Knowledge Base: Financial Forecast Models

This article includes:

• What is a Forecast model?
• Why do you need a Forecast?
• What investors expect to see
• Key Metrics Investors look for
• What HMRC are looking for
• Further resources

What is a Forecast model?

A forecasting model is a tool that businesses use to predict outcomes for things like sales, supply and demand, and consumer behaviour. The models can be especially useful in sales and marketing and can help businesses identify how they might perform in different future situations.

Why do you need a Forecast?

It is an essential part of your investor toolkit alongside your Pitch Deck. While the Pitch deck is your vision for growth, the direction you see for your business and why you need your business to deliver; the Forecast is what brings that vision to life in facts and numbers – using metrics and evidential numbers from past activity it will show what your business could look like in the future.

What investors expect to see in a Financial Forecast

• Scope of Financial Forecast, how your business will grow into the future, usually a 3 year or 5 year forecast but you can use a longer timeframe if that is more appropriate for your business, the decision for this should be based on the speed of growth – how quickly are you getting to profit, how quickly can you demonstrate a decent growth curve.

• A story of Growth, you should demonstrate month-by-month, year-by-year how your business projects into the future.

• Statement of your assumptions, e.g. Number of Funding rounds

• Profit and Loss, Balance sheet, Cashflow show the costs that drive the revenue; i.e. the marketing costs, the technology costs, staff costs, etc. These will all help to build the story of your growth. This will allow the story of your business to be more easily understood, you will be able to demonstrate to Investors why you need to raise the amounts you are looking for, when the money needs to come into the business and how you plan to use it to drive the revenue and ultimately profit in your business.

• Team/Salary sheet. Using this you can show all the people you have in the business now, but also all the people you plan to introduce to the business as it grows, what that will cost and at what stage you will be looking to bring them in.

Key Metrics Investors look for...

• Customer Acquisition Cost (CAC) - How much money do you spend to gain 1 new customer? It is recommended to average this figure over a period of 3-6 months.

• Customer Lifetime Value (CLV) - the length of time customers engage with your business. Tracking how long a customer utilises your service or product and over that period of time how much do they spend.

Also take into consideration the Marketing Coefficient – existing customers that introduce other customers to your business.

What HMRC are looking for when submitting an Advance Assurance application...

• How the business will look once you take on funding; you need to show the incoming investment and how it will be spent

• Justification for the raise of funds; you must demonstrate why you need to undertake a funding round to achieve your goals

• Your forecast model must also reconcile with your pitch deck

• The minimum term for your forecast is 3 years and should start roughly from the date you will begin the funding round

• HMRC do not require a month-by-month model, you can provide a consolidated model just year-by-year

• Sources of Revenue - demonstrate how you will be earning to prove you have a qualifying trade; if you have multiple sources i.e. advertising, product sales, sponsorship, subscriptions, etc. use a separate line for each source and a match line for the cost of sales associated

• Demonstrate that you are a genuine growth company; you will need to show that you are growing by some metric - Revenue, hiring staff, customer account base, etc.

The forecast models that get through the HMRC screening process quickly are based on a very standard format that shows your Revenue, Cost of Sale, Overheads, Incoming Investment and the Cashflow.

It is recommended that if you have your own model which layers on different unit economics, scaling and perhaps additional products, these should be put onto a separate tab and then link this into a summary tab that produces the standard P&L format which HMRC will expect.

Be careful when showing your costs - both direct cost of sale and overheads - you need to show how the raised funds are going to be used and HMRC will expect to see multiple areas; i.e. internally to recruit staff, pay for marketing, development using in-house capability, using an external provider for services, etc. If the majority of your funds are going to an external service provider this will be queried by HMRC.

Above all, keep it simple. HMRC will challenge your application if you overcomplicate your forecast model with an excessive number of tabs.

Further resources

Our free 'minimum viable forecast model'

This is simple and easy to tailor to your business. Even better, we've never had queries from HMRC on this during the advance assurance process.

30 mins webinar recording on “Forecast Models Demystified: Insights for Entrepreneurs”