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Finance basics: How to forecast expenses?

Forecasting equals saving money and reducing wastage. Crucial enough for a good business? It really is.

This is a three-part series where we attempt to help businesses forecast their growth for better financial management and revenues. The blog series is divided into three blogs:

1. How to forecast expenses?

2. How to forecast revenues?

3. How to forecast growth?

So why is forecasting growth, revenues and expenses so important for businesses? Forecasting takes a lot of time and may not be that accurate, you would think. But here’s a reality check. Few investors would take interest in your startup or enterprise if you have no growth projections and analysed forecasts. However, it’s not just for the sake of investments.

Appropriate financial forecasts would practically help you to plan your operational costs and staffing and in streamlining your marketing plans.

Let’s start with learning to forecast expenses.

At the start of your business, you will realize it’s easier and more practical to forecast expenses than revenues.

How to forecast expenses?

Whether or not you studied finance as a subject, you can easily categorize your expenses under various heads. But here’s the simplest way to do that. Categorize each of your expenses in these two heads:

1. Costs that remain fixed: These are the costs that either remain totally fixed or vary occasionally. These are:

– Utility bills

– Rent

– Salaries/fee

– Accounting/book-keeping

– Phone bills/communication expenses

– Licensing fees/legal expenses

– Technology upgrades

– Advertising/marketing

2. Costs that vary: These can be further categorized into:

– Direct labour costs: Including direct sales, direct marketing and customer service or support.

– Cost of goods sold: Like raw material, supplies or packaging.

Things to remember while forecasting expenses

1. Monitor direct sales and customer service

Make sure you are monitoring your direct sales and customer service time. Include these as a direct labour expense even when you are the one doing all these activities during the start of your business. This is because when you have more clients, you will delegate these and most likely incur expense on these.

2. Double your marketing estimates

Marketing is an activity that directly relates to getting more sales. Therefore, it’s best that this activity is not compromised. Always double your advertising and marketing estimates as they are bound to escalate as per changing market trends or new laws or new competitors.

3. Triple your legal estimates

At the start of your business, you will end up overpaying legal expenses due to lack of experience or overwhelming information about taxes. Triple your estimates for insurance, licensing fee or any other legal expenses.

4. Get an intuitive accounting software

Make sure your fixed cost expense on accounting is worth it. Get a cloud-based accounting software such as Giddh that automates tasks and helps in giving you realistic estimates of your finances.

We are on a mission of taking sound finance and accounting practises within layman understanding. If you have any questions about finance or accounting of your business, give us a call.

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