forecast.
The downside of this solution is its cost. From experience, obtaining a simple financial forecast over three years (including a balance sheet, income statement, and cash flow statement) is likely to cost a minimum of £700 or $1,000.
The indicative cost above, is for a small business, and a forecast is done as a one-shot exercise. Using a consultant or accountant to track your actuals vs. forecast and to keep your financial projections up to date on a monthly or quarterly basis will cost a lot more.
If you opt for this solution, make sure your accountant has in-depth knowledge of your industry, so that they may challenge your figures and offer insights (as opposed to just taking your assumptions at face value to create the forecast).
Why not use a spreadsheet such as Excel or Google Sheets to build your computer engineering company'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 computer engineering company 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 computer engineering company'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 forecast templates for inspiration
The Business Plan Shop has dozens of financial forecast examples available.
Our templates contain both a financial forecast and a written business plan which presents, in detail, the company, the team, the strategy, and the medium-term objectives.
Our templates are a great source of inspiration, whether you just want to see what a complete business plan looks like, or are looking for concrete examples of how you should model financial elements in your own forecast.
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 computer engineering company 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 computer engineering company, 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.
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