How to create a financial forecast for a consulting firm?
Creating a financial forecast for your consulting firm, and ensuring it stays up to date, is the only way to maintain visibility on future cash flows.
This might sound complex, but with the right guidance and tools, creating an accurate financial forecast for your consulting firm is not that hard.
In this guide, we'll cover everything from the main goal of a financial projection, the data you need as input, to the tables that compose it, and the tools that can help you build a forecast efficiently.
Without further ado, let us begin!
Why create and maintain a financial forecast for a consulting firm?
In order to prosper, your business needs to have visibility on what lies ahead and the right financial resources to grow. This is where having a financial forecast for your consulting firm becomes handy.
Creating a consulting firm financial forecast forces you to take stock of where your business stands and where you want it to go.
Once you have clarity on the destination, you will need to draw up a plan to get there and assess what it means in terms of future profitability and cash flows for your consulting firm.
Having this clear plan in place will give you the confidence needed to move forward with your business’s development.
Having an up-to-date financial forecast for a consulting firm is also useful if your trading environment worsens, as the forecast enables you to adjust to your new market conditions and anticipate any potential cash shortfall.
Finally, your consulting firm's financial projections will also help you secure financing, as banks and investors alike will want to see accurate projections before agreeing to finance your business.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
What information is used as input to build a consulting firm financial forecast?
A consulting firm's financial forecast is only as good as the inputs used to build it.
If you are creating (or updating) the forecast of an existing consulting firm, then you mostly need your accounting information, key historical operating non-financial data, and your team’s input on what to expect for the coming years.
If you are building financial projections for a consulting firm startup, you will need to have done your research and have a clear picture of your competitive environment and go-to-market strategy so that you can forecast sales accurately.
For a new venture, you will also need a precise list of the resources needed to keep the consulting firm running on a day-to-day basis and a list of the equipment and expenditures required to start the business (more on that later).
Let's now take a closer look at the elements that make up your consulting firm's financial forecast.
The sales forecast for a consulting firm
From experience, it usually makes sense to start your consulting firm's financial projection with the revenues forecast.
The inputs used to forecast your sales will include the historical trading data of your consulting firm (which can be used as a starting point for existing businesses) and the data collected in your market research (which both new ventures and existing businesses need to project their sales forward).
Your consulting firm's sales forecast can be broken down into two key estimates:
- The average price
- The number of monthly transactions
To assess these variables accurately, you will need to consider the following factors:
- You may see a decrease in the average price of your consulting services due to the rise of competition in the market. This could be caused by an influx of new consulting firms offering similar services at lower prices, forcing you to lower your prices in order to remain competitive.
- If your consulting firm specializes in a specific industry, changes in that industry's economy could greatly affect the number of monthly transactions. For example, if the industry experiences a downturn, companies may be less likely to invest in consulting services, resulting in a decrease in your number of transactions.
- Your consulting firm's reputation and brand recognition can also have an impact on your average price and number of transactions. If you have a strong reputation and are well-known in the industry, you may be able to charge higher prices and attract more clients, resulting in an increase in both metrics.
- The overall economic climate can also play a role in your sales forecast. A strong economy may lead to businesses being more willing to invest in consulting services, resulting in an increase in your average price and number of transactions. On the other hand, a weak economy may lead to businesses cutting back on expenses, resulting in a decrease in your metrics.
- The size and growth of your target market can also affect your sales forecast. If your consulting firm primarily serves small businesses, an increase in the number of small businesses in the market may lead to an increase in your number of transactions. However, if your target market is limited in size, it may be more difficult to achieve significant growth in your metrics.
Once you have a sales forecast in place, the next step will be to work on your overhead budget. Let’s have a look at that now.
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The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
The operating expenses for a consulting firm
The next step is to estimate the costs you’ll have to incur to operate your consulting firm.
These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.).
But your consulting firm's operating expenses should normally include the following items:
- Staff costs: This would include salaries, bonuses, benefits, and any other expenses related to your employees. As a consulting firm, your staff costs would be a significant portion of your operating expenses.
- Accountancy fees: As a consulting firm, you would need to hire an accountant to manage your finances and ensure compliance with tax laws and regulations. This would be an ongoing expense for your firm.
- Insurance costs: It is important for consulting firms to have insurance coverage to protect against any potential risks or liabilities. This could include professional liability insurance, general liability insurance, and workers' compensation insurance.
- Software licenses: In order to effectively run your consulting firm, you would need to invest in various software licenses for project management, accounting, communication, and other essential functions.
- Banking fees: As a consulting firm, you would have regular banking transactions, such as deposits, withdrawals, and wire transfers. These transactions would incur fees, which would be an operating expense for your firm.
- Office rent: You would need to rent office space to run your consulting firm. This could include expenses such as rent, utilities, and maintenance fees.
- Marketing and advertising: To attract clients and grow your consulting business, you would need to invest in marketing and advertising efforts. This could include website development, digital marketing, and other promotional activities.
- Travel expenses: As a consulting firm, you may need to travel for client meetings, conferences, or other business-related activities. This would include expenses such as airfare, hotel stays, and meals.
- Professional development: It is important for consulting firms to invest in the professional development of their employees. This could include training, workshops, and conferences to keep your team up-to-date with industry trends and best practices.
- Office supplies: Your consulting firm would need various office supplies such as stationery, printers, and other equipment to operate efficiently.
- Telephone and internet expenses: In order to communicate with clients and run your business, you would need to pay for telephone and internet services. These would be recurring expenses for your consulting firm.
- Legal fees: As a consulting firm, you may require legal advice and services for contracts, agreements, and other business-related matters. This would be an operating expense for your firm.
- Taxes: Your consulting firm would need to pay various taxes, such as income tax, sales tax, and payroll taxes. These taxes would be an ongoing expense for your business.
- Employee benefits: In addition to salaries, your consulting firm may offer employee benefits such as health insurance, retirement plans, and paid time off. These benefits would be a part of your operating expenses.
- Professional services: Depending on the nature of your consulting services, you may need to hire outside professionals such as lawyers, accountants, or IT specialists. These services would be an ongoing expense for your firm.
This list is not exhaustive by any means, and will need to be tailored to your consulting firm's specific circumstances.
What investments are needed to start or grow a consulting firm?
Creating and expanding a consulting firm also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for a consulting firm could include elements such as:
- Office Space: This includes the cost of purchasing or leasing a physical location for your consulting firm. This can include rent, utilities, and any necessary renovations or furniture.
- Technology and Equipment: As a consulting firm, you may need to invest in technology and equipment such as computers, printers, software, and phones to effectively run your business and provide services to clients.
- Professional Services: You may need to hire outside professionals such as lawyers, accountants, or IT consultants to assist with specific projects or tasks. These services can be costly but may be necessary for the success of your consulting firm.
- Training and Development: While this may not fall under operating expenses, investing in training and development for yourself and your employees is crucial for the growth and success of your consulting firm. This may include attending conferences, workshops, or enrolling in courses to enhance skills and knowledge.
- Marketing and Branding: While you may not include advertising in your capital expenditures, investing in marketing and branding efforts such as creating a website, designing a logo, or developing marketing materials can help establish your consulting firm's presence and attract potential clients.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your consulting firm.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
The financing plan of your consulting firm
The next step in the creation of your financial forecast for your consulting firm is to think about how you might finance your business.
You will have to assess how much capital will come from shareholders (equity) and how much can be secured through banks.
Bank loans will have to be modelled so that you can separate the interest expenses from the repayments of principal, and include all this data in your forecast.
Issuing share capital and obtaining a bank loan are two of the most common ways that entrepreneurs finance their businesses.
What tables compose the financial plan for a consulting firm?
Now let's have a look at the main output tables of your consulting firm's financial forecast.
The forecasted profit & loss statement
The profit & loss forecast gives you a clear picture of your business’ expected growth over the first three to five years, and whether it’s likely to be profitable or not.
A healthy consulting firm's P&L statement should show:
- Sales growing at (minimum) or above (better) inflation
- Stable (minimum) or expanding (better) profit margins
- A healthy level of net profitability
This will of course depend on the stage of your business: numbers for an established consulting firm will look different than for a startup.
The projected balance sheet
Your consulting firm's forecasted balance sheet enables you to assess your financial structure and working capital requirements.
It is composed of three types of elements: assets, liabilities and equity:
- Assets: represent what the business owns and uses to produce cash flows. It includes resources such as cash, equipment, and accounts receivable (money owed by clients).
- Liabilities: represent funds advanced to the business by lenders and other creditors. It includes items such as accounts payable (money owed to suppliers), taxes due and loans.
- Equity: is the combination of what has been invested by the business owners and the cumulative profits and losses generated by the business to date (which are called retained earnings). Equity is a proxy for the value of the owner's stake in the business.
The projected cash flow statement
A projected cash flow statement for a consulting firm is used to show how much cash the business is generating or consuming.
The cash flow forecast is usually organised by nature to show three key metrics:
- The operating cash flow: do the core business activities generate or consume cash?
- The investing cash flow: how much is the business investing in long-term assets (this is usually compared to the level of fixed assets on the balance sheet to assess whether the business is regularly maintaining and renewing its equipment)?
- The financing cash flow: is the business raising new financing or repaying financiers (debt repayment, dividends)?
Cash is king and keeping an eye on future cash flows is imperative for running a successful business. Therefore, you should pay close attention to your consulting firm's cash flow forecast.
If you are trying to secure financing, note that it is customary to provide both yearly and monthly cash flow forecasts in a financial plan - so that the reader can analyze seasonal variation and ensure the consulting firm is appropriately capitalised.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Which tool should you use to create your consulting firm's financial forecast?
Creating your consulting firm's financial forecast may sound fairly daunting, but the good news is that there are several ways to go about it.
Using online financial forecasting software to build your consulting firm's projections
The modern and easiest way is to use professional online financial forecasting software such as the one we offer at The Business Plan Shop.
There are several advantages to using specialised software:
- You can easily create your financial forecast by letting the software take care of the financial calculations for you without errors
- You have access to complete financial forecast templates
- You get a complete financial forecast ready to be sent to your bank or investors
- You can easily track your actual financial performance against your financial forecast, and recalibrate your forecast as the year goes by
- You can create scenarios to stress test your forecast's main assumptions
- You can easily update your forecast as time goes by to maintain visibility on future cash flows
- You have a friendly support team on standby to assist you when you are stuck
- It’s cost-efficient and much cheaper than using an accountant or consultant (see below)
If you are interested in this type of solution, you can try our forecasting software for free by signing up here.
Calling in a financial consultant or chartered accountant
Enlisting the help of a consultant or accountant is also a good way to obtain a professional consulting firm financial forecast.
The downside of this solution is its cost. From experience, obtaining a simple financial forecast over three years (including a balance sheet, income statement, and cash flow statement) is likely to cost a minimum of £700 or $1,000.
The indicative cost above, is for a small business, and a forecast is done as a one-shot exercise. Using a consultant or accountant to track your actuals vs. forecast and to keep your financial projections up to date on a monthly or quarterly basis will cost a lot more.
If you opt for this solution, make sure your accountant has in-depth knowledge of your industry, so that they may challenge your figures and offer insights (as opposed to just taking your assumptions at face value to create the forecast).
Why not use a spreadsheet such as Excel or Google Sheets to build your consulting firm's financial forecast?
Creating an accurate and error-free consulting firm financial forecast on Excel (or any spreadsheet) is very technical and requires both a strong grasp of accounting principles and solid skills in financial modelling.
Most entrepreneurs lack the expertise required to create an accurate financial forecast using spreadsheet software like Excel or Google Sheets. As a result, it is unlikely anyone will trust your numbers.
The second reason is that it is inefficient. Building forecasts on spreadsheets was the only option in the 1990s and early 2000s, nowadays technology has advanced and software can do it much faster and much more accurately.
This is why professional forecasters all use software. With the rise of AI, software is also becoming smarter at helping us detect mistakes in our forecasts and helping us analyse the numbers to make better decisions.
Finally, like everything with spreadsheets, tracking actuals vs. forecasts and updating your forecast as the year progresses is manual, tedious, error-prone, and time-consuming. Whereas financial forecasting software like The Business Plan Shop is built for this.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Use our financial projection templates for inspiration
The Business Plan Shop has dozens of financial forecasting templates available.
Our examples contain both the financial forecast, and a written business plan which presents, in detail, the company, the team, the strategy, and the medium-term objectives.
Whether you are just starting out or already have your own consulting firm, looking at our template is always a good way to get ideas on how to model financial items and what to write when creating a business plan to secure funding.
Takeaways
- A financial projection shows expected growth, profitability, and cash generation for your business over the next three to five years.
- Tracking actuals vs. forecast and keeping your financial forecast up-to-date is the only way to maintain visibility on future cash flows.
- Using financial forecasting software makes it easy to create and maintain up-to-date projections for your consulting firm.
You have reached the end of our guide. We hope you now have a better understanding of how to create a financial forecast for a consulting firm. Don't hesitate to contact our team if you have any questions or want to share your experience building forecasts!
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Also on The Business Plan Shop
- Example of financial projections
- How to project sales for a business?
- Sample financial forecast for business idea
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Founder & CEO at The Business Plan Shop Ltd
