How to create a financial forecast for an HVAC equipment maker?

Developing and maintaining an up-to-date financial forecast for your HVAC equipment manufacturing business is key in order to maintain visibility on your business’s future cash flows. 

If you feel overwhelmed at the thought of putting together an HVAC equipment manufacturing business financial forecast then don’t worry as this guide is here to help you.

We'll cover everything from: the main objectives of a financial forecast, the data you need to gather before starting, to the tables that compose it, and the tools that will help you create and maintain your forecast efficiently.

Let's get started!

Why create and maintain a financial forecast for an HVAC equipment manufacturing business?

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

A financial plan for an HVAC equipment manufacturing business 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 HVAC equipment manufacturing business 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 HVAC equipment manufacturing business'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 an HVAC equipment manufacturing business financial forecast?

A HVAC equipment 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 HVAC equipment manufacturing business.

If you are creating (or updating) the forecast of an existing HVAC equipment 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 HVAC equipment 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 HVAC equipment 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 HVAC equipment manufacturing business's financial forecast.

The sales forecast for an HVAC equipment manufacturing business

The sales forecast, also called topline projection, is normally where you will start when building your HVAC equipment 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 HVAC equipment makers), 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 an HVAC equipment manufacturing business

The next step is to estimate the costs you’ll have to incur to operate your HVAC equipment manufacturing business.

These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.). 

But your HVAC equipment manufacturing business's operating expenses should normally include the following items:

This list is not exhaustive by any means, and will need to be tailored to your HVAC equipment manufacturing business's specific circumstances.

What investments are needed to start or grow an HVAC equipment manufacturing business?

Your HVAC equipment manufacturing business financial forecast will also need to include the capital expenditures (aka investments in plain English) and initial working capital items required for the creation or development of your business.

For an HVAC equipment manufacturing business, these could include:

Again, this list will need to be adjusted according to the size and ambitions of your HVAC equipment manufacturing business.

The financing plan of your HVAC equipment manufacturing business

The next step in the creation of your financial forecast for your HVAC equipment 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 HVAC equipment manufacturing business?

Now let's have a look at the main output tables of your HVAC equipment manufacturing business's financial forecast.

The profit & loss forecast

The forecasted profit & loss statement will enable you to visualise your HVAC equipment manufacturing business's expected growth and profitability over the next three to five years.

A financially viable P&L statement for an HVAC equipment 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

The projected balance sheet gives an overview of your HVAC equipment manufacturing business'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 HVAC equipment manufacturing business. 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 HVAC equipment 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 HVAC equipment 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 HVAC equipment 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 HVAC equipment manufacturing business's financial plan - so that banks or investors can assess seasonal variation and ensure your business is appropriately capitalised.

Which tool should you use to create your HVAC equipment manufacturing business's financial forecast?

Creating your HVAC equipment manufacturing business's financial forecast may sound fairly daunting, but the good news is that there are several ways to go about it.

Using online financial forecasting software to build your HVAC equipment manufacturing business'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.

Hiring a financial consultant or chartered accountant

Hiring a consultant or chartered accountant is also an efficient way to get a professional HVAC equipment 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 HVAC equipment manufacturing business'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 HVAC equipment manufacturing business 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 HVAC equipment manufacturing business'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.

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 HVAC equipment manufacturing business, 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 HVAC equipment manufacturing business

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 HVAC equipment 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 HVAC equipment manufacturing business. 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 revenues for a business?
• Example of financial forecast for business idea

Know someone who runs or wants to start an HVAC equipment manufacturing business? Share our financial projection guide with them!