How to create a financial forecast for a credit reporting agency?
Creating a financial forecast for your credit reporting agency, 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 credit reporting agency 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 credit reporting agency?
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 credit reporting agency becomes handy.
Creating a credit reporting agency 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 credit reporting agency.
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 credit reporting agency 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 credit reporting agency'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 credit reporting agency financial forecast?
A credit reporting agency's financial forecast needs to be built on the right foundation: your assumptions.
The data required to create your assumptions will depend on whether you are a new or existing credit reporting agency.
If you are creating (or updating) the forecast of an existing credit reporting agency, then your main inputs will be historical accounting data and operating metrics, and your team’s view on what to expect for the next three to five years.
If you are building financial projections for a new credit reporting agency startup, you will need to rely on market research to form your go-to-market strategy and derive your sales forecast.
For a new venture, you will also need an itemised list of resources needed for the credit reporting agency to operate, along with a list of equipment required to launch the venture (more on that below).
Now that you understand what is needed, let’s have a look at what elements will make up your credit reporting agency's financial forecast.
The sales forecast for a credit reporting agency
The sales forecast, also called topline projection, is normally where you will start when building your credit reporting agency financial forecast.
Creating a coherent sales projection boils down to estimating two key drivers:
- The average price
- The number of monthly transactions
To do this, you will need to rely on historical data (for an existing business), market research data (for both new and existing credit reporting agencies), and consider the elements below:
- Changes in credit reporting regulations: As a credit reporting agency, you are subject to various regulations that govern the industry. Any changes in these regulations, such as increased requirements for data security or additional reporting requirements, may impact the amount of resources and time needed to comply, potentially affecting your average price and number of monthly transactions.
- Economic conditions: The state of the economy can have a significant impact on the number of consumers seeking credit reports. During times of economic growth, more individuals may be looking to take out loans or credit, resulting in an increase in your number of monthly transactions. On the other hand, during a recession, consumers may be more cautious with their spending, leading to a potential decrease in transactions.
- Data breaches: With the increasing prevalence of cybercrime, data breaches have become a major concern for businesses, including credit reporting agencies. A data breach can not only damage your reputation and credibility but also result in legal consequences and financial losses. This may lead to an increase in your average price as you invest in enhanced security measures to prevent future breaches.
- Competition: As the credit reporting industry continues to grow, competition among agencies is becoming fiercer. The entry of new players or the advancement of existing competitors can impact your market share and potentially lead to changes in your pricing strategy to remain competitive.
- Technological advancements: Technology plays a crucial role in the credit reporting process, and advancements in this area can greatly impact your operations. For example, the development of new software or tools can increase efficiency and speed, leading to a potential increase in your number of monthly transactions. On the other hand, outdated technology or system failures may result in delays or errors, affecting your average price and customer satisfaction.
After the sales forecast comes the operating expenses budget, which we will now look into in more detail.
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The operating expenses for a credit reporting agency
The next step is to estimate the costs you’ll have to incur to operate your credit reporting agency.
These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.).
But your credit reporting agency's operating expenses should normally include the following items:
- Staff costs: Includes salaries, benefits, and training expenses for employees such as credit analysts, customer service representatives, and data entry personnel.
- Accountancy fees: Covers the cost of hiring external accountants to conduct audits and maintain financial records in compliance with regulatory requirements.
- Insurance costs: Includes premiums for professional liability insurance and data breach insurance to protect against potential risks and liabilities.
- Software licenses: Covers the cost of purchasing and renewing licenses for credit reporting software, data management systems, and other technology used in daily operations.
- Banking fees: Includes charges for maintaining bank accounts, processing payments, and transferring funds to and from clients and business partners.
- Marketing and advertising expenses: Covers the cost of promoting the credit reporting agency's services through various channels such as digital ads, print ads, and events.
- Rent and utilities: Covers the cost of leasing office space and utilities such as electricity, water, and internet for daily operations.
- Professional fees: Includes fees for legal counsel, consulting services, and other professional services required to run the business.
- Training and development: Covers the cost of ongoing training and development programs for employees to enhance their skills and knowledge in credit reporting.
- Office supplies and equipment: Includes expenses for purchasing and maintaining office supplies, furniture, and equipment such as computers, printers, and scanners.
- Travel and entertainment: Covers expenses related to business travel, client meetings, and networking events.
- Data storage and security: Includes costs for data storage solutions and cybersecurity measures to ensure the security and integrity of sensitive information.
- Telecommunications: Covers the cost of phone and internet services for communication with clients and business partners.
- Professional memberships and subscriptions: Includes fees for industry memberships and subscriptions to credit reporting publications and databases.
- Taxes and licenses: Covers taxes and fees required to operate as a credit reporting agency, such as business license fees and taxes on revenue.
This list is not exhaustive by any means, and will need to be tailored to your credit reporting agency's specific circumstances.
What investments are needed to start or grow a credit reporting agency?
Once you have an idea of how much sales you could achieve and what it will cost to run your credit reporting agency, it is time to look into the equipment required to launch or expand the activity.
For a credit reporting agency, capital expenditures and initial working capital items could include:
- Credit report database: This includes the cost of purchasing or building a database to store and manage credit report data. This database is essential for a credit reporting agency as it is where all the credit information is stored and retrieved from.
- Credit scoring software: This refers to the software used to calculate credit scores for individuals. This software must be regularly updated to ensure accuracy and efficiency in the credit scoring process.
- Hardware and equipment: This includes computers, servers, and other necessary equipment for the credit reporting agency's operations. These items may need to be replaced or upgraded periodically to keep up with technological advancements.
- Security systems: As a credit reporting agency handles sensitive personal and financial information, it is crucial to invest in robust security systems to protect against cyber threats and data breaches.
- Office space: This may include the cost of leasing or purchasing office space, as well as renovations and furnishings. A professional and well-equipped office is essential for a credit reporting agency to operate efficiently and maintain a strong reputation.
Again, this list will need to be adjusted according to the specificities of your credit reporting agency.
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 credit reporting agency
The next step in the creation of your financial forecast for your credit reporting agency 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 credit reporting agency?
Now let's have a look at the main output tables of your credit reporting agency'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 credit reporting agency'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 credit reporting agency will look different than for a startup.
The projected balance sheet
The projected balance sheet gives an overview of your credit reporting agency's financial structure at the end of the financial year.
It is composed of three categories of items: assets, liabilities and equity:
- Assets: are what the business possesses and uses to produce cash flows. It includes resources such as cash, buildings, equipment, and accounts receivable (money owed by clients).
- Liabilities: are the debts of your credit reporting agency. They include accounts payable (money owed to suppliers), taxes due and bank loans.
- Equity: is the combination of what has been invested by the business owners and the cumulative profits to date (which are called retained earnings). Equity is a proxy for the value of the owner's stake in the business.
The cash flow forecast
Your credit reporting agency's cash flow forecast shows how much cash your business is expected to consume or generate in the years to come.
It is best practice to organise the cash flow forecast by nature to better explain where cash is used or generated by the credit reporting agency:
- Operating cash flow: shows how much cash is generated by the operating activities
- Investing cash flow: shows how much will be invested in capital expenditure to maintain or expand the business
- Financing cash flow: shows if the business is raising new capital or repaying financiers (debt repayment, dividends)
Keeping an eye on (and regularly updating) your credit reporting agency's cash flow forecast is key to ensuring that your business has sufficient liquidity to operate normally and to detect financing requirements as early as possible.
If you are trying to raise capital, you will normally be asked to provide a monthly cash flow forecast in your credit reporting agency's financial plan - so that banks or investors can assess seasonal variation and ensure your business 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 credit reporting agency's financial forecast?
Using the right tool or solution will make the creation of your credit reporting agency's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial projection software to build your credit reporting agency's forecast
The modern and easiest way to build a forecast is to use professional financial projection 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
Outsourcing the creation of your credit reporting agency financial forecast is another possible solution.
This will cost more than using software as you can expect as your price will have to cover the accountant’s time, software cost, and profit margin.
Price can vary greatly based on the complexity of your business. For a small business, from experience, a simple three-year financial forecast (including a balance sheet, income statement, and cash flow statement) will start at around £700 or $1,000.
Bear in mind that this is for forecasts produced at a single point in time, updating or tracking your forecast against actuals will cost extra.
If you decide to outsource your forecasting:
- Make sure the professional has direct experience in your industry and is able to challenge your assumptions constructively.
- Steer away from consultants using sectorial ratios to build their client’s financial forecasts (these projections are worthless for a small business).
Why not use a spreadsheet such as Excel or Google Sheets to build your credit reporting agency's financial forecast?
Creating an accurate and error-free credit reporting agency 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 forecast templates available.
Our examples contain a complete business plan with a financial forecast and a written presentation of the company, the team, the strategy, and the medium-term objectives.
Whether you are just starting out or already have your own credit reporting agency, looking at our financial forecast template is a good way to:
- Understand what a complete business plan should look like
- Understand how you should model financial items for your credit reporting agency
Takeaways
- A financial forecast shows expected growth, profitability, and cash generation metrics for your credit reporting agency.
- Tracking actuals vs. forecast and having an up-to-date financial forecast is key to maintaining visibility on your future cash flows.
- Using financial forecasting software is the modern way of creating and maintaining financial projections.
We hope that this guide helped you gain a clearer perspective on the steps needed to create the financial forecast for a credit reporting agency. Don't hesitate to contact us if you have any questions!
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
- Financial forecast example
- How to project revenues for a business?
- Financial forecast for a business idea
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Founder & CEO at The Business Plan Shop Ltd
