How to create a financial forecast for a psychology research firm?
Creating a financial forecast for your psychology research firm, 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 psychology research firm 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 psychology research firm?
The financial projections for your psychology research firm 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 psychology research firm'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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What information is used as input to build a psychology research firm financial forecast?
A psychology research firm'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 psychology research firm.
If you are creating (or updating) the forecast of an existing psychology research firm, 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 psychology research firm 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 psychology research firm 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 psychology research firm's financial forecast.
The sales forecast for a psychology research firm
From experience, it usually makes sense to start your psychology research firm's financial projection with the revenues forecast.
The inputs used to forecast your sales will include the historical trading data of your psychology research firm (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 psychology research firm'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:
- Research demands: As the owner of a psychology research firm, you know that the demand for your services can fluctuate based on current trends and societal issues. For example, if there is a rise in mental health awareness or a high-profile psychological study is published, there may be an increase in demand for your research services. This can result in higher average prices for your services or an increase in the number of monthly transactions as clients seek out your expertise.
- Competition: The presence of other psychology research firms in your area can also impact your business. If there is a larger or more established firm in your area, they may be able to charge higher average prices and attract more clients, making it more difficult for your firm to compete. On the other hand, if you are the only psychology research firm in your area, you may be able to charge higher prices and attract more clients due to less competition.
- Economic climate: The overall state of the economy can also have an impact on your business's average price and number of monthly transactions. During times of economic downturn, clients may have less disposable income to spend on research services, resulting in a decrease in average prices and transactions. On the other hand, during times of economic growth, clients may have more disposable income and be more willing to invest in research, resulting in higher average prices and transactions.
- Technology advancements: With the rapid pace of technological advancements, it is important for your psychology research firm to stay up to date with new tools and software that can improve the efficiency and accuracy of your research. Clients may be willing to pay higher average prices for your services if they know you are utilizing the latest technology, and this can also lead to an increase in the number of monthly transactions as clients seek out your advanced services.
- Partnerships and collaborations: Collaborating with other professionals or organizations in the psychology field can also impact your business's average price and number of monthly transactions. Partnering with well-respected researchers or institutions can increase your credibility and attract more clients, resulting in higher average prices and transactions. Additionally, collaborations can lead to new and innovative research projects, which can also attract clients and increase your business's average price.
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 operating expenses for a psychology research firm
The next step is to estimate the costs you’ll have to incur to operate your psychology research firm.
These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.).
But your psychology research firm's operating expenses should normally include the following items:
- Staff Costs: This includes salaries and wages for researchers, psychologists, and administrative staff. It also includes benefits such as health insurance, retirement contributions, and paid time off.
- Accountancy Fees: You will need to hire an accountant to help with financial management, tax preparation, and budgeting for your psychology research firm. These services can be costly but are necessary for accurate and compliant financial reporting.
- Insurance Costs: As a psychology research firm, you will need to have insurance to protect your business and employees. This includes liability insurance, professional liability insurance, and workers' compensation insurance.
- Software Licenses: You will need to invest in software for data analysis, statistical analysis, and project management. These licenses can be expensive and may need to be renewed annually.
- Banking Fees: Your psychology research firm will have various banking fees, such as transaction fees, wire transfer fees, and monthly account fees. These fees can add up, so it's important to research different banking options to find the best fit for your business.
- Office Supplies: This includes items such as paper, pens, printer ink, and other necessary supplies for your office. These costs may seem small, but they can add up over time.
- Rent: If you have a physical office space for your psychology research firm, you will need to pay rent. This can be a significant expense depending on the location and size of your office.
- Utilities: You will need to pay for electricity, water, internet, and other utilities for your office space. These costs can vary depending on the size and location of your office.
- Travel Expenses: As a psychology research firm, you may need to travel for conferences, meetings, or to conduct research. This includes expenses such as airfare, lodging, and meals.
- Marketing Expenses: You will need to invest in marketing efforts to promote your psychology research firm. This can include website development, advertising, and branding.
- Professional Memberships: Joining professional organizations and associations can provide networking opportunities and resources for your psychology research firm. However, these memberships often come with annual fees.
- Consulting Fees: You may need to hire consultants for specific projects or to provide expertise in a certain area of psychology research. These fees can vary depending on the scope and duration of the consulting services.
- Conferences and Training: Attending conferences and training workshops can help you stay updated on the latest research and techniques in psychology. However, these events often come with registration fees and travel expenses.
- Legal Fees: As a psychology research firm, you may need to seek legal advice for issues such as contracts, intellectual property, and employment law. These services can be costly, but they are necessary for protecting your business.
- Outsourcing Expenses: Depending on the needs of your psychology research firm, you may need to outsource certain tasks such as data entry or transcription. These services can be costly but can save you time and resources in the long run.
This list is not exhaustive by any means, and will need to be tailored to your psychology research firm's specific circumstances.
What investments are needed to start or grow a psychology research firm?
Once you have an idea of how much sales you could achieve and what it will cost to run your psychology research firm, it is time to look into the equipment required to launch or expand the activity.
For a psychology research firm, capital expenditures and initial working capital items could include:
- Research equipment and technology: This includes items such as computers, software, specialized equipment, and technology used for data collection and analysis. For a psychology research firm, these items are crucial for conducting studies and producing accurate results.
- Laboratory facilities: A psychology research firm may need to invest in building or renovating laboratory facilities to conduct experiments and store equipment and supplies. This may include items such as specialized lighting, soundproofing, and ventilation systems.
- Participant compensation: In some cases, psychology research firms may need to compensate participants for their time and travel expenses. This could include stipends, gift cards, or other forms of compensation. This expense is important to consider when budgeting for a study.
- Specialized training: As a psychology research firm, you may need to invest in specialized training for your team members. This could include workshops, conferences, or certifications to stay current with the latest research methods and techniques.
- Furniture and office supplies: While not directly related to conducting research, a psychology research firm may also need to invest in furniture and office supplies for their workspace. This could include desks, chairs, filing cabinets, and other necessary items for a functional office environment.
Again, this list will need to be adjusted according to the specificities of your psychology research 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 psychology research firm
The next step in the creation of your financial forecast for your psychology research 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 psychology research firm?
Now let's have a look at the main output tables of your psychology research firm's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your psychology research firm's expected growth and profitability over the next three to five years.
A financially viable P&L statement for a psychology research firm 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 psychology research firm'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 psychology research 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 psychology research 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 psychology research 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 psychology research 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 psychology research firm's financial forecast?
Using the right tool or solution will make the creation of your psychology research firm's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial projection software to build your psychology research firm'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 psychology research firm 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 psychology research firm's financial forecast?
Creating an accurate and error-free psychology research 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
- A financial forecast shows expected growth, profitability, and cash generation metrics for your psychology research firm.
- 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 psychology research firm. 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.
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Founder & CEO at The Business Plan Shop Ltd
