How to create a financial forecast for a water distribution company?
Creating a financial forecast for your water distribution company, 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 water distribution company 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 water distribution company?
The financial projections for your water distribution company 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 water distribution company'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 needed to build a water distribution company financial forecast?
The quality of your inputs is key when it comes to financial modelling: no matter how good the model is, if your inputs are off, so will the forecast.
If you are building a financial plan to start a water distribution company, you will need to have done your market research and have a clear picture of your sales and marketing strategies so that you can project revenues with confidence.
You will also need to have a clear idea of what resources will be required to operate the water distribution company on a daily basis, and to have done your research with regard to the equipment needed to launch your venture (see further down this guide).
If you are creating a financial forecast of an existing water distribution company, things are usually simpler as you will be able to use your historical accounting data as a budgeting base, and complement that with your team’s view on what lies ahead for the years to come.
Let's now zoom in on what will go in your water distribution company's financial forecast.
The sales forecast for a water distribution company
The sales forecast, also called topline projection, is normally where you will start when building your water distribution company 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 water distribution companies), and consider the elements below:
- Changes in government regulations on water usage and pricing could affect your average price per transaction and the number of monthly transactions.
- Droughts or other natural disasters in your region could lead to an increase in demand for water and a potential increase in your average price per transaction.
- Competition from other water distribution companies in your area could drive down your average price per transaction and potentially impact the number of monthly transactions.
- Changes in customer preferences towards environmentally-friendly options could lead to an increase in demand for sustainable water sources and potentially affect your average price per transaction.
- Infrastructure developments in your area, such as the construction of new housing developments or commercial buildings, could lead to an increase in demand for water and potentially impact your number of monthly transactions.
After the sales forecast comes the operating expenses budget, which we will now look into in more detail.
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 water distribution company
The next step is to estimate the costs you’ll have to incur to operate your water distribution company.
These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.).
But your water distribution company's operating expenses should normally include the following items:
- Staff Costs: This includes salaries, benefits, and training expenses for all employees, such as customer service representatives, maintenance technicians, and administrative staff.
- Accountancy Fees: You will need to hire an accountant or use accounting software to keep track of your finances and prepare tax returns, which will come with a cost.
- Insurance Costs: As a water distribution company, you will need to have insurance for your equipment, vehicles, and liability coverage in case of accidents or damages.
- Software Licences: In addition to accounting software, you may also need to purchase specific software for managing customer accounts, tracking water usage, and analyzing data.
- Banking Fees: To process payments from customers and manage your finances, you will need to pay fees for bank accounts, credit card processing, and other financial services.
- Maintenance and Repair Costs: Your equipment and vehicles will require regular maintenance and occasional repairs, which can add up over time.
- Utility Expenses: As a water distribution company, you will have high utility expenses for electricity, gas, and water usage for your operations.
- Fuel Costs: If your company uses vehicles to transport water or equipment, you will need to budget for fuel costs.
- Office Supplies: You will need to purchase office supplies, such as paper, pens, and printer ink, for your administrative staff.
- Marketing and Advertising Expenses: To attract new customers and promote your services, you may need to invest in marketing materials, advertising campaigns, and online marketing efforts.
- Rent or Property Taxes: If you own or rent a building for your operations, you will need to budget for rent or property taxes.
- Vehicle Expenses: In addition to fuel costs, you will need to budget for vehicle maintenance, repairs, and insurance for any vehicles used for your water distribution operations.
- Training and Development: To keep your employees up-to-date on industry standards and improve their skills, you may need to invest in training and development programs.
- Legal Fees: As a business owner, you may need to seek legal advice or hire a lawyer for contracts, compliance issues, or other legal matters.
- Depreciation: Over time, your equipment and vehicles will decrease in value, and you will need to account for this depreciation in your expenses.
This list is not exhaustive by any means, and will need to be tailored to your water distribution company's specific circumstances.
What investments are needed to start or grow a water distribution company?
Once you have an idea of how much sales you could achieve and what it will cost to run your water distribution company, it is time to look into the equipment required to launch or expand the activity.
For a water distribution company, capital expenditures and initial working capital items could include:
- Water Treatment Plant: This is a crucial capital expenditure for a water distribution company as it is responsible for treating and purifying water before it is distributed to customers. The cost of building and maintaining a water treatment plant can be significant.
- Pumping Equipment: In order to move water from the treatment plant to distribution pipes, a water distribution company needs to invest in pumping equipment. This includes pumps, motors, and other related equipment. These items need to be regularly maintained and replaced if necessary.
- Distribution Pipes: Distribution pipes are a key component of a water distribution company's infrastructure. These pipes carry water from the treatment plant to customers' homes and businesses. They need to be regularly inspected and replaced as they can deteriorate over time.
- Storage Tanks: Water distribution companies often invest in storage tanks to store excess water for periods of high demand. These tanks also serve as a backup in case of emergencies or system failures. The cost of purchasing and maintaining these tanks can be significant.
- Water Meters: Water meters are used to measure and monitor the amount of water used by customers. These meters need to be regularly calibrated and replaced if they become faulty. The cost of purchasing and maintaining water meters can add up for a water distribution company.
Again, this list will need to be adjusted according to the specificities of your water distribution company.
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 water distribution company
The next step in the creation of your financial forecast for your water distribution company 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 water distribution company?
Now let's have a look at the main output tables of your water distribution company's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your water distribution company's expected growth and profitability over the next three to five years.
A financially viable P&L statement for a water distribution company 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 water distribution company'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 water distribution company'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 water distribution company:
- 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 water distribution company'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 water distribution company'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 water distribution company's financial projections?
Building a water distribution company 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 water distribution company'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.
Hiring a financial consultant or chartered accountant
Hiring a consultant or chartered accountant is also an efficient way to get a professional water distribution company 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 water distribution company's financial forecast?
Creating an accurate and error-free water distribution company financial forecast on Excel (or any spreadsheet) is very technical and requires both a strong grasp of accounting principles and solid skills in financial modelling.
Most entrepreneurs lack the expertise required to create an accurate financial forecast using spreadsheet software like Excel or Google Sheets. As a result, it is unlikely anyone will trust your numbers.
The second reason is that it is inefficient. Building forecasts on spreadsheets was the only option in the 1990s and early 2000s, nowadays technology has advanced and software can do it much faster and much more accurately.
This is why professional forecasters all use software. With the rise of AI, software is also becoming smarter at helping us detect mistakes in our forecasts and helping us analyse the numbers to make better decisions.
Finally, like everything with spreadsheets, tracking actuals vs. forecasts and updating your forecast as the year progresses is manual, tedious, error-prone, and time-consuming. Whereas financial forecasting 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 forecast templates for inspiration
The Business Plan Shop has dozens of financial forecast examples available.
Our templates contain both a financial forecast and a written business plan which presents, in detail, the company, the team, the strategy, and the medium-term objectives.
Our templates are a great source of inspiration, whether you just want to see what a complete business plan looks like, or are looking for concrete examples of how you should model financial elements in your own forecast.
Takeaways
- A financial forecast shows expected growth, profitability, and cash generation metrics for your water distribution company.
- 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 water distribution company. 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 create a sales forecast for a business?
- Sample financial forecast for business idea
Know someone who runs a water distribution company? Share our business guide with them!
Founder & CEO at The Business Plan Shop Ltd
