How to create a financial forecast for an auction house?
Creating a financial forecast for your auction house, 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 auction house 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 auction house?
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 auction house becomes handy.
Creating an auction house 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 auction house.
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 auction house 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 auction house'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 auction house financial forecast?
A auction house'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 auction house.
If you are creating (or updating) the forecast of an existing auction house, 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 auction house 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 auction house 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 auction house's financial forecast.
The sales forecast for an auction house
The sales forecast, also called topline projection, is normally where you will start when building your auction house 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 auction houses), and consider the elements below:
- Economic trends: As the economy fluctuates, so does the average price of items sold at auction. In times of economic prosperity, people may be more willing to spend money on luxury items, leading to higher average prices. On the other hand, during economic downturns, people may be more cautious with their spending, resulting in lower average prices.
- Uniqueness of items: The rarity and uniqueness of items up for auction can greatly impact the average price. Rare and one-of-a-kind items tend to attract more attention and higher bids, resulting in higher average prices. On the other hand, if the items being auctioned are more common, the average price may be lower.
- Competition: The presence of other auction houses or online platforms offering similar items can affect the average price. If there is a lot of competition for a certain item, it may drive up the average price as bidders try to outbid each other. However, if there are not many other options for buyers, the average price may be lower.
- Popularity of auction house: The reputation and popularity of the auction house can also affect the average price. If the auction house is well-known and respected, it may attract more bidders and result in higher average prices. On the other hand, if the auction house is relatively unknown or has a negative reputation, it may struggle to attract bidders and result in lower average prices.
- Trends in collectibles: The popularity and demand for certain types of collectibles can also impact the average price at an auction house. For example, if there is a sudden surge in interest for a certain type of artwork or vintage item, it may drive up the average price at auctions. On the other hand, if the demand for a certain type of collectible declines, it may result in lower average prices.
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 auction house
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your auction house 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 auction house will include some of the following items:
- Staff costs: This includes salaries, wages, and benefits for all employees working at the auction house. This could also include any freelance or contract workers that you may hire for specific events or projects.
- Accountancy fees: You will need to hire an accountant or accounting firm to help you manage your financial records, prepare tax returns, and provide financial advice.
- Insurance costs: As an auction house, you will need to have insurance to protect against any potential risks or damages that may occur during an event. This could include general liability insurance, property insurance, and professional indemnity insurance.
- Software licences: You may need to purchase software licences for various programs and platforms that you use to manage your auctions, inventory, and finances. This could include auction software, accounting software, and inventory management software.
- Banking fees: Every time you make a transaction, whether it is a sale or a purchase, there will be banking fees associated with it. These could include wire transfer fees, credit card processing fees, and ATM fees.
- Marketing and advertising costs: In order to attract buyers and consignors, you will need to invest in marketing and advertising efforts. This could include online advertising, print ads, and event sponsorships.
- Rent or lease payments: If you do not own the building where your auction house is located, you will need to pay rent or lease payments on a monthly basis.
- Utilities: You will need to pay for utilities such as electricity, water, and internet for your auction house.
- Professional services: You may need to hire outside professionals such as lawyers or appraisers for certain events or projects.
- Cleaning and maintenance: It is important to keep your auction house clean and well-maintained for both the safety of your employees and the satisfaction of your clients.
- Travel expenses: If you need to attend auctions or events outside of your local area, you will need to budget for travel expenses such as airfare, lodging, and meals.
- Office supplies: You will need to purchase office supplies such as paper, ink, and pens to keep your business running smoothly.
- Security: As an auction house, you will need to invest in security measures to protect your valuable assets and ensure the safety of your employees and clients.
- Training and development: It is important to continuously train and develop your staff to ensure they have the necessary skills and knowledge to provide top-notch service to your clients.
- Furniture and equipment: You may need to purchase furniture and equipment such as chairs, tables, and display cases to set up your auction house and make it functional.
This list will need to be tailored to the specificities of your auction house, but should offer a good starting point for your budget.
What investments are needed to start or grow an auction house?
Creating and expanding an auction house also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for an auction house could include elements such as:
- Facility Renovations and Improvements: This can include upgrades to the physical building, such as new lighting, flooring, or HVAC systems. You may also need to invest in security measures, such as cameras or alarms, to protect valuable items.
- Equipment and Technology: An auction house requires various equipment and technology to properly display and manage items, such as display cases, shelving, and auction software. These can be significant investments, especially if you are starting from scratch or upgrading outdated equipment.
- Storage and Transportation: As an auction house, you will likely need to store and transport valuable items. This may include investing in a secure storage facility or purchasing a truck for transportation.
- Inventory: Depending on the type of auction house, you may need to purchase inventory to sell at your auctions. This can include fine art, antiques, or other valuable items. Keep in mind that these items may require insurance and proper storage, adding to the overall cost.
- Furniture and Fixtures: In addition to equipment and technology, you may also need to invest in furniture and fixtures for your auction house. This can include seating for attendees, podiums for auctioneers, and display cases for items.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your auction house.
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 auction house
The next step in the creation of your financial forecast for your auction house 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 auction house?
Now let's have a look at the main output tables of your auction house's financial forecast.
The projected profit & loss statement
The projected profit & loss shows how profitable your auction house is likely to be in the years to come.
For your auction house to be financially viable, your projected P&L should ideally show:
- Sales growing above inflation (the higher the better)
- Profit margins which are stable or expanding (the higher the better)
- A net profit at the end of each financial year (the higher the better)
This is for established auction houses, there is some leniency for startups which will have numbers that will look a bit different than existing businesses.
The projected balance sheet
Your auction house'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 an auction house 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 auction house'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 auction house 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 auction house's financial forecast?
Using the right tool or solution will make the creation of your auction house's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your auction house'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 auction house 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 auction house'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 auction house 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 auction house'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 projection templates for inspiration
The Business Plan Shop has dozens of financial forecast templates available.
Our examples contain a complete business plan with a financial forecast and a written presentation of the company, the team, the strategy, and the medium-term objectives.
Whether you are just starting out or already have your own auction house, looking at our financial forecast template is a good way to:
- Understand what a complete business plan should look like
- Understand how you should model financial items for your auction house
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 auction house 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 auction house, 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 project revenues for a business?
- Financial forecast for a business idea
Know someone who owns or is thinking of starting an auction house? Share our forecasting guide with them!
Founder & CEO at The Business Plan Shop Ltd
