How to create a financial forecast for a scrap yard?
If you are serious about keeping visibility on your future cash flows, then you need to build and maintain a financial forecast for your scrap yard.
Putting together a scrap yard financial forecast may sound complex, but don’t worry, with the right tool, it’s easier than it looks, and The Business Plan Shop is here to guide you.
In this practical guide, we'll cover everything you need to know about building financial projections for your scrap yard.
We will start by looking at why they are key, what information is needed, what a forecast looks like once completed, and what solutions you can use to create yours.
Let's dive in!
Why create and maintain a financial forecast for a scrap yard?
In order to prosper, your business needs to have visibility on what lies ahead and the right financial resources to grow. This is where having a financial forecast for your scrap yard becomes handy.
Creating a scrap yard financial forecast forces you to take stock of where your business stands and where you want it to go.
Once you have clarity on the destination, you will need to draw up a plan to get there and assess what it means in terms of future profitability and cash flows for your scrap yard.
Having this clear plan in place will give you the confidence needed to move forward with your business’s development.
Having an up-to-date financial forecast for a scrap yard is also useful if your trading environment worsens, as the forecast enables you to adjust to your new market conditions and anticipate any potential cash shortfall.
Finally, your scrap yard's financial projections will also help you secure financing, as banks and investors alike will want to see accurate projections before agreeing to finance your 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.
What information is used as input to build a scrap yard financial forecast?
A scrap yard'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 scrap yard.
If you are creating (or updating) the forecast of an existing scrap yard, 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 scrap yard 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 scrap yard 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 scrap yard's financial forecast.
The sales forecast for a scrap yard
From experience, it is usually best to start creating your scrap yard financial forecast by your sales forecast.
To create an accurate sales forecast for your scrap yard, you will have to rely on the data collected in your market research, or if you're running an existing scrap yard, 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:
- Metal Prices: Metal prices are a major driver that can affect the average price of your scrap yard. Fluctuations in the market can impact the value of the materials you buy and sell, ultimately affecting your revenue.
- Demand for Recycled Materials: The demand for recycled materials can directly affect the number of monthly transactions at your scrap yard. If there is a high demand for certain materials, you may see an increase in the number of customers and transactions.
- Economic Conditions: Economic conditions, such as a recession or a boom, can also impact the average price and number of transactions at your scrap yard. During tough economic times, individuals and businesses may be more likely to sell scrap materials, leading to an increase in transactions. On the other hand, during a strong economy, there may be a higher demand for materials, resulting in an increase in average price.
- Competition: The level of competition in your local area can also affect your scrap yard's sales forecast. If there are several other scrap yards in the vicinity, you may need to adjust your prices or offer promotions to stay competitive.
- Environmental Regulations: Government regulations regarding the disposal and recycling of materials can also impact your business. Changes in regulations, such as stricter environmental laws, can affect the cost of operations and ultimately, your average price and number of 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.
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 scrap yard
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your scrap yard 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 scrap yard will include some of the following items:
- Staff costs: This includes salaries, wages, benefits, and any other expenses related to your employees. As a scrap yard, you may have staff for sorting and processing materials, operating heavy machinery, and managing administrative tasks.
- Accountancy fees: You may need to hire an accountant to help with bookkeeping, tax preparation, and other financial tasks. This can include the cost of software or online tools used to manage your finances.
- Insurance costs: It's important to have insurance to protect your business from risks such as theft, accidents, and liability. This may include general liability insurance, worker's compensation, and property insurance.
- Software licenses: You may need to purchase software licenses for programs that help manage your inventory, track sales, or handle other aspects of your business. This may also include subscription fees for online tools or software updates.
- Banking fees: As a business, you will likely have bank accounts for handling deposits, payments, and other financial transactions. These accounts may have fees for services such as wire transfers, check processing, and overdraft protection.
- Rent or lease costs: If you are not operating out of a owned property, you will need to factor in the cost of rent or lease for your scrap yard location.
- Utilities: This includes electricity, water, and other utilities necessary for running your scrap yard operations.
- Equipment maintenance: Your scrap yard may have a variety of equipment such as forklifts, shredders, and conveyor belts that need regular maintenance and repairs.
- Transportation costs: You may need to transport materials to and from your scrap yard, which can include the cost of fuel, vehicle maintenance, and any fees for using transportation services.
- Marketing and advertising: To attract customers and promote your business, you may need to invest in marketing and advertising efforts such as creating flyers, running ads, or attending industry events.
- Permits and licenses: As a scrap yard, you may need to obtain permits and licenses from local or state authorities to operate your business. These may include environmental permits, business licenses, or zoning permits.
- Security costs: To protect your scrap yard from theft and vandalism, you may need to invest in security measures such as cameras, alarms, and security personnel.
- Office supplies: Even with the use of technology, you may still need to have basic office supplies such as paper, pens, and printer ink to manage administrative tasks.
- Training and development: As your business grows, you may need to invest in training and development for your employees to ensure they have the skills and knowledge necessary to perform their jobs effectively.
- Professional services: You may need to hire professionals such as lawyers or consultants to advise you on legal matters or help with specific projects related to your scrap yard operations.
This list will need to be tailored to the specificities of your scrap yard, but should offer a good starting point for your budget.
What investments are needed to start or grow a scrap yard?
Creating and expanding a scrap yard also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for a scrap yard could include elements such as:
- Scrap Yard Equipment: This includes machines and tools used for processing and sorting scrap metal, such as shredders, balers, shears, and cranes. These are essential fixed assets for a scrap yard and require significant capital investment.
- Fencing and Security Systems: A scrap yard needs proper security measures to prevent theft and vandalism. This may include fencing around the property, surveillance cameras, and alarm systems. These are important capital expenditures to ensure the safety and security of your scrap yard.
- Facility Renovations and Upgrades: As a scrap yard grows and expands, it may require facility renovations and upgrades to improve efficiency and accommodate larger volumes of scrap. This could include expanding the yard, adding new buildings, and upgrading existing structures. These capital expenditures are necessary to keep your scrap yard running smoothly.
- Transportation Vehicles: A scrap yard needs reliable transportation vehicles to transport scrap metal to and from the yard. This may include trucks, trailers, and forklifts. These are considered fixed assets and are essential for the daily operations of a scrap yard.
- Weighing and Measuring Equipment: Accurate weighing and measuring of scrap metal is crucial for determining its value. A scrap yard may need to invest in scales, weighbridges, and other measuring equipment to ensure accurate and fair pricing. These are necessary capital expenditures for a scrap yard to accurately determine its revenue.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your scrap yard.
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 scrap yard
The next step in the creation of your financial forecast for your scrap yard 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 scrap yard?
Now let's have a look at the main output tables of your scrap yard's financial forecast.
The projected profit & loss statement
The projected profit & loss shows how profitable your scrap yard is likely to be in the years to come.
For your scrap yard to be financially viable, your projected P&L should ideally show:
- Sales growing above inflation (the higher the better)
- Profit margins which are stable or expanding (the higher the better)
- A net profit at the end of each financial year (the higher the better)
This is for established scrap yards, there is some leniency for startups which will have numbers that will look a bit different than existing businesses.
The projected balance sheet
The projected balance sheet gives an overview of your scrap yard'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 scrap yard. 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 cash flow forecast
Your scrap yard'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 scrap yard:
- 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 scrap yard'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 scrap yard'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 scrap yard's financial forecast?
Using the right tool or solution will make the creation of your scrap yard's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your scrap yard'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
Outsourcing the creation of your scrap yard 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 scrap yard'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 scrap yard 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 scrap yard'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 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 scrap yard, 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 scrap yard
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 scrap yard 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 scrap yard, 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 turnover forecast for a business?
- Example of financial forecast for business idea
Know someone who owns or is thinking of starting a scrap yard? Share our forecasting guide with them!
Founder & CEO at The Business Plan Shop Ltd
