When you have a new export business, it is critical to ensure you have considered and prepared for all financial requirements of your business before starting operations. For this purpose, it is necessary to make projections, which are nothing but forecasts about these financial requirements. There is definitely a way of going about it, but there is intelligent guesswork at play as well. You have to be realistic in your estimates while making financial projections. You cannot simply consider the “best-case scenario”, but should rather follow accountancy’s ‘conservatism principle’ – anticipate future losses and liabilities as soon as their possibility exists, but count assets and gains only when assured of them.
One essential purpose of these financial projections is to answer certain basic financial questions you should consider:
How much capital can I commit to the business?
How much operating cost can be supported by my export business on a monthly/yearly basis?
How much will my preliminary expenses be before the business starts to generate revenue, and how will I meet them?
By when can my business reach the break-even point?
Will the business be able to cope with unexpected expenses or investment needs?
The above questions are only a few of the many you may have – your method of projection will depend on the information you require, and also on the nature of your business. For example, the financial projections of a heavy machinery company will differ greatly from that of a handloom and handicraft exporter. Nevertheless, there are certain core steps that all businesses need to undergo when calculating financial projections:
As per the conservatism principle mentioned above, this should be your first step. Your export business will have fixed costs like rent, utilities, salaries, accounting and compliances, license and memberships, advertising and marketing, etc. There will also be variable costs like cost of goods sold, packaging, export logistics costs like loading, unloading, demurrage, wharf charges, freight and insurance, direct sales and marketing costs, customer service costs, etc. Further, there may be export financing costs like discounting charges, hedging of foreign exchange risk, etc. While some of these expenses are pre-negotiated and set in stone, expenses like legal, insurance, advertising, etc. are often variable and can easily exceed your initial estimation. Be sure to allow for these expenses to go a little overboard if needed.
Do remember to add your preliminary expenses to your list of total costs and decide on the amortization timeline for the same.
Fig. 1: Sample Exporter Costing Sheet
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This can be tricky. All new businessmen – exporters or otherwise –see great promise in their ventures. However, don’t translate your high hopes into sales figures while estimating the revenues. Remember conservatism and consider constraints that you may face, like price cuts due to competition, sudden lack of demand, departure of critical resources, etc., and the impact such situations will have on your sales. It can also be a good idea to make an aggressive sales forecast based on the assumption your business does well. By comparing these two, you can make some pretty thorough financial projections.
Projected cash flow is projected sales minus operating cash outflow. Once you make this initial projection, you will have to monitor the periodic cash flow pattern and the cash balance accumulated for at least the first couple of years. This will help you better understand the progress of your business.
You must remember to estimate important key ratios like gross margin, operating profit margin, employee productivity, product profitability, client profitability, etc.
Now that you have identified all the probable costs for your business, you should estimate your break-even point – the point when your sales and revenue will be equal to the costs incurred.
After estimating the capital that you need to invest in your business assets and inventories, you will also get a picture of how your projected balance sheet will look.
The projected P&L of your business is an essential projection that you can use as a reference point to measure the performance of your business. You should project the profitability of your business against different sales estimates, which can help you take strategic decisions and positions. To calculate the projected P&L, you will have to first arrive at the gross profit by deducting the Cost of Goods Sold from your Estimated Sales. By deducting all the operating expenses from your gross profit, you will get the net profit before tax.
You cannot overlook potential risk while calculating financial projections. You may have to face unexpected competition in the market, tackle operational issues related to delivery, technology, production, or price-and-demand associated issues, manage staff inefficiencies, weather increases in workforce cost, possibly face ‘force majeure’ conditions, etc. These will all need to be accounted for in your projections, otherwise your business could be in for some very nasty surprises.
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Monitor profitability of projects on an ongoing basis. Instead of focusing on sales, focus on profitable sales.
Be prepared to consider expenses in order to speed up cash inflow. Incentives like cash discounts can speed up cash recovery and improve your liquidity.
Try to allocate all expenses to a granular level (project-based allocation, client-based allocation, etc.) to get a better financial projection of profitability.
While following the conservatism principle in sales, don’t reduce the aggressiveness of business development. The sales forecast should balance conservative expectations with aggressive targets.
Be careful in calculating the Cost of Goods Sold, including expenses that are incurred only if you sell your product. Inconsequential expenses can distort your gross profit numbers.
Don’t forget to include depreciation in your projectioins if you have fixed assets in your books, as it is a non-cash expense and can easily be overlooked.