How to create a financial forecast for a debt collection agency?
Developing and maintaining an up-to-date financial forecast for your debt collection agency 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 debt collection agency 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 debt collection agency?
The financial projections for your debt collection agency act as a financial blueprint to guide its growth with confidence and ensure its long-term financial viability.
To create them, you will need to look at your business in detail - from sales to operating costs and investments - to assess how much profit it can generate in the years to come and what will be the associated cash flows.
During challenging market conditions, maintaining an up-to-date financial forecast enables early detection of potential financial shortfalls, allowing for timely adjustments or securing financing before facing a cash crisis.
Your debt collection agency's financial forecast will also prove invaluable when seeking financing. Banks and investors will undoubtedly request a thorough examination of your financial figures, making precision and presentation essential.
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 debt collection agency financial forecast?
A debt collection agency'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 debt collection agency, 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 debt collection agency 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 debt collection agency 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 debt collection agency's financial forecast.
The sales forecast for a debt collection agency
The sales forecast, also called topline projection, is normally where you will start when building your debt collection 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 debt collection agencies), and consider the elements below:
- Your reputation and track record in the industry can greatly impact your average price and number of monthly transactions. A good reputation for successfully collecting debts can lead to higher fees and a larger client base.
- The state of the economy can also affect your business, as a strong economy may lead to more people being able to pay their debts, resulting in lower demand for your services. On the other hand, a weak economy may lead to more people defaulting on their debts, increasing demand for debt collection agencies and potentially driving up your average price.
- The effectiveness of your collection strategies and techniques can also impact your average price and monthly transactions. If your strategies are successful, you may be able to charge higher fees and attract more clients. However, if your strategies are not effective, you may struggle to collect debts and lose clients.
- The size and scope of your client base can also affect your business. A larger client base with a wide range of debtors can lead to more monthly transactions and potentially higher fees. On the other hand, a smaller client base may limit your transactions and average price.
- The regulatory environment can also play a role in the success of your debt collection agency. Changes in laws and regulations related to debt collection can impact your ability to collect debts and may require you to adjust your pricing and strategies accordingly.
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 debt collection agency
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your debt collection agency 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 debt collection agency will include some of the following items:
- Staff Costs: This includes salaries, wages, benefits, and payroll taxes for all employees, including debt collectors, administrative staff, and managers.
- Accountancy Fees: You will need to hire a certified public accountant to ensure accurate financial record keeping and compliance with tax laws.
- Insurance Costs: As a debt collection agency, you will need to have insurance coverage for potential lawsuits or claims made against your company.
- Software Licenses: You will need to pay for software licenses for debt collection software, accounting software, and any other necessary programs to run your business.
- Banking Fees: You will incur fees for bank accounts, wire transfers, and credit card processing, which are essential for collecting payments from debtors.
- Rent/Lease: You may need to rent or lease office space for your debt collection agency, which will incur monthly or yearly expenses.
- Utilities: You will need to pay for electricity, water, and other utilities to keep your office running.
- Office Supplies: This includes items such as paper, ink cartridges, pens, and other necessary supplies for day-to-day operations.
- Marketing Expenses: To attract new clients, you may need to spend money on marketing efforts, such as advertising, website development, and promotional materials.
- Legal Fees: You may need to consult with a lawyer to ensure your debt collection practices are legal and compliant with state and federal laws.
- Training and Development: To ensure your employees are equipped with the skills and knowledge to effectively collect debts, you may need to invest in training and development programs.
- Travel Expenses: If your agency operates in multiple locations, you may need to budget for travel expenses, including airfare, lodging, and meals.
- Depreciation: This is the gradual decrease in value of your office equipment and furniture over time, which you will need to factor into your expenses.
- Taxes: You will need to pay income taxes and potentially other taxes, such as sales tax, on your business operations.
- Collection Agency Bond: In some states, debt collection agencies are required to obtain a surety bond to protect clients from any potential misconduct or fraud. This will incur annual costs.
This list will need to be tailored to the specificities of your debt collection agency, but should offer a good starting point for your budget.
What investments are needed to start or grow a debt collection agency?
Creating and expanding a debt collection agency also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for a debt collection agency could include elements such as:
- Debt collection software: This is a crucial investment for your debt collection agency as it will help you manage and track all your accounts, payments, and communication with debtors. It will also allow you to generate reports and analyze data to improve your collection strategies.
- Collection equipment: This includes items such as computers, printers, phones, and other office equipment that are necessary for the day-to-day operations of your agency. These items may need to be replaced or upgraded periodically to ensure smooth functioning of your business.
- Legal fees: As a debt collection agency, you may need to hire legal services to handle certain cases or to advise you on compliance with debt collection laws. These fees can be a significant expense, especially in the event of lawsuits or legal disputes.
- Office space: Your agency will require a physical location to conduct business and meet with clients. This may include rent, utilities, and maintenance costs, which can add up to a substantial amount over time.
- Transportation expenses: If your agency operates in multiple locations, you may need to invest in vehicles or transportation services to reach debtors and conduct field visits. This can include fuel costs, insurance, and maintenance expenses.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your debt collection 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 debt collection agency
The next step in the creation of your financial forecast for your debt collection 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 debt collection agency?
Now let's have a look at the main output tables of your debt collection agency's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your debt collection agency's expected growth and profitability over the next three to five years.
A financially viable P&L statement for a debt collection agency should normally show:
- Sales growing above inflation
- Stable or expanding (ideally) profit margins
- A net profit
This will of course depend on the stage of your business: a new venture might be loss-making until it reaches its breakeven point in year 2 or 3, for example.
The projected balance sheet
Your debt collection agency's projected balance sheet provides a snapshot of your business’s financial position at year-end.
It is composed of three types of elements: assets, liabilities and equity:
- Assets: represent what the business possesses including cash, equipment, and accounts receivable (money owed by clients).
- Liabilities: represent funds advanced to the business by lenders and other creditors. They include accounts payable (money owed to suppliers), taxes payable and loans from banks and financial institutions.
- 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 cash flow projection
The cash flow forecast of your debt collection agency will show how much cash the business is expected to generate or consume over the next three to five years.
There are multiple ways of presenting a cash flow forecast but from experience, it is better to organise it by nature in order to clearly show these elements:
- Operating cash flow: how much cash is generated by the debt collection agency's operations
- Investing cash flow: what is the business investing to expand or maintain its equipment
- Financing cash flow: is the business raising additional funds or repaying financiers (debt repayment, dividends)
Your cash flow forecast is the most important element of your overall financial projection and that’s where you should focus your attention to ensure that your debt collection agency is adequately funded.
Note: if you are preparing a financial forecast in order to try to secure funding, you will need to include both a yearly and monthly cash flow forecast in your debt collection agency's financial plan.
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 debt collection agency's financial forecast?
Using the right tool or solution will make the creation of your debt collection agency's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial projection software to build your debt collection 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.
Hiring a financial consultant or chartered accountant
Hiring a consultant or chartered accountant is also an efficient way to get a professional debt collection agency 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 debt collection agency's financial forecast?
Creating an accurate and error-free debt collection agency financial forecast with a spreadsheet is very technical and requires a deep knowledge of accounting and an understanding of financial modelling.
Very few business owners are financially savvy enough to be able to build a forecast themselves on Excel without making mistakes.
Lenders and investors know this, which is why forecasts created on Excel by the business owner are often frowned upon.
Having numbers one can trust is key when it comes to financial forecasting and to that end using software is much safer.
Using financial forecasting software is also faster than using a spreadsheet, and, with the rise of artificial intelligence, software is also becoming smarter at helping us analyse the numbers to make smarter decisions.
Finally, like everything with spreadsheets, tracking actuals vs. forecasts and keeping your projections up to date as the year progresses is manual, tedious, and error-prone. Whereas financial projection 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 debt collection 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 debt collection agency
Takeaways
- A financial forecast shows expected growth, profitability, and cash generation metrics for your debt collection 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 debt collection 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 template for a business idea
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Founder & CEO at The Business Plan Shop Ltd
