How to create a financial forecast for a house flipping business?
Creating a financial forecast for your house flipping business, 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 house flipping business 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 house flipping business?
Creating and maintaining an up-to-date financial forecast is the only way to steer the development of your house flipping business and ensure that it can be financially viable in the years to come.
A financial plan for a house flipping business enables you to look at your business in detail - from income to operating costs and investments - to evaluate its expected profitability and future cash flows.
This gives you the visibility needed to plan future investments and expansion with confidence.
And, when your trading environment gets tougher, having an up to date house flipping business forecast enables you to detect potential upcoming financing shortfalls in advance, enabling you to make adjustments or secure financing before you run out of cash.
It’s also important to remember that your house flipping business's financial forecast will be essential when looking for financing. You can be 100% certain that banks and investors will ask to see your numbers, so make sure they’re set out accurately and attractively.
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 house flipping business financial forecast?
A house flipping business's financial forecast needs to be built on the right foundation: your assumptions.
The data required to create your assumptions will depend on whether you are a new or existing house flipping business.
If you are creating (or updating) the forecast of an existing house flipping business, then your main inputs will be historical accounting data and operating metrics, and your team’s view on what to expect for the next three to five years.
If you are building financial projections for a new house flipping business startup, you will need to rely on market research to form your go-to-market strategy and derive your sales forecast.
For a new venture, you will also need an itemised list of resources needed for the house flipping business to operate, along with a list of equipment required to launch the venture (more on that below).
Now that you understand what is needed, let’s have a look at what elements will make up your house flipping business's financial forecast.
The sales forecast for a house flipping business
From experience, it is usually best to start creating your house flipping business financial forecast by your sales forecast.
To create an accurate sales forecast for your house flipping business, you will have to rely on the data collected in your market research, or if you're running an existing house flipping business, 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:
- The average price of houses in your target market
- The availability of financing options for potential buyers
- The condition of the housing market in your area
- The popularity of house flipping as a form of investment
- The number of foreclosures or distressed properties in your area
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.
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 house flipping business
The next step is to estimate the expenses needed to run your house flipping business 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 house flipping business's operating expenses should include the following items at a minimum:
- Staff costs: This includes salaries, wages, and benefits for any employees you have, such as contractors, carpenters, and project managers.
- Accountancy fees: You may need to hire an accountant to help you with bookkeeping, tax filings, and financial planning for your house flipping business.
- Insurance costs: It's important to have insurance coverage for your properties, as well as liability insurance for any potential accidents or injuries on the job.
- Software licenses: You may need to invest in software for project management, accounting, or design purposes. Make sure to budget for any recurring software subscription fees.
- Banking fees: You'll likely have to pay fees for business bank accounts, credit card processing, and wire transfers.
- Legal fees: You may need to hire a lawyer for contract review, real estate transactions, or other legal matters related to your house flipping business.
- Marketing expenses: This can include costs for advertising, website design, business cards, and other marketing materials to promote your business and attract potential buyers.
- Office supplies: You'll need basic office supplies such as paper, pens, printer ink, and envelopes for your administrative tasks.
- Utilities: This includes costs for electricity, water, gas, and internet for your office and any properties you own.
- Property taxes: As a property owner, you'll have to pay property taxes on any properties you own, so make sure to include this in your budget.
- Renovation costs: This includes materials, labor, and other expenses for any renovations or repairs you need to make on your properties.
- Inspection fees: You may need to hire a home inspector to assess the condition of a property before purchasing it, or to conduct inspections during the renovation process.
- Permits and licenses: Depending on your location, you may need to obtain permits and licenses for your house flipping business, which may have associated fees.
- Travel expenses: If you need to travel for property inspections, meetings with contractors, or other business-related tasks, make sure to budget for transportation, lodging, and meals.
- Miscellaneous expenses: This can include any other unexpected or miscellaneous costs that may arise while running your house flipping business, such as legal fees for disputes or unexpected repairs on a property.
This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small house flipping business might not have the same level of expenditure as a larger one, for example.
What investments are needed to start or grow a house flipping business?
Your house flipping business financial forecast will also need to include the capital expenditures (aka investments in plain English) and initial working capital items required for the creation or development of your business.
For a house flipping business, these could include:
- Renovation materials and supplies: This includes items such as flooring, paint, fixtures, and appliances that are necessary to update and improve the property before putting it on the market.
- Property acquisition costs: This includes expenses related to purchasing the property, such as closing costs, title insurance, and appraisal fees.
- Contractor fees and labor costs: Flipping a house often requires hiring contractors and other laborers for tasks such as plumbing, electrical work, and carpentry. These labor costs can add up quickly and should be included in your expenditure forecast.
- Permits and inspections: Before making any major changes to a property, you will likely need to obtain permits and have the property inspected. These costs should be factored into your budget.
- Equipment and tools: Depending on the scope of your house flipping business, you may need to purchase or rent equipment and tools, such as power tools, ladders, and a truck for hauling materials.
Again, this list will need to be adjusted according to the size and ambitions of your house flipping 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 house flipping business
The next step in the creation of your financial forecast for your house flipping 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 house flipping business?
Now let's have a look at the main output tables of your house flipping business'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 house flipping business'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 house flipping business will look different than for a startup.
The projected balance sheet
Your house flipping business's forecasted balance sheet enables you to assess your financial structure and working capital requirements.
It is composed of three types of elements: assets, liabilities and equity:
- Assets: represent what the business owns and uses to produce cash flows. It includes resources such as cash, equipment, and accounts receivable (money owed by clients).
- Liabilities: represent funds advanced to the business by lenders and other creditors. It includes items such as accounts payable (money owed to suppliers), taxes due and loans.
- Equity: is the combination of what has been invested by the business owners and the cumulative profits and losses generated by the business 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 house flipping business 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 house flipping business'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 house flipping business 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 house flipping business's financial projections?
Building a house flipping 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 projection software to build your house flipping business's forecast
The modern and easiest way to build a forecast is to use professional financial projection 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 house flipping business 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 house flipping business's financial forecast?
Creating an accurate and error-free house flipping business financial forecast with a spreadsheet is very technical and requires a deep knowledge of accounting and an understanding of financial modelling.
Very few business owners are financially savvy enough to be able to build a forecast themselves on Excel without making mistakes.
Lenders and investors know this, which is why forecasts created on Excel by the business owner are often frowned upon.
Having numbers one can trust is key when it comes to financial forecasting and to that end using software is much safer.
Using financial forecasting software is also faster than using a spreadsheet, and, with the rise of artificial intelligence, software is also becoming smarter at helping us analyse the numbers to make smarter decisions.
Finally, like everything with spreadsheets, tracking actuals vs. forecasts and keeping your projections up to date as the year progresses is manual, tedious, and error-prone. Whereas financial projection 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 house flipping 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 house flipping business
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 house flipping business 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 house flipping business, 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?
- Sample financial forecast for business idea
Know someone who owns or is thinking of starting a house flipping business? Share our forecasting guide with them!
Founder & CEO at The Business Plan Shop Ltd
