How to create a financial forecast for an essential oil manufacturer?
If you are serious about keeping visibility on your future cash flows, then you need to build and maintain a financial forecast for your essential oil manufacturing business.
Putting together an essential oil manufacturing business 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 essential oil manufacturing business.
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 an essential oil manufacturing business?
The financial projections for your essential oil 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 essential oil 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.
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 an essential oil manufacturing business financial forecast?
A essential oil 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 essential oil manufacturing business.
If you are creating (or updating) the forecast of an existing essential oil 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 essential oil 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 essential oil 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 essential oil manufacturing business's financial forecast.
The sales forecast for an essential oil manufacturing business
The sales forecast, also called topline projection, is normally where you will start when building your essential oil manufacturing business 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 essential oil manufacturers), and consider the elements below:
- Seasonal Demand Changes: As an essential oil manufacturing business, your sales may be affected by seasonal changes in demand. For example, during the winter months, there may be a higher demand for oils with warming and immune-boosting properties, while during the summer months, oils with cooling and insect-repellent properties may be more popular.
- New Product Releases: Introducing new essential oils or blends with unique properties or scents can drive up your average price and increase the number of monthly transactions. Customers may be willing to pay a premium for these new products, and it can also attract new customers to your business.
- Supply Chain Disruptions: Any disruptions in your supply chain, such as natural disasters or supplier issues, can affect your average price and number of monthly transactions. If you are unable to source certain oils, you may have to increase prices or limit availability, which can impact sales.
- Changes in Consumer Preferences: As with any industry, consumer preferences for essential oils can change over time. Keeping up with market trends and adjusting your product offerings accordingly can help maintain or even increase your average price and number of monthly transactions.
- Competitor Actions: The actions of your competitors can also impact your sales forecast. If a competitor introduces a similar product at a lower price or offers promotions and discounts, it can affect your average price and number of monthly transactions. Keeping an eye on the competition and adjusting your strategies accordingly can help mitigate any negative impact on your business.
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 an essential oil manufacturing business
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your essential oil manufacturing business 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 an essential oil manufacturing business will include some of the following items:
- Staff costs: This includes salaries, wages, and benefits for all employees, including production workers, administrative staff, and sales representatives.
- Raw materials: Essential oils are made from natural plant materials, so the cost of sourcing these materials is a significant expense for your business.
- Packaging materials: Essential oils must be packaged in specialized containers to maintain their potency and purity, which can be expensive.
- Utilities: Running an essential oil manufacturing facility requires a significant amount of energy, including electricity and water.
- Rent: You may need to lease a production facility, warehouse, or office space to run your essential oil business.
- Equipment maintenance: Essential oil production equipment, such as distillation units and bottling machines, require regular maintenance and repairs.
- Marketing and advertising: To attract customers and promote your brand, you'll need to invest in marketing and advertising efforts.
- Accountancy fees: As a business owner, you'll need to hire an accountant to handle bookkeeping, taxes, and other financial tasks.
- Insurance costs: To protect your business from potential risks and liabilities, you'll need to purchase various insurance policies, such as product liability insurance and property insurance.
- Software licenses: You may need to purchase software licenses for essential oil formulation, inventory management, and other business operations.
- Transportation costs: Essential oils may need to be transported from suppliers to your production facility, and then to your customers, which can incur shipping and transportation fees.
- Banking fees: Your business bank account may charge fees for transactions, wire transfers, and other financial services.
- Rent of storage facility: You may need to rent a separate storage facility to store excess inventory and finished products.
- Professional fees: You may need to hire consultants, lawyers, or other professionals for specific projects or tasks.
- Training and development: To ensure the quality and consistency of your essential oils, you may need to invest in training and development programs for your staff.
This list will need to be tailored to the specificities of your essential oil manufacturing business, but should offer a good starting point for your budget.
What investments are needed to start or grow an essential oil manufacturing business?
Once you have an idea of how much sales you could achieve and what it will cost to run your essential oil manufacturing business, it is time to look into the equipment required to launch or expand the activity.
For an essential oil manufacturing business, capital expenditures and initial working capital items could include:
- Equipment: This includes machinery and tools used in the manufacturing process such as distillation equipment, bottling machines, and labeling machines.
- Facility Improvements: This includes renovations or upgrades to the manufacturing facility such as installing proper ventilation systems, flooring, and storage shelves.
- Transportation Vehicles: If you plan on delivering your essential oils to customers, you may need to purchase a transportation vehicle such as a van or truck to ensure timely and safe delivery.
- Packaging Supplies: Essential oils need to be packaged in bottles or containers with proper labeling. This would include the cost of bottles, labels, and packaging materials.
- Storage Tanks: Essential oils need to be stored in a controlled environment to maintain their quality. This may require the purchase of storage tanks or barrels.
Again, this list will need to be adjusted according to the specificities of your essential oil 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 essential oil manufacturing business
The next step in the creation of your financial forecast for your essential oil 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 an essential oil manufacturing business?
Now let's have a look at the main output tables of your essential oil manufacturing business's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your essential oil manufacturing business's expected growth and profitability over the next three to five years.
A financially viable P&L statement for an essential oil 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 essential oil 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 cash flow forecast
Your essential oil manufacturing business'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 essential oil manufacturing business:
- 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 essential oil manufacturing business'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 essential oil manufacturing business'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 essential oil manufacturing business's financial projections?
Building an essential oil manufacturing business 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 essential oil 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 essential oil 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 essential oil manufacturing business's financial forecast?
Creating an accurate and error-free essential oil manufacturing business 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 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 essential oil manufacturing business.
You have reached the end of our guide. We hope you now have a better understanding of how to create a financial forecast for an essential oil manufacturing business. 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 create a sales forecast for a business?
- Financial forecast template for a business idea
Know someone who runs or wants to start an essential oil manufacturing business? Share our financial projection guide with them!
Founder & CEO at The Business Plan Shop Ltd
