This guide sets out a general method. Tax and social security rules depend on your legal status and your business: it does not replace the advice of a chartered accountant (expert-comptable).
What is a financial forecast for, and who reads it?
A financial forecast is a set of tables that estimate, before launch, the project’s funding needs, sales, expenses and profit over the first few years. The profit (or net result) is what is left when you subtract all costs from sales: a profit if it is positive, a loss if it is negative.
It is first a way for you to check that the project covers its expenses, its loan repayments and your own pay. It then serves the people you ask for money:
- The banker checks whether the business leaves enough each month to pay the loan instalment. Our guide what a banker looks at goes through their questions.
- The prêt d’honneur network (interest-free personal loans for founders) checks that the project holds up and that the amount requested matches a real need. See our guide on the prêt d’honneur.
- Your partners or future partners want to know how much they are putting in, when the business becomes profitable and what they can expect from it.
It is the numbers section of the business plan: the text explains the project, the figures show that it can be financed.
The four tables of a financial forecast
Most templates, including those from Bpifrance Création (the start-up guidance service of Bpifrance, the French public investment bank) and the CCIs (French chambers of commerce and industry), rest on four tables.
The initial financing plan sets the long-term needs of the launch (fit-out work, equipment, stock, a cash reserve) against the resources that cover them (your personal contribution, loans, grants). Both columns must have the same total.
The forecast income statement adds up sales and costs for each year and works out the result. Amounts are entered excluding VAT, because the VAT you collect is not income: you pay it back to the State.
The cash flow plan tracks the money actually received and paid out, in the month it enters or leaves the account. Cash is the money available in the account at a given moment. Here, amounts are entered including VAT, since that is what really goes through your account, with a line for the VAT paid back.
Finally, the break-even point is the revenue at which the business stops losing money.
Three years is the most common period: long enough to show that the business reaches its pace, short enough for the assumptions to stay credible. Some funders ask for five years.
Building revenue from assumptions
Revenue is the total of your sales excluding VAT. It is the most scrutinised figure, and the one most often overestimated.
Do not start from a target like “I am aiming for 1% of the market”. Start from the ground up: a number of customers, an average amount, a number of trading days. This is the bottom-up method: each element can be checked separately.
- Choose the unit that fits your trade: customers per day for a shop, contracts per month for a service business, covers per service for a restaurant.
- For each assumption, write down what it is based on: a footfall count outside a comparable shop, a price list, quotes, customers who have already shown interest.
- Plan a ramp-up: a new business does not reach its pace in the first month.
- Compare the total you get with the size of your market. Our guide on market size explains how to estimate it.
Fixed costs, variable costs and working capital
Separating fixed and variable costs
Variable costs move with sales: goods for resale, raw materials, commissions.
Fixed costs stay the same whatever the level of sales: rent, insurance, accountant’s fees, salaries, loan interest. They are due even in a month when you sell nothing.
Remember your own pay and the social security contributions that come with it. A forecast in which the founder works for free gives a false picture of profitability.
One last cost often catches people out: depreciation. When you buy equipment that will be used for several years, its cost is spread over its useful life. A €12,000 display counter used for five years weighs €2,400 a year in the income statement, even if you paid for it in one go.
Working capital requirement, explained simply
The working capital requirement (BFR in French) is the money tied up by the gap between what you pay out and what you collect. It is calculated as: stock, plus amounts your customers owe you, minus amounts you owe your suppliers and other short-term creditors.
A company that buys stock and then waits 60 days to be paid by its customers has to fund that gap. A consultant paid on the spot, with no stock, has almost no working capital requirement. It only shows up after launch, but its funding must be planned from day one in the initial financing plan.
A complete example: a neighbourhood grocery store
The initial financing plan
The prêt d’honneur is an interest-free personal loan, granted to Claire and not to the company. She puts it into the grocery store and repays it from her own pay. The €30,000 bank loan is repaid in monthly instalments of about €410.
The revenue assumptions
Claire counted footfall outside two comparable grocery stores and uses an average basket of €16 excluding VAT. She forecasts 45 customers a day in year one, 55 in year two, then 60 in year three with the basket raised to €16.50. That gives 45 × €16 × 300 days = €216,000 in year 1, €264,000 in year 2 and €297,000 in year 3.
Her variable costs make up 66% of sales: 65% for buying the products she resells and 1% for bags and card fees. So she keeps 34 cents on every euro sold to pay the fixed costs. What is left is called the contribution margin.
The three-year forecast income statement
Depreciation spreads the fit-out work over 10 years (€1,800 a year) and the equipment over 5 years (€2,400 a year). The security deposit is not depreciated: it will be returned at the end of the lease. The tax due on the profit depends on the company’s legal structure; it is not calculated here.
The break-even point
The break-even point is calculated by dividing fixed costs by the contribution margin ratio. For year one: €72,330 ÷ 0.34 = about €212,735 in revenue.
In customers: €212,735 ÷ 300 days = about €709 in sales per day, i.e. €709 ÷ €16 = 44.3 customers. Claire therefore needs to serve 45 customers a day to cover her costs. That is exactly her year-one assumption: the grocery store runs at break-even, with a profit of €1,110. If she only gets 40 customers a day, she sells €192,000 and loses about €7,050.
So year one has no safety margin at all: the €9,000 cash reserve fully earns its place.
The cash flow plan for the first months
Three differences from the income statement stand out. Depreciation does not appear, because no money leaves the account. The full loan instalment appears, principal included. And the 30 days granted by suppliers mean the first month costs little in purchases. In a real cash flow plan, enter amounts including VAT and add the VAT paid back each month or each quarter.
Checking that the tables are consistent
The tables must tell the same story. Before sending your forecast, check that:
- total sales over the 12 months of the cash flow plan, excluding VAT, match year 1 revenue;
- every investment in the financing plan shows up in depreciation;
- the interest matches the loan repayment schedule;
- salaries are identical from one table to the next;
- the break-even point uses the same fixed costs as the income statement;
- cash never drops below zero. If it does, increase the reserve in the financing plan or find additional funding before you launch.
Common mistakes
- Full revenue from the first month. Plan a ramp-up over several months.
- Forgetting your own pay or the social security contributions.
- Mixing up excl. and incl. VAT: excluding VAT in the income statement, including VAT in the cash flow plan.
- Forgetting working capital: starting stock and customer payment terms have to be funded.
- Assumptions with no justification. Every figure should point to a count, a quote or a comparison.
- A single scenario. Make a second version with lower sales, for example a third lower over the first six months, and see how long the cash lasts.
When should you get help?
You can build a first version on your own, with a spreadsheet or a guided tool: it is by setting out your assumptions that you come to understand your project. Prelud supports you at this stage: once the idea is tested, you prepare your full pack, including the business plan and its financial forecasts.
Then have your figures reviewed by a chartered accountant or by an adviser from a CCI, a chambre de métiers (the French chamber of trades and crafts) or a start-up support network, especially if you are hiring, taking over an existing business or unsure about your legal status. They will check contribution rates, tax and VAT, which depend on your situation.
Sources
General information. This guide does not replace advice from a chartered accountant, a lawyer or a bank adviser.
