How to create a financial forecast for a managed IT services company?
Creating a financial forecast for your managed IT services company, 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 managed IT services company 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 managed IT services company?
The financial projections for your managed IT services company 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 managed IT services company'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.
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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.
What information is used as input to build a managed IT services company financial forecast?
A managed IT services company'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 managed IT services company, 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 managed IT services company 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 managed IT services company 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 managed IT services company's financial forecast.
The sales forecast for a managed IT services company
From experience, it is usually best to start creating your managed IT services company financial forecast by your sales forecast.
To create an accurate sales forecast for your managed IT services company, you will have to rely on the data collected in your market research, or if you're running an existing managed IT services company, the historical data of the business, to estimate two key variables:
- The average price
- The number of monthly transactions
To get there, you will need to consider the following factors:
- Industry Trends: Keep a close eye on industry trends, as they can greatly affect your average price and number of monthly transactions. For example, if there is a sudden increase in demand for cloud computing services, you may be able to charge a higher price for your managed IT services.
- Technology Advancements: Technological advancements can also impact your business's average price and number of monthly transactions. For instance, if a new software or hardware is introduced that can significantly improve the efficiency of your services, you may be able to increase your prices and attract more customers.
- Competition: Keep a close eye on your competitors and their pricing strategies. If they are offering similar services at a lower price, you may need to adjust your prices to stay competitive. On the other hand, if you have a unique offering or a strong reputation, you may be able to charge a premium price.
- Economic Conditions: Economic conditions can also have a significant impact on your business. During a recession, companies may be looking to cut costs and may be less likely to invest in managed IT services. On the other hand, during a period of economic growth, companies may be more willing to spend on technology and may be willing to pay higher prices for quality services.
- Customer Retention: The number of monthly transactions can also be affected by your customer retention rate. If you have a high customer retention rate, you may have a steady stream of monthly transactions. However, if you are experiencing a high rate of customer churn, you may need to focus on improving your services and retaining customers to maintain your monthly transactions.
Once you have an idea of what your future sales will look like, it will be time to work on your overhead budget. Let’s see what this entails.
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The operating expenses for a managed IT services company
The next step is to estimate the costs you’ll have to incur to operate your managed IT services company.
These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.).
But your managed IT services company's operating expenses should normally include the following items:
- Staff Costs: This includes salaries, benefits, and training for your team of IT professionals.
- Accountancy Fees: You may need to hire a professional accountant to manage your financial records and taxes.
- Insurance Costs: To protect your business and clients, you will need to pay for various types of insurance, such as liability and cyber insurance.
- Software Licenses: As a managed IT services company, you will need to purchase software licenses for various tools and programs to support your clients.
- Banking Fees: This includes transaction fees, account maintenance fees, and any other charges associated with managing your business finances.
- Marketing and Advertising: To attract new clients and promote your services, you may need to invest in marketing and advertising efforts.
- Rent/Lease: If you have a physical office space, you will need to pay rent or lease fees to maintain it.
- Utilities: This includes electricity, water, and internet costs for your office space.
- Travel Expenses: If you need to travel for client meetings or conferences, you will need to cover the costs of transportation, accommodation, and meals.
- Professional Memberships: You may need to pay for memberships to industry associations or organizations to stay updated on the latest trends and network with other professionals.
- Office Supplies: This includes items such as computers, printers, and other equipment necessary for running your business.
- Professional Development: To stay updated on the latest technologies and techniques, you may need to invest in training and professional development opportunities for your team.
- Legal Fees: You may need to consult with a lawyer or pay for legal services related to contracts, client agreements, or other business matters.
- Taxes: As a business, you will need to pay various taxes, including income tax, sales tax, and payroll tax.
- Office Maintenance: This includes regular cleaning and maintenance of your office space, as well as any repairs or renovations.
This list is not exhaustive by any means, and will need to be tailored to your managed IT services company's specific circumstances.
What investments are needed to start or grow a managed IT services company?
Once you have an idea of how much sales you could achieve and what it will cost to run your managed IT services company, it is time to look into the equipment required to launch or expand the activity.
For a managed IT services company, capital expenditures and initial working capital items could include:
- Hardware: This includes equipment such as servers, routers, and switches that are necessary to provide IT services to your clients. These items typically have a longer lifespan and are considered fixed assets.
- Software: As a managed IT services company, you will need to invest in software licenses for tools and programs that you use to manage and monitor your clients' IT systems. These licenses are considered capital expenditures and can include items such as antivirus software, remote monitoring tools, and backup software.
- Infrastructure: This refers to the physical infrastructure needed to support your IT services, such as data centers, network cabling, and power backups. These are essential to the operation of your business and are considered fixed assets.
- Office Equipment: In addition to IT-specific equipment, your company will also need basic office equipment such as computers, printers, and furniture. These items are considered fixed assets and should be included in your expenditure forecast.
- Training and Certifications: While training and development expenses are typically considered operating expenses, any training or certifications necessary for your IT staff to effectively provide services to your clients can be considered capital expenditures. This may include certifications for specific software or hardware, as well as ongoing training to keep your team up-to-date with industry advancements.
Again, this list will need to be adjusted according to the specificities of your managed IT services 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 managed IT services company
The next step in the creation of your financial forecast for your managed IT services 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 managed IT services company?
Now let's have a look at the main output tables of your managed IT services company's financial forecast.
The projected profit & loss statement
The projected profit & loss shows how profitable your managed IT services company is likely to be in the years to come.
For your managed IT services company to be financially viable, your projected P&L should ideally show:
- Sales growing above inflation (the higher the better)
- Profit margins which are stable or expanding (the higher the better)
- A net profit at the end of each financial year (the higher the better)
This is for established managed IT services companies, there is some leniency for startups which will have numbers that will look a bit different than existing businesses.
The projected balance sheet
Your managed IT services company'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 projected cash flow statement
A projected cash flow statement for a managed IT services company 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 managed IT services company'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 managed IT services company 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 managed IT services company's financial forecast?
Using the right tool or solution will make the creation of your managed IT services company's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your managed IT services company'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 managed IT services company 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 managed IT services company's financial forecast?
Creating an accurate and error-free managed IT services 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 managed IT services 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 managed IT services 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 managed IT services 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 create a sales forecast for a business?
- Financial forecast for a business idea
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Founder & CEO at The Business Plan Shop Ltd
