How to create a financial forecast for a software publishing firm?
Developing and maintaining an up-to-date financial forecast for your software publishing 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 software publishing 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 software publishing 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 software publishing firm becomes handy.
Creating a software publishing 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 software publishing 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 software publishing 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 software publishing 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 needed to build a software publishing firm financial forecast?
The quality of your inputs is key when it comes to financial modelling: no matter how good the model is, if your inputs are off, so will the forecast.
If you are building a financial plan to start a software publishing firm, you will need to have done your market research and have a clear picture of your sales and marketing strategies so that you can project revenues with confidence.
You will also need to have a clear idea of what resources will be required to operate the software publishing firm on a daily basis, and to have done your research with regard to the equipment needed to launch your venture (see further down this guide).
If you are creating a financial forecast of an existing software publishing firm, things are usually simpler as you will be able to use your historical accounting data as a budgeting base, and complement that with your team’s view on what lies ahead for the years to come.
Let's now zoom in on what will go in your software publishing firm's financial forecast.
The sales forecast for a software publishing firm
The sales forecast, also called topline projection, is normally where you will start when building your software publishing firm 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 software publishing firms), and consider the elements below:
- Competition: The level of competition in the software publishing industry can greatly affect your average price and number of monthly transactions. If there are many competitors offering similar products at lower prices, you may need to adjust your prices to remain competitive and attract customers.
- Technology Advancements: The constantly evolving nature of technology can also impact your business's sales forecast. A new technology or platform may require you to invest in updates or new software development, which can affect your average price and sales.
- Customer Needs and Demands: Understanding the needs and demands of your target market is crucial in determining your average price and number of monthly transactions. If your customers are looking for specific features or updates, you may need to adjust your prices or develop new products to meet their demands.
- Economic Conditions: The state of the economy can also affect your business's sales forecast. During a recession, customers may be more hesitant to spend money on software, resulting in a decrease in average price and number of monthly transactions. On the other hand, during a strong economy, customers may be more willing to invest in new software, leading to an increase in sales.
- Partnerships and Collaborations: Collaborating with other businesses or forming partnerships can also impact your sales forecast. By teaming up with other companies, you may be able to expand your customer base and increase your sales. However, if a partnership falls through or a collaboration is not successful, it could negatively affect your average price and number of monthly transactions.
After the sales forecast comes the operating expenses budget, which we will now look into in more detail.
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 software publishing firm
The next step is to estimate the expenses needed to run your software publishing 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 software publishing firm's operating expenses should include the following items at a minimum:
- Staff costs: This includes salaries, benefits, and any bonuses or incentives for your employees. As a software publishing firm, you will need to hire skilled developers, designers, and marketing professionals to create and promote your software products.
- Accountancy fees: You will need to hire an accountant or a financial advisor to help you manage your finances and keep track of your expenses. They will also assist you with tax preparation and filing.
- Insurance costs: As a software publishing firm, you will need to protect your business with various insurance policies such as general liability insurance, professional liability insurance, and cyber liability insurance.
- Software licenses: You will need to purchase licenses for software tools and programs that you use to develop, test, and distribute your software products. These may include design software, project management tools, and antivirus programs.
- Banking fees: Your business will have various banking needs such as setting up a business bank account, paying for online transactions, and managing credit card payments. These fees can add up over time.
- Marketing expenses: In order to reach your target audience and promote your software products, you will need to invest in marketing efforts such as advertising, social media campaigns, and attending industry events.
- Website hosting and maintenance: Your business website is crucial for showcasing your software products and connecting with potential customers. You will need to pay for website hosting and maintenance services to keep your site running smoothly.
- Office rent: If you have a physical office space, you will need to include rent expenses in your operating costs. This may also include utilities such as electricity, water, and internet.
- Office supplies: You will need to purchase various office supplies such as computers, printers, paper, and ink cartridges to keep your business running smoothly.
- Legal fees: As a software publishing firm, you may need to seek legal advice or services for issues such as copyright protection, contract drafting, and intellectual property rights.
- Travel expenses: If you need to attend conferences, meet with clients, or travel for business purposes, you will need to include travel expenses such as airfare, accommodation, and meals in your operating costs.
- Professional development: It is important to invest in your employees' professional development to keep their skills and knowledge up-to-date. This may include training courses, workshops, and conferences.
- Customer support: As a software publishing firm, you will need to provide customer support for your products. This may include hiring a support team or outsourcing to a third-party provider.
- Taxes and licenses: You will need to pay taxes and obtain necessary licenses to operate your business legally. These may include sales tax, business licenses, and software development licenses.
- Renting equipment: If you need specialized equipment for your software development or testing, you may need to rent or lease it instead of purchasing it outright.
This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small software publishing firm might not have the same level of expenditure as a larger one, for example.
What investments are needed to start or grow a software publishing firm?
Your software publishing firm 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 software publishing firm, these could include:
- Computer Hardware: This includes purchasing desktops, laptops, servers, and other necessary hardware for the software publishing firm. These are essential fixed assets that will be used for software development, testing, and other business operations.
- Software Licenses: As a software publishing firm, you will need to purchase licenses for the software programs you use to develop, test, and distribute your own software products. These licenses can be costly, but they are necessary for your business to function.
- Office Space and Equipment: Your software publishing firm will require a physical office space to operate. This may include expenses for office rent, furniture, and equipment such as printers, scanners, and copiers.
- Website Development: In today's digital age, having a professional and user-friendly website is crucial for a software publishing firm. This may involve hiring a web developer, purchasing a domain name, and hosting services.
- Server Infrastructure: As your business grows, you may need to invest in your server infrastructure to handle the increasing demand for your software products. This may include purchasing new servers, upgrading existing ones, or investing in cloud services.
Again, this list will need to be adjusted according to the size and ambitions of your software publishing 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 software publishing firm
The next step in the creation of your financial forecast for your software publishing 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 software publishing firm?
Now let's have a look at the main output tables of your software publishing 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 software publishing 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 software publishing firm will look different than for a startup.
The projected balance sheet
Your software publishing 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 projected cash flow statement
A projected cash flow statement for a software publishing firm 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 software publishing firm'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 software publishing firm 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 software publishing firm's financial forecast?
Creating your software publishing firm'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 software publishing 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.
Hiring a financial consultant or chartered accountant
Hiring a consultant or chartered accountant is also an efficient way to get a professional software publishing 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 software publishing firm's financial forecast?
Creating an accurate and error-free software publishing 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 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 software publishing firm, 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 software publishing 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 software publishing 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
- 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
