How to create a financial forecast for a process improvement firm?
Developing and maintaining an up-to-date financial forecast for your process improvement firm 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 process improvement firm 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 process improvement 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 process improvement firm becomes handy.
Creating a process improvement 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 process improvement 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 process improvement 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 process improvement 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 process improvement firm financial forecast?
A process improvement 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 process improvement 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 process improvement 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 process improvement 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 process improvement firm's financial forecast.
The sales forecast for a process improvement firm
From experience, it is usually best to start creating your process improvement firm financial forecast by your sales forecast.
To create an accurate sales forecast for your process improvement firm, you will have to rely on the data collected in your market research, or if you're running an existing process improvement firm, 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 demand: The overall demand for process improvement services within your target industry can significantly affect your average price and number of monthly transactions. For example, if your clients are primarily in the manufacturing sector and there is a downturn in the industry, they may be less willing to invest in process improvement services, leading to a decrease in both price and transactions.
- Economic conditions: The state of the economy can also impact your business's sales forecast. During an economic downturn, businesses may cut back on expenses such as process improvement services, leading to a decrease in average price and number of transactions. Conversely, during an economic boom, businesses may be more willing to invest in these services, resulting in an increase in both price and transactions.
- Competitor pricing: Your competitors' pricing strategies can also affect your average price and number of monthly transactions. If your competitors offer similar services at a lower price, you may need to adjust your prices to remain competitive. This can lead to a decrease in average price and potentially an increase in transactions as clients seek out more affordable options.
- Technology advancements: The constant evolution of technology can also impact your business's sales forecast. If there are significant advancements in process improvement tools and software, you may need to adjust your prices to reflect the added value of these new technologies. This can lead to an increase in average price and potentially an increase in transactions from clients seeking to stay ahead in their industries.
- Regulatory changes: Changes in regulations and compliance requirements within your target industry can also affect your business's sales forecast. For example, if new regulations require businesses to implement more efficient processes, there may be an increased demand for your services, leading to an increase in both price and 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.
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 operating expenses for a process improvement firm
The next step is to estimate the expenses needed to run your process improvement firm on a day-to-day basis.
These will vary based on the level of sales expected, and the location and size of your business.
But your process improvement firm's operating expenses should include the following items at a minimum:
- Staff costs: This includes salaries, benefits, and any other related expenses for our team members. As a process improvement firm, our staff is our most valuable asset, and investing in their well-being is crucial for our success.
- Accountancy fees: As a business, you must comply with various tax and accounting regulations. Our firm will need to hire accountants or outsource accounting services to ensure accurate financial record-keeping and tax compliance.
- Insurance costs: Running a process improvement firm involves inherent risks, and it is essential to protect our business from potential liabilities. Insurance costs may include general liability insurance, professional liability insurance, and workers' compensation insurance.
- Software licenses: To provide top-notch process improvement services, we will need to invest in various software tools and licenses. This can include project management software, data analytics tools, and other specialized software for process improvement.
- Banking fees: As a business, we will need to have a business bank account to manage our finances. This may involve monthly maintenance fees, transaction fees, and other banking charges.
- Marketing expenses: To attract clients and promote our services, we will need to invest in marketing efforts such as website development, advertising, and attending industry events.
- Professional development: As a process improvement firm, we must stay updated with the latest industry trends, methodologies, and tools. This may involve investing in training programs, conferences, and certifications for our team members.
- Office rent and utilities: An office space is essential for conducting business and meeting with clients. Rent, utilities, and other related expenses will be included in our operating expenses.
- Travel expenses: Depending on the scope of our services, we may need to travel to client locations or attend conferences. This may include airfare, accommodation, and other travel-related expenses.
- Legal fees: As a business, we may require legal services for contract review, trademark registration, or any other legal matters. Therefore, legal fees will be a part of our operating expenses.
- Office supplies: Our firm will require various office supplies such as stationery, printer ink, and other supplies to operate efficiently.
- Telephone and internet expenses: Communication is essential for any business, and we will need to invest in telephone and internet services to stay connected with clients and team members.
- Subscriptions and memberships: To stay updated with industry news and trends, we may need to invest in subscriptions to relevant publications and memberships to industry organizations.
- Rentals and leases: As a process improvement firm, we may need to rent or lease equipment or space for specific projects. These expenses will be included in our operating costs.
- Consulting fees: In some cases, we may need to hire external consultants to assist with specific projects or provide expert advice. Their fees will be included in our operating expenses.
This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small process improvement firm might not have the same level of expenditure as a larger one, for example.
What investments are needed to start or grow a process improvement firm?
Once you have an idea of how much sales you could achieve and what it will cost to run your process improvement firm, it is time to look into the equipment required to launch or expand the activity.
For a process improvement firm, capital expenditures and initial working capital items could include:
- Your office space - This includes purchasing or leasing a building or office space for your process improvement firm. It may also include renovations or improvements to the space.
- Your equipment and software - This includes any necessary equipment and software for your firm, such as computers, printers, project management software, and other tools needed to carry out your services.
- Your training and development programs - While not considered an operating expense, investing in training and development programs for your employees is important for the success of your process improvement firm. This may include workshops, seminars, or certifications to enhance their skills and knowledge.
- Your fleet vehicles - If your firm requires employees to travel to client sites, purchasing or leasing fleet vehicles may be a necessary capital expenditure. This includes the cost of the vehicles, insurance, and maintenance.
- Your furniture and fixtures - This includes purchasing office furniture, such as desks, chairs, and conference tables, as well as any fixtures needed for your office space, such as lighting or shelving.
Again, this list will need to be adjusted according to the specificities of your process improvement 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 process improvement firm
The next step in the creation of your financial forecast for your process improvement 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 process improvement firm?
Now let's have a look at the main output tables of your process improvement 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 process improvement 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 process improvement firm will look different than for a startup.
The projected balance sheet
The projected balance sheet gives an overview of your process improvement firm'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 process improvement firm. 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 projection
The cash flow forecast of your process improvement firm 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 process improvement firm'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 process improvement firm 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 process improvement firm'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 process improvement firm's financial projections?
Building a process improvement firm financial forecast is not difficult provided that you use the right tool for the job. Let’s see what options are available below.
Using online financial forecasting software to build your process improvement 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 process improvement 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 process improvement firm's financial forecast?
Creating an accurate and error-free process improvement 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 forecast templates for inspiration
The Business Plan Shop has dozens of financial forecast examples available.
Our templates contain both a financial forecast and a written business plan which presents, in detail, the company, the team, the strategy, and the medium-term objectives.
Our templates are a great source of inspiration, whether you just want to see what a complete business plan looks like, or are looking for concrete examples of how you should model financial elements in your own forecast.
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 process improvement firm 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 process improvement firm, 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
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- Sample financial forecast for business idea
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Founder & CEO at The Business Plan Shop Ltd
