How to create a financial forecast for an art direction agency?
Creating a financial forecast for your art direction agency, 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 art direction agency 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 an art direction agency?
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 art direction agency becomes handy.
Creating an art direction agency 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 art direction agency.
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 an art direction agency 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 art direction agency'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 an art direction agency financial forecast?
A art direction 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 art direction agency.
If you are creating (or updating) the forecast of an existing art direction 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 art direction 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 art direction 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 art direction agency's financial forecast.
The sales forecast for an art direction agency
The sales forecast, also called topline projection, is normally where you will start when building your art direction agency 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 art direction agencies), and consider the elements below:
- Economic conditions: Changes in the economy, such as a recession or economic growth, can greatly impact the average price of your services and the number of monthly transactions. In times of economic downturn, clients may be more price-sensitive and opt for lower-priced services or fewer transactions, while in times of economic growth, clients may be more willing to invest in higher-priced services and more frequent transactions.
- Industry trends: The art direction industry is constantly evolving, with new trends and techniques emerging. As an agency, it's important to stay up-to-date with these trends and offer services that align with current industry standards. This can affect your average price, as clients may be willing to pay more for cutting-edge services, and the number of monthly transactions, as clients may be attracted to your agency for its innovative approach.
- Competition: The number of competitors in your market can also impact your average price and number of monthly transactions. If there are many agencies offering similar services, it may be necessary to lower your prices in order to remain competitive. On the other hand, if there are fewer competitors, you may be able to command higher prices and attract a larger number of monthly transactions.
- Client demographics: The demographics of your target clients can also play a role in your sales forecast. For example, if your agency primarily caters to high-end clients, you may be able to charge higher prices and have a lower number of monthly transactions. However, if your target clients are more budget-conscious, you may need to adjust your prices and offer a higher volume of transactions.
- Seasonal fluctuations: Depending on the nature of your services, you may experience seasonal fluctuations in your average price and number of monthly transactions. For example, if your agency offers services related to holiday campaigns, you may see a spike in both the average price and number of transactions during the holiday season. It's important to take these seasonal trends into account when creating your sales forecast.
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 an art direction agency
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your art direction agency on a daily basis.
Expenses normally vary based on how much revenue you anticipate (which is why, from experience, it is always better to start your forecast with the topline projection), and where your business is based.
Operating expenses for an art direction agency will include some of the following items:
- Staff costs: This includes salaries, benefits, and any other expenses related to your employees. As an art direction agency, your staff costs will likely be a significant portion of your operating expenses.
- Accountancy fees: You may need to hire an accountant or use accounting software to manage your finances and ensure compliance with tax laws. These fees should be factored into your operating expenses.
- Insurance costs: It's important to have insurance to protect your agency in case of any unforeseen events, such as accidents, lawsuits, or property damage. Your insurance premiums should be included in your operating expenses.
- Software licenses: As an art direction agency, you may need to use various software programs for design, project management, and other tasks. These licenses will incur a cost and should be included in your operating expenses.
- Banking fees: Your agency will likely have various banking fees, such as transaction fees, wire transfer fees, and account maintenance fees. These should be included in your operating expenses.
- Rent: If you have a physical office space, rent will be a significant operating expense. This includes not just the monthly rent, but also utilities, maintenance, and any other associated costs.
- Marketing and advertising: As an art direction agency, it's important to promote your services and attract clients. This may include expenses for social media ads, print ads, or attending industry events.
- Professional development: To stay competitive and up-to-date in the industry, your agency may need to invest in professional development for your team. This can include workshops, conferences, or online courses.
- Office supplies and equipment: These expenses include items such as stationery, printer ink, and office furniture. They may seem small, but they can add up over time.
- Travel expenses: If your agency works with clients in different locations, you may need to budget for travel expenses, such as flights, accommodations, and meals.
- Web hosting and domain fees: Your agency's website is an important tool for showcasing your work and attracting clients. As such, you'll need to budget for web hosting and domain fees in your operating expenses.
- Professional fees: These include any fees paid to outside professionals, such as lawyers, consultants, or freelancers. These fees can vary depending on the specific services you require.
- Taxes: As a business, you'll need to pay various taxes, such as income tax, sales tax, and payroll taxes. These should be factored into your operating expenses.
- Software subscriptions: In addition to software licenses, you may also have ongoing software subscriptions for tools such as project management software or design software. These should be included in your operating expenses.
- Miscellaneous expenses: Finally, it's important to have a buffer for any unexpected expenses that may arise, such as repairs, legal fees, or office supplies. Budgeting for miscellaneous expenses can help mitigate any financial surprises.
This list will need to be tailored to the specificities of your art direction agency, but should offer a good starting point for your budget.
What investments are needed to start or grow an art direction agency?
Once you have an idea of how much sales you could achieve and what it will cost to run your art direction agency, it is time to look into the equipment required to launch or expand the activity.
For an art direction agency, capital expenditures and initial working capital items could include:
- Studio Equipment: This includes items such as cameras, lighting equipment, and computer hardware and software that are necessary for producing high-quality art direction work.
- Furniture and Fixtures: This category includes office furniture such as desks, chairs, and storage units, as well as any fixtures that are permanently attached to the office space.
- Office Renovations: If you are starting your agency from scratch, you may need to invest in renovating your office space to create a professional and inspiring environment for your team and clients.
- Printing and Production Equipment: Depending on the type of projects you work on, you may need to purchase equipment such as printers, scanners, and production machines to handle large-scale printing and production work.
- Vehicles: If your agency offers on-location services or if you have a team that frequently travels for client meetings or shoots, you may need to invest in company vehicles for transportation purposes.
Again, this list will need to be adjusted according to the specificities of your art direction 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 art direction agency
The next step in the creation of your financial forecast for your art direction 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 an art direction agency?
Now let's have a look at the main output tables of your art direction agency'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 art direction agency'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 art direction agency will look different than for a startup.
The projected balance sheet
The projected balance sheet gives an overview of your art direction agency'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 art direction agency. 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 art direction agency 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 art direction agency'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 art direction agency 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 art direction agency'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 art direction agency's financial forecast?
Using the right tool or solution will make the creation of your art direction agency's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your art direction agency's projections
The modern and easiest way is to use an online financial forecasting tool 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 projection software for free by signing up here.
Calling in a financial consultant or chartered accountant
Outsourcing the creation of your art direction 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 art direction agency's financial forecast?
Creating an accurate and error-free art direction agency 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 art direction agency, 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 art direction agency 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 an art direction agency, 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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- Example of financial forecast for business idea
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Founder & CEO at The Business Plan Shop Ltd
