How to create a financial forecast for a data processing company?
Developing and maintaining an up-to-date financial forecast for your data processing company is key in order to maintain visibility on your business’s future cash flows.
If you feel overwhelmed at the thought of putting together a data processing company financial forecast then don’t worry as this guide is here to help you.
We'll cover everything from: the main objectives of a financial forecast, the data you need to gather before starting, to the tables that compose it, and the tools that will help you create and maintain your forecast efficiently.
Let's get started!
Why create and maintain a financial forecast for a data processing company?
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 data processing company becomes handy.
Creating a data processing company 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 data processing company.
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 data processing company 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 data processing company'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 data processing company financial forecast?
A data processing company'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 data processing company.
If you are creating (or updating) the forecast of an existing data processing company, 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 data processing company 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 data processing company 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 data processing company's financial forecast.
The sales forecast for a data processing company
From experience, it usually makes sense to start your data processing company's financial projection with the revenues forecast.
The inputs used to forecast your sales will include the historical trading data of your data processing company (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 data processing company'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 can expect changes in technology to affect your average price and number of monthly transactions. For example, advancements in data processing software may increase the cost of your services, resulting in a higher average price. On the other hand, new and improved software may also attract more customers, resulting in an increase in your number of monthly transactions.
- The state of the economy can also have a significant impact on your business's average price and number of monthly transactions. During times of economic downturn, businesses may be more hesitant to invest in data processing services, leading to a decrease in your average price and number of monthly transactions. However, during times of economic growth, businesses may be more willing to invest in data processing services, resulting in an increase in your average price and number of monthly transactions.
- Changes in government regulations can also affect your average price and number of monthly transactions. For instance, if new data privacy laws are implemented, businesses may need to invest in data processing services to ensure compliance, leading to an increase in your average price and number of monthly transactions.
- The demand for data security can also impact your business's average price and number of monthly transactions. As data breaches become more common, businesses are increasingly prioritizing data security. This may result in a higher average price for your services, as well as an increase in your number of monthly transactions.
- Your company's reputation and customer satisfaction can also influence your average price and number of monthly transactions. If you consistently provide high-quality and reliable data processing services, you may be able to increase your average price as well as attract more customers, resulting in an increase in your number of monthly transactions.
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 data processing company
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your data processing company on a daily basis.
Expenses normally vary based on how much revenue you anticipate (which is why, from experience, it is always better to start your forecast with the topline projection), and where your business is based.
Operating expenses for a data processing company will include some of the following items:
- Staff Costs: This includes salaries, benefits, and any other compensation for your employees, such as bonuses and commissions. As a data processing company, your staff will play a crucial role in ensuring smooth operations and efficient delivery of services to your clients.
- Accountancy Fees: As a business, it is important to maintain accurate financial records and comply with tax laws. This will require hiring an accountant or accounting firm to handle your bookkeeping, tax preparation, and other financial tasks.
- Insurance Costs: As a data processing company, you will handle sensitive and valuable information for your clients. It is important to protect your business and your clients from any potential risks or liabilities, such as data breaches. This will require investing in insurance policies, such as cyber liability insurance.
- Software Licences: Your data processing company will rely heavily on software for various tasks, such as data analysis, storage, and security. You will need to pay for software licences to use these tools, and the cost will depend on the type and number of licences needed.
- Banking Fees: As a business, you will have to deal with various banking fees, such as transaction fees, wire transfer fees, and account maintenance fees. These fees can add up over time, so it is important to keep track of them and find ways to minimize them.
- Rent/Lease Expenses: If you have a physical office space, you will have to pay rent or lease expenses. This includes the cost of utilities, maintenance, and repairs for your office.
- Marketing and Advertising: To attract clients and grow your business, you will need to invest in marketing and advertising efforts. This can include creating a website, attending industry events, and running digital ad campaigns.
- Training and Development: As a data processing company, it is important to stay updated with the latest technologies and industry trends. This may require investing in training and development programs for your employees to enhance their skills and knowledge.
- Office Supplies: Your employees will need basic office supplies, such as paper, pens, and printer ink, to perform their daily tasks. These expenses may seem small, but they can add up over time.
- Travel Expenses: Depending on your client base, you may have to travel for business meetings or to provide on-site services. This will require covering expenses such as airfare, lodging, and meals.
- Telephone and Internet: As a data processing company, you will heavily rely on communication and internet services. This will include paying for business phone lines, internet service, and potentially mobile phone plans for your employees.
- Professional Memberships: To stay connected with the industry and gain access to valuable resources, you may need to pay for professional memberships and subscriptions to industry publications.
- Legal Fees: As a business, you may encounter legal issues that require the expertise of a lawyer. This can include drafting contracts, handling disputes, and ensuring compliance with laws and regulations.
- Utilities: In addition to rent/lease expenses, you will also have to pay for utilities such as electricity, water, and gas for your office space.
- Maintenance and Repairs: Your office and equipment will require regular maintenance and occasional repairs. This can include fixing broken equipment, updating software, and maintaining a clean and safe office space.
This list will need to be tailored to the specificities of your data processing company, but should offer a good starting point for your budget.
What investments are needed to start or grow a data processing company?
Creating and expanding a data processing company also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for a data processing company could include elements such as:
- Computers and Servers: As a data processing company, one of your main capital expenditures will be purchasing computers and servers to store and process large amounts of data. These are essential fixed assets that will enable you to provide your services to clients efficiently and effectively.
- Data Storage Equipment: Another important capital expenditure for a data processing company is data storage equipment, such as hard drives and cloud storage services. These assets will allow you to securely store and access large amounts of data for your clients.
- Network Infrastructure: Your company will also need to invest in network infrastructure, including routers, switches, and cabling, to ensure a stable and secure connection for data transfer. This is essential for a data processing company as a strong network is crucial for the success of your operations.
- Security Systems: As a data processing company, it is crucial to invest in security systems, such as firewalls, antivirus software, and intrusion detection systems, to protect your clients' data from cyber threats. These are considered fixed assets as they are necessary for the long-term security of your business.
- Backup and Disaster Recovery Solutions: In the event of a data loss or disaster, having a backup and disaster recovery solution in place is crucial for a data processing company. This can include offsite storage, backup servers, and disaster recovery software. These are important fixed assets to ensure the continuity of your operations and the security of your clients' data.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your data processing company.
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 data processing company
The next step in the creation of your financial forecast for your data processing company 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 data processing company?
Now let's have a look at the main output tables of your data processing company'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 data processing company'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 data processing company will look different than for a startup.
The projected balance sheet
The projected balance sheet gives an overview of your data processing company'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 data processing company. 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 data processing company'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 data processing company:
- 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 data processing company'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 data processing company'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 data processing company's financial forecast?
Using the right tool or solution will make the creation of your data processing company's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your data processing company's projections
The modern and easiest way is to use an online financial forecasting tool 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 projection software for free by signing up here.
Hiring a financial consultant or chartered accountant
Hiring a consultant or chartered accountant is also an efficient way to get a professional data processing company financial projection.
As you can imagine, this solution is much more expensive than using software. From experience, the creation of a simple financial forecast over three years (including a balance sheet, income statement, and cash flow statement) is likely to start around £700 or $1,000 excluding taxes.
The indicative estimate above, is for a small business, and a forecast done as a one-off. Using a financial consultant or accountant to track your actuals vs. forecast and to keep your financial forecast up to date on a monthly or quarterly basis will naturally cost a lot more.
If you choose this solution, make sure your service provider has first-hand experience in your industry, so that they may challenge your assumptions and offer insights (as opposed to just taking your figures at face value to create the forecast’s financial statements).
Why not use a spreadsheet such as Excel or Google Sheets to build your data processing company's financial forecast?
Creating an accurate and error-free data processing company 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 data processing company, 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
- Having a financial forecast enables you to visualise the expected growth, profitability, and cash generation for your business over the next three to five years.
- Tracking actuals vs. forecast and keeping your financial projections up-to-date is the only way to get a view on what your data processing company future cash flows may look like.
- Using financial forecasting software is the mordern and easy way to create and maintain your forecasts.
This is the end of our guide on how to build the financial forecast for a data processing company, we hope you found it useful. Don't hesitate to contact us if you want to share your feedback or 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
- Example of financial forecast
- How to project revenues for a business?
- Sample financial forecast for business idea
Know someone who owns or is thinking of starting a data processing company? Share our forecasting guide with them!
Founder & CEO at The Business Plan Shop Ltd
