10 Tips to Help You Create Your 3-Year Forecast

Whether you’re planning for your future, looking for a business loan, or seeking investors, a 3-year forecast is something most businesses need at some point. And, if you’re like most business owners I meet, you don’t have a clue where to start.

While my first recommendation would be to hire some professional help, if you’re planning to figure it out on your own, here’s a guide to help you through the process.

1. Run a monthly P&L from your QuickBooks file (or other accounting software) for the full year – January through December. Make sure to select “Show All” for the rows. That way even if you haven’t had any activity yet in a particular account, it will still populate.
2. Export this monthly P&L to Excel to create your template for your forecast. Keep a copy of the actual data in one tab, a create a copy to use for the forecasted amounts.
3. Keep the “Actuals” tab intact to reference as you’re working through your forecast.
4. Clear the data out of the forecast tab, but leave the formulas! You’ll use this tab to forecast.
5. Copy the 12 months and total of Year 1, and paste to create Year 2 and Year 3, so that you end up with 36 monthly columns and 3 total columns in your forecast tab.
6. Now, it’s time for forecast. First, focus on your revenue. Determine your drivers.
   1. If you’re a service provider, with a recurring fee model, you might use number of clients as your first driver, combined with your average monthly fee. Then, you can determine how many new clients you intend to bring on per month or year.
   1. If you’re in a retail business, you would use your average weekly sales for the prior year and then apply a growth rate to it, for example, 10% growth. Keep in mind, if you experience seasonality in your business, you’ll need to take that into account.
   1. For a medical practice, you might use number of visits per day, plus average visit revenue. For a landscaping business, you could use average number of mows per week, plus average rate per mow. For a real estate business, you might use number of units, average monthly rental, and occupancy rates.
7. Once you think about your business and what drives your revenue, create a tab to build out the revenue each month based on those drivers. Then, pull that revenue to the main forecast. Using formulas, you can then change your drivers as you plan. If you plan to increase your marketing spend, you might increase your new clients from 2 to 4 per month. If you raise your prices, you can adjust your average fee in your forecast.
8. After you’ve got revenue forecasted, then consider your cost of goods sold (COGS). Think about how your revenue growth will affect your COGS.
   1. Is your COGS a % of revenue?
   1. Do you have labor costs to consider?
   1. Do you gain efficiencies with scale that will reduce the COGS %?
   1. What COGS costs are fixed vs. variable?
   1. Determine your COGS drivers and if needed, create a tab to build those costs out.
   1. If your COGS are simple, you may be able to use % in your main forecast and build that out.
9. With Revenue and COGS forecasted, you can move on your expenses. Most expenses can likely be forecasted using prior year averages. Refer to your Actuals tab and calculate averages.
   1. Office supplies likely vary every month, but they will average out over the course of 12 months.
   1. You probably have some one-time business license or registration fees that hit in certain months throughout the year.
   1. Will you need to grow your team based on the growth you’re projecting? If so, determine when you’ll need to hire and how much the salaries will be. You might consider a separate tab for forecasting revenue to help you build out your hiring plans.
   1. Rent will be fixed, while utilities will vary with the seasons.
   1. Consider all of your expenses and how you might forecast those expenses over the 3-year period.
10. Review and adjust! After you’ve completed forecasting your Revenue, COGS, and Expenses, it’s time to review.
    1. Compare your forecast to your prior year results. Do your numbers seem reasonable?
    1. What does your bottom line look like? If it seems unachievable, you might want to review to see what seems off. If you’ve never made more than $20K per year and next year’s forecast has you making $300K, you might need to look further.
    1. Compare expenses by category and make sure you increased your expenses enough to account for the increase in revenue you’re expecting.
    1. Review and adjust until it seems reasonable to you.

Bonus Tips:

1. Make sure you can tell your story. If you’re planning to grow by double the amount that you’ve grown in prior years, you need to be able to explain why that is. Are you starting a new product line? Entering a new market? Whether you’re preparing the forecast for your own planning purposes, or you need it for the bank, having a strong understanding of your numbers and what drives your forecast is critical.  
2. If you’re preparing your forecast before the year is over, use a trailing 12-month P&L instead of the calendar year.

Here’s an example forecast to help you visualize how it works!

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