How to create a financial forecast for a lighting equipment manufacturer?
Creating a financial forecast for your lighting equipment manufacturing 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 lighting equipment manufacturing 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 lighting equipment manufacturing business?
The financial projections for your lighting equipment 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 lighting equipment 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.
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What information is used as input to build a lighting equipment manufacturing business financial forecast?
A lighting equipment manufacturing 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 lighting equipment manufacturing business.
If you are creating (or updating) the forecast of an existing lighting equipment manufacturing 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 lighting equipment manufacturing 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 lighting equipment manufacturing 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 lighting equipment manufacturing business's financial forecast.
The sales forecast for a lighting equipment manufacturing business
From experience, it usually makes sense to start your lighting equipment manufacturing business's financial projection with the revenues forecast.
The inputs used to forecast your sales will include the historical trading data of your lighting equipment 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 lighting equipment 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:
- Competition: The level of competition in the lighting equipment manufacturing industry can affect your average price and number of monthly transactions. If there is intense competition, you may have to lower your prices to remain competitive, which can lead to a decrease in your average price. Similarly, if your competitors are offering better deals or promotions, it may impact the number of transactions your business receives.
- Economic conditions: Changes in the overall economic conditions can also have an impact on your business's sales forecast. For example, during a recession, consumers may have less disposable income, leading to a decrease in demand for your lighting equipment. This can result in a decrease in average price and number of monthly transactions.
- Technological advancements: As technology continues to evolve, it can affect the demand for your lighting equipment. For instance, if there is a new and more energy-efficient lighting technology introduced in the market, it may decrease the demand for your products, leading to a decrease in average price and number of monthly transactions.
- Seasonal demand: Depending on the type of lighting equipment your business produces, there may be seasonal fluctuations in demand. For example, if you manufacture holiday lighting, you may experience a surge in sales during the holiday season, resulting in an increase in average price and number of monthly transactions. However, during other times of the year, your sales may decrease.
- Government regulations: Changes in government regulations, such as energy efficiency standards, can impact the demand for your lighting equipment. If new regulations require your products to meet certain standards, it may lead to an increase in production costs, which can affect your average price. Additionally, if the regulations make your products less desirable, it can decrease the number of monthly transactions your business receives.
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.
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The operating expenses for a lighting equipment manufacturing business
The next step is to estimate the expenses needed to run your lighting equipment manufacturing 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 lighting equipment manufacturing business's operating expenses should include the following items at a minimum:
- Staff costs: This includes salaries, wages, benefits, and any other expenses related to your employees. As a lighting equipment manufacturing business, you may need engineers, technicians, production workers, and administrative staff to run your operations.
- Accountancy fees: You will need to hire an accountant to manage your financial records, prepare tax returns, and provide financial advice for your business. This can include monthly or annual fees, depending on the services you require.
- Insurance costs: As with any business, it is important to have insurance to protect your company from potential risks and liabilities. This can include property insurance, liability insurance, and worker's compensation insurance.
- Software licenses: To run your business efficiently, you may need software for accounting, inventory management, customer relationship management, and other operations. These software programs may require monthly or annual licensing fees.
- Banking fees: As a business, you will likely have a business bank account to manage your finances. This may include fees for account maintenance, transactions, and wire transfers.
- Rent/lease expenses: If you do not own the building or space where your business is located, you will need to pay rent or lease expenses. This can include rent for a manufacturing facility, office space, or warehouse.
- Utilities: As a manufacturing business, you will have high energy consumption from machinery and equipment. This can include electricity, water, and gas bills.
- Raw materials: To produce your lighting equipment, you will need to purchase raw materials such as metal, plastic, and glass. The cost of these materials will vary depending on market prices and suppliers.
- Marketing and advertising: To promote your business and products, you may need to invest in marketing and advertising efforts. This can include expenses for creating marketing materials, attending trade shows, and running online advertising campaigns.
- Maintenance and repairs: With the use of machinery and equipment, there may be maintenance and repair costs to keep them in good working condition. This can include routine maintenance, unexpected repairs, and replacement parts.
- Shipping and logistics: To deliver your products to customers, you will need to pay for shipping and logistics services. This can include transportation costs, packaging materials, and warehousing fees.
- Professional fees: As a business, you may need to seek professional advice from lawyers, consultants, or other experts. This can include fees for legal services, consulting services, and market research.
- Training and development: To keep your employees up-to-date with industry trends and best practices, you may need to invest in training and development programs. This can include fees for workshops, conferences, and online courses.
- Office supplies: To run your business, you will need to purchase office supplies such as paper, pens, and printer ink. These may seem like small expenses, but they can add up over time.
- Taxes and licenses: As a business, you will need to pay taxes and obtain necessary licenses to operate legally. This can include income tax, sales tax, and business licenses.
This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small lighting equipment manufacturing business might not have the same level of expenditure as a larger one, for example.
What investments are needed to start or grow a lighting equipment manufacturing business?
Once you have an idea of how much sales you could achieve and what it will cost to run your lighting equipment manufacturing business, it is time to look into the equipment required to launch or expand the activity.
For a lighting equipment manufacturing business, capital expenditures and initial working capital items could include:
- Machinery and Equipment: This includes any specialized machinery or equipment needed for the manufacturing process, such as presses, molds, and assembly machines. These are essential for producing high-quality lighting products efficiently and effectively.
- Facility Renovations: As a lighting equipment manufacturing business, you may need to renovate or modify your facility to accommodate the production process. This could include installing proper lighting, ventilation systems, and storage space for raw materials and finished products.
- Technology Upgrades: In order to stay competitive in the market, it's important to invest in the latest technology and software for your business. This could include computer-aided design (CAD) software, advanced manufacturing equipment, and inventory management systems.
- Raw Materials and Supplies: Raw materials and supplies are essential for the production of lighting equipment. This could include components such as LED bulbs, wires, connectors, and packaging materials. It's important to budget for these expenses to ensure a steady supply of materials for production.
- Furniture and Fixtures: This includes any furniture and fixtures needed for your office and production facility, such as desks, chairs, workbenches, and shelving units. These items are necessary for creating a comfortable and organized workplace for you and your employees.
Again, this list will need to be adjusted according to the specificities of your lighting equipment 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 lighting equipment manufacturing business
The next step in the creation of your financial forecast for your lighting equipment 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 lighting equipment manufacturing business?
Now let's have a look at the main output tables of your lighting equipment manufacturing business's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your lighting equipment manufacturing business's expected growth and profitability over the next three to five years.
A financially viable P&L statement for a lighting equipment manufacturing business 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
Your lighting equipment manufacturing business's projected balance sheet provides a snapshot of your business’s financial position at year-end.
It is composed of three types of elements: assets, liabilities and equity:
- Assets: represent what the business possesses including cash, equipment, and accounts receivable (money owed by clients).
- Liabilities: represent funds advanced to the business by lenders and other creditors. They include accounts payable (money owed to suppliers), taxes payable and loans from banks and financial institutions.
- 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 lighting equipment manufacturing 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 lighting equipment manufacturing 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 lighting equipment manufacturing 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 lighting equipment manufacturing business's financial forecast?
Using the right tool or solution will make the creation of your lighting equipment manufacturing business's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your lighting equipment manufacturing business'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.
Hiring a financial consultant or chartered accountant
Hiring a consultant or chartered accountant is also an efficient way to get a professional lighting equipment 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 lighting equipment manufacturing business's financial forecast?
Creating an accurate and error-free lighting equipment manufacturing 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 forecasting templates available.
Our examples contain both the financial forecast, and a written business plan which presents, in detail, the company, the team, the strategy, and the medium-term objectives.
Whether you are just starting out or already have your own lighting equipment manufacturing business, looking at our template is always a good way to get ideas on how to model financial items and what to write when creating a business plan to secure funding.
Takeaways
- A financial forecast shows expected growth, profitability, and cash generation metrics for your lighting equipment manufacturing business.
- Tracking actuals vs. forecast and having an up-to-date financial forecast is key to maintaining visibility on your future cash flows.
- Using financial forecasting software is the modern way of creating and maintaining financial projections.
We hope that this guide helped you gain a clearer perspective on the steps needed to create the financial forecast for a lighting equipment manufacturing business. Don't hesitate to contact us if you 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
- Financial forecast example
- How to project revenues for a business?
- Example of financial forecast for business idea
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Founder & CEO at The Business Plan Shop Ltd
