How to create a financial forecast for a marketplace?
Creating a financial forecast for your marketplace, 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 marketplace 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 marketplace?
The financial projections for your marketplace 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 marketplace'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 used as input to build a marketplace financial forecast?
A marketplace'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 marketplace.
If you are creating (or updating) the forecast of an existing marketplace, 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 marketplace 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 marketplace 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 marketplace's financial forecast.
The sales forecast for a marketplace
From experience, it usually makes sense to start your marketplace's financial projection with the revenues forecast.
The inputs used to forecast your sales will include the historical trading data of your marketplace (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 marketplace'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: As more competitors enter the market, the average price of your products or services may decrease due to increased competition. This may also lead to a decrease in the number of monthly transactions as customers have more options to choose from.
- Economic conditions: Economic downturns can lead to a decrease in consumer spending, which can result in a decrease in the average price of your products or services. This may also lead to a decrease in the number of monthly transactions as customers have less disposable income.
- Product or service quality: If your marketplace offers high-quality products or services, this can lead to an increase in the average price and also attract more customers, resulting in an increase in the number of monthly transactions.
- Technology advancements: As technology advances and new features or products become available, this may increase the average price of your products or services. It may also attract more customers who are willing to pay for the latest technology, resulting in an increase in the number of monthly transactions.
- Market demand: The overall demand for your products or services can greatly impact the average price and number of monthly transactions. If there is a high demand for your offerings, you may be able to increase the average price and see an increase in the number of transactions. On the other hand, a decrease in demand may lead to a decrease in the average price and number of transactions.
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 marketplace
The next step is to estimate the costs you’ll have to incur to operate your marketplace.
These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.).
But your marketplace's operating expenses should normally include the following items:
- Staff Costs: This includes salaries, benefits, and payroll taxes for all employees involved in running the marketplace, such as customer service representatives, developers, and marketing staff.
- Accountancy Fees: You may need to hire an accountant or accounting firm to handle your marketplace's finances, including tax preparation, bookkeeping, and financial reporting.
- Insurance Costs: It's important to have insurance coverage for your marketplace, including general liability insurance, cyber liability insurance, and business interruption insurance.
- Software Licenses: As a marketplace operator, you'll need to invest in software licenses for various platforms and tools, such as e-commerce software, payment processing software, and marketing automation software.
- Banking Fees: To process transactions and manage your marketplace's finances, you'll need a business bank account, which may come with fees such as monthly maintenance fees, transaction fees, and wire transfer fees.
- Marketing and Advertising Costs: To attract buyers and sellers to your marketplace, you'll need to invest in marketing and advertising efforts, such as social media ads, influencer partnerships, and email marketing campaigns.
- Website Hosting and Maintenance: Your marketplace's website will need to be hosted on a server, and you may need to pay for additional maintenance services to keep it running smoothly.
- Customer Service Costs: Providing excellent customer service is crucial for the success of your marketplace, and you may need to hire a team or outsource this function to a call center.
- Legal Fees: As a marketplace operator, you may need to consult with a lawyer for various legal matters, such as drafting contracts, addressing intellectual property issues, and handling disputes.
- Office Rent: If you have a physical office space for your marketplace, you'll need to factor in the cost of rent, utilities, and other associated expenses.
- Travel Expenses: Depending on the nature of your marketplace, you may need to travel for business purposes, such as attending conferences, meeting with potential partners, or conducting market research.
- Professional Development: As a marketplace operator, it's important to stay updated on industry trends and best practices, which may involve attending workshops, conferences, and other professional development opportunities.
- Taxes: You'll need to factor in income and sales taxes for your marketplace, as well as any other applicable taxes, such as property or excise taxes.
- Office Supplies and Equipment: Your marketplace's physical office space may require supplies such as computers, printers, and office furniture, as well as ongoing expenses for items like paper, ink, and stationery.
- Utilities: If you have a physical office space, you'll need to factor in expenses for utilities such as electricity, water, and internet service.
This list is not exhaustive by any means, and will need to be tailored to your marketplace's specific circumstances.
What investments are needed to start or grow a marketplace?
Creating and expanding a marketplace also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for a marketplace could include elements such as:
- Technology Infrastructure: This includes servers, databases, and other hardware and software necessary for the functioning of your marketplace platform. These are essential for the smooth operation of your marketplace and should be included in your expenditure forecast.
- Payment Processing System: As a marketplace, you will need a secure and reliable payment processing system to facilitate transactions between buyers and sellers. This may include fees for setting up the system, as well as ongoing transaction fees.
- User Acquisition and Onboarding: While marketing and advertising expenses may fall under operating expenses, the initial costs of acquiring and onboarding users to your marketplace should be included in your capital expenditure forecast. This may include costs for developing user-friendly interfaces and onboarding materials.
- Customer Support Tools: Keeping your users satisfied and resolving any issues they may have is crucial for the success of your marketplace. As such, investing in customer support tools, such as helpdesk software, may be necessary and should be included in your expenditure forecast.
- Security Measures: As a marketplace, you are responsible for protecting the sensitive data of your users. This may involve investing in security measures, such as encryption software and regular security audits, to ensure the safety and trust of your platform.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your marketplace.
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 marketplace
The next step in the creation of your financial forecast for your marketplace 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 marketplace?
Now let's have a look at the main output tables of your marketplace's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your marketplace's expected growth and profitability over the next three to five years.
A financially viable P&L statement for a marketplace 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 marketplace'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 cash flow forecast
Your marketplace's cash flow forecast shows how much cash your business is expected to consume or generate in the years to come.
It is best practice to organise the cash flow forecast by nature to better explain where cash is used or generated by the marketplace:
- Operating cash flow: shows how much cash is generated by the operating activities
- Investing cash flow: shows how much will be invested in capital expenditure to maintain or expand the business
- Financing cash flow: shows if the business is raising new capital or repaying financiers (debt repayment, dividends)
Keeping an eye on (and regularly updating) your marketplace's cash flow forecast is key to ensuring that your business has sufficient liquidity to operate normally and to detect financing requirements as early as possible.
If you are trying to raise capital, you will normally be asked to provide a monthly cash flow forecast in your marketplace's financial plan - so that banks or investors can assess seasonal variation and ensure your 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 marketplace's financial forecast?
Using the right tool or solution will make the creation of your marketplace's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your marketplace'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
Enlisting the help of a consultant or accountant is also a good way to obtain a professional marketplace 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 marketplace'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 marketplace 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 marketplace'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 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 marketplace, 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 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 marketplace.
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 marketplace. 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 project revenues for a business?
- Sample financial forecast for business idea
Know someone who runs or wants to start a marketplace? Share our financial projection guide with them!
Founder & CEO at The Business Plan Shop Ltd
