How to create a financial forecast for a royalty collection agency?
Developing and maintaining an up-to-date financial forecast for your royalty 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 royalty 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 royalty collection agency?
The financial projections for your royalty 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 royalty 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 royalty collection agency financial forecast?
A royalty collection agency'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 royalty collection agency.
If you are creating (or updating) the forecast of an existing royalty collection agency, 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 royalty collection agency 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 royalty collection agency 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 royalty collection agency's financial forecast.
The sales forecast for a royalty collection agency
From experience, it is usually best to start creating your royalty collection agency financial forecast by your sales forecast.
To create an accurate sales forecast for your royalty collection agency, you will have to rely on the data collected in your market research, or if you're running an existing royalty collection agency, 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:
- Number of registered users: The number of registered users on your platform can directly impact your average price and number of monthly transactions. As the number of users increases, the potential for more usage and transactions also increases.
- Popularity of music streaming services: The popularity of music streaming services can also affect your business. If more users are turning to streaming services for their music needs, it could lead to a decrease in the number of transactions and average price for royalty collections.
- Changes in royalty rates: Any changes in royalty rates can have a significant impact on your business. If royalty rates increase, it could lead to higher average prices for your services. On the other hand, a decrease in royalty rates could attract more users and increase the number of monthly transactions.
- Number of new artists signing up: The number of new artists signing up for your services can also affect your business. As more artists join your platform, it could lead to an increase in the number of transactions and potentially higher average prices for your services.
- Economic conditions: Economic conditions, such as a recession or economic boom, can impact the music industry and in turn, your business. During a recession, there may be a decrease in the number of transactions and average price as consumers may have less disposable income for music purchases. Conversely, during an economic boom, there may be an increase in transactions and average price as consumers have more disposable income for music purchases.
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 royalty collection agency
The next step is to estimate the expenses needed to run your royalty collection agency 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 royalty collection agency's operating expenses should include the following items at a minimum:
- Staff Costs: This includes the salaries, benefits, and training costs for your team of royalty collection specialists and administrative staff.
- Accountancy Fees: As a royalty collection agency, you will need to hire a professional accountant to help manage your finances and ensure accurate reporting to your clients.
- Insurance Costs: It is important to protect your agency from potential risks and liabilities, so you will need to budget for insurance coverage for your employees and office space.
- Software Licences: Your agency will need to invest in software that can efficiently track and manage the royalties collected from various sources. This may include royalty calculation and distribution software, as well as accounting and invoicing software.
- Banking Fees: You will need to budget for banking fees associated with processing royalty payments, such as wire transfer fees and transaction fees.
- Marketing and Advertising Expenses: To attract new clients and promote your agency's services, you may need to invest in marketing materials, advertising campaigns, and attending industry events.
- Rent and Utilities: Your agency will need a physical office space to operate from, so you will need to budget for rent, utilities, and maintenance costs.
- Professional Memberships: Joining professional organizations and attending industry conferences can provide valuable networking opportunities and resources for your agency, but may come with membership fees.
- Legal Fees: Your agency may need to seek legal advice or services for contract negotiations, copyright issues, or other legal matters related to royalty collection.
- Office Supplies and Equipment: In addition to software, your agency will need basic office supplies such as paper, printer ink, and pens, as well as office equipment like computers, printers, and furniture.
- Travel Expenses: Depending on the scope of your agency's operations, you may need to budget for travel expenses related to meeting with clients or attending industry events.
- Training and Development: To stay current with industry trends and best practices, you may need to invest in training and development opportunities for your team.
- Telephone and Internet Costs: Your agency will need reliable communication channels, so you will need to budget for telephone and internet services.
- Taxes: As with any business, your agency will need to pay taxes on its profits. Make sure to budget for these expenses accordingly.
- Consulting Fees: If your agency needs specialized expertise or support, you may need to hire consultants on a project basis. Make sure to include these fees in your budget.
This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small royalty collection agency might not have the same level of expenditure as a larger one, for example.
What investments are needed to start or grow a royalty collection agency?
Your royalty collection agency financial forecast will also need to include the capital expenditures (aka investments in plain English) and initial working capital items required for the creation or development of your business.
For a royalty collection agency, these could include:
- Royalty software: This is a necessary investment for a royalty collection agency as it helps track and manage payments from licensees and calculate royalties owed to clients accurately.
- Royalty database: In order to efficiently manage large amounts of data, a royalty collection agency may need to invest in a secure and reliable database system to store and organize information on licensees, clients, and royalty payments.
- Electronic payment system: To streamline the payment process and reduce the risk of errors, a royalty collection agency may need to invest in an electronic payment system that allows for secure and timely transfer of funds between clients and licensees.
- Office equipment: A royalty collection agency may need to purchase office equipment such as computers, printers, and scanners to support daily operations and maintain efficient communication with clients and licensees.
- Security measures: As a royalty collection agency deals with sensitive financial information, it is crucial to invest in security measures such as firewalls, data encryption, and backup systems to protect against cyber threats and ensure the safety of client and licensee data.
Again, this list will need to be adjusted according to the size and ambitions of your royalty 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 royalty collection agency
The next step in the creation of your financial forecast for your royalty 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 royalty collection agency?
Now let's have a look at the main output tables of your royalty collection agency's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your royalty collection agency's expected growth and profitability over the next three to five years.
A financially viable P&L statement for a royalty 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 royalty collection agency's forecasted balance sheet enables you to assess your financial structure and working capital requirements.
It is composed of three types of elements: assets, liabilities and equity:
- Assets: represent what the business owns and uses to produce cash flows. It includes resources such as cash, equipment, and accounts receivable (money owed by clients).
- Liabilities: represent funds advanced to the business by lenders and other creditors. It includes items such as accounts payable (money owed to suppliers), taxes due and loans.
- 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 royalty collection agency 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 royalty collection agency'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 royalty collection agency 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 royalty collection agency's financial forecast?
Creating your royalty collection agency's financial forecast may sound fairly daunting, but the good news is that there are several ways to go about it.
Using online financial forecasting software to build your royalty collection agency'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
Outsourcing the creation of your royalty collection agency financial forecast is another possible solution.
This will cost more than using software as you can expect as your price will have to cover the accountant’s time, software cost, and profit margin.
Price can vary greatly based on the complexity of your business. For a small business, from experience, a simple three-year financial forecast (including a balance sheet, income statement, and cash flow statement) will start at around £700 or $1,000.
Bear in mind that this is for forecasts produced at a single point in time, updating or tracking your forecast against actuals will cost extra.
If you decide to outsource your forecasting:
- Make sure the professional has direct experience in your industry and is able to challenge your assumptions constructively.
- Steer away from consultants using sectorial ratios to build their client’s financial forecasts (these projections are worthless for a small business).
Why not use a spreadsheet such as Excel or Google Sheets to build your royalty collection agency's financial forecast?
You and your financial partners need numbers you can trust. Unless you have studied finance or accounting, creating a trustworthy and error-free royalty collection agency financial forecast on a spreadsheet is likely to prove challenging.
Financial modelling is very technical by nature and requires a solid grasp of accounting principles to be done without errors. This means that using spreadsheet software like Excel or Google Sheets to create accurate financial forecasts is out of reach for most business owners.
Creating forecasts in Excel is also inefficient nowadays:
- Software has advanced to the point where forecasting can be done much faster and more accurately than manually on a spreadsheet.
- With artificial intelligence, the software is capable of detecting mistakes and helping decision-making.
Spreadsheets are versatile tools but they are not tailor-made for reporting. Importing your royalty collection agency's accounting data in Excel to track actual vs. forecast is incredibly manual and tedious (and so is keeping forecasts up to date). It is much faster to use dedicated financial planning tools like The Business Plan Shop which are built specially 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 projection shows expected growth, profitability, and cash generation for your business over the next three to five years.
- Tracking actuals vs. forecast and keeping your financial forecast up-to-date is the only way to maintain visibility on future cash flows.
- Using financial forecasting software makes it easy to create and maintain up-to-date projections for your royalty collection agency.
You have reached the end of our guide. We hope you now have a better understanding of how to create a financial forecast for a royalty collection agency. Don't hesitate to contact our team if you have any questions or want to share your experience building forecasts!
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 projections
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- Sample financial forecast for business idea
Know someone who runs or wants to start a royalty collection agency? Share our financial projection guide with them!
Founder & CEO at The Business Plan Shop Ltd
