How to create a financial forecast for a product certification laboratory?

Creating a financial forecast for your product certification laboratory, 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 product certification laboratory 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 product certification laboratory?

Creating and maintaining an up-to-date financial forecast is the only way to steer the development of your product certification laboratory and ensure that it can be financially viable in the years to come.

A financial plan for a product certification laboratory 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 product certification laboratory 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 product certification laboratory'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.

What information is used as input to build a product certification laboratory financial forecast?

A product certification laboratory'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 product certification laboratory, 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 product certification laboratory 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 product certification laboratory 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 product certification laboratory's financial forecast.

The sales forecast for a product certification laboratory

The sales forecast, also called topline projection, is normally where you will start when building your product certification laboratory financial forecast.

Creating a coherent sales projection boils down to estimating two key drivers:

• The average price 
• The number of monthly transactions

To do this, you will need to rely on historical data (for an existing business), market research data (for both new and existing product certification laboratories), and consider the elements below:

After the sales forecast comes the operating expenses budget, which we will now look into in more detail.

The operating expenses for a product certification laboratory

The next step is to estimate the expenses needed to run your product certification laboratory 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 product certification laboratory's operating expenses should include the following items at a minimum:

This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small product certification laboratory might not have the same level of expenditure as a larger one, for example.

What investments are needed to start or grow a product certification laboratory?

Once you have an idea of how much sales you could achieve and what it will cost to run your product certification laboratory, it is time to look into the equipment required to launch or expand the activity.

For a product certification laboratory, capital expenditures and initial working capital items could include:

Again, this list will need to be adjusted according to the specificities of your product certification laboratory.

The financing plan of your product certification laboratory

The next step in the creation of your financial forecast for your product certification laboratory 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 product certification laboratory?

Now let's have a look at the main output tables of your product certification laboratory's financial forecast.

The profit & loss forecast

The forecasted profit & loss statement will enable you to visualise your product certification laboratory's expected growth and profitability over the next three to five years.

A financially viable P&L statement for a product certification laboratory 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 product certification laboratory'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 projection

The cash flow forecast of your product certification laboratory 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 product certification laboratory'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 product certification laboratory 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 product certification laboratory's financial plan. 

Which tool should you use to create your product certification laboratory's financial projections?

Building a product certification laboratory 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 product certification laboratory'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 product certification laboratory 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 product certification laboratory's financial forecast?

Creating an accurate and error-free product certification laboratory 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.

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 product certification laboratory, 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

1. A financial projection shows expected growth, profitability, and cash generation for your business over the next three to five years.
2. Tracking actuals vs. forecast and keeping your financial forecast up-to-date is the only way to maintain visibility on future cash flows.
3. Using financial forecasting software makes it easy to create and maintain up-to-date projections for your product certification laboratory.

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 product certification laboratory. Don't hesitate to contact our team if you have any questions or want to share your experience building forecasts!

Also on The Business Plan Shop

• Example of financial projections
• How to project sales for a business?
• Financial forecast template for a business idea

Know someone who runs or wants to start a product certification laboratory? Share our financial projection guide with them!