How to create a financial forecast for an audit practice?
If you are serious about keeping visibility on your future cash flows, then you need to build and maintain a financial forecast for your audit practice.
Putting together an audit practice financial forecast may sound complex, but don’t worry, with the right tool, it’s easier than it looks, and The Business Plan Shop is here to guide you.
In this practical guide, we'll cover everything you need to know about building financial projections for your audit practice.
We will start by looking at why they are key, what information is needed, what a forecast looks like once completed, and what solutions you can use to create yours.
Let's dive in!
Why create and maintain a financial forecast for an audit practice?
The financial projections for your audit practice 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 audit practice'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 an audit practice financial forecast?
A audit practice'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 audit practice.
If you are creating (or updating) the forecast of an existing audit practice, 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 audit practice 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 audit practice 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 audit practice's financial forecast.
The sales forecast for an audit practice
The sales forecast, also called topline projection, is normally where you will start when building your audit practice 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 audit practices), and consider the elements below:
- Regulatory changes: Changes in regulations governing the audit industry can have a significant impact on the average price of your services. For example, if new regulations require more detailed and time-consuming audits, you may need to increase your prices to cover the additional costs.
- Economic conditions: Economic conditions, such as recessions or economic booms, can affect the number of monthly transactions for your audit practice. During a recession, companies may be more cautious with their spending and may opt for fewer audits, while during an economic boom, there may be an increase in business activity and therefore a higher demand for audits.
- Technology advancements: Advancements in technology can also affect your average price and number of transactions. For example, if new software or tools are developed that make audits more efficient, you may be able to offer lower prices to clients or increase the number of audits you can complete in a month.
- Industry trends: Changes in industry trends can also impact your sales forecast. For instance, if there is a growing trend towards companies conducting internal audits rather than hiring external auditors, this could lead to a decline in your number of monthly transactions.
- Competition: The level of competition in the audit industry can also affect your business's average price and number of transactions. If there is increased competition, you may need to lower your prices to remain competitive or invest in marketing efforts to attract more clients.
After the sales forecast comes the operating expenses budget, which we will now look into in more detail.
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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 audit practice
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your audit practice 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 audit practice will include some of the following items:
- Staff Costs: This includes salaries, benefits, and any other expenses related to your audit team such as training and development.
- Accountancy Fees: These are the fees paid to external accountants or auditors for their services in assisting with the audit process.
- Insurance Costs: This includes professional liability insurance, general liability insurance, and any other insurance policies necessary to protect your audit practice.
- Software Licences: These are the costs associated with purchasing and maintaining software used for audit purposes, such as audit management software or data analytics tools.
- Banking Fees: This includes fees for maintaining bank accounts, wire transfers, and any other banking services needed for your audit practice.
- Office Rent: This is the cost of renting office space for your audit practice.
- Travel Expenses: These are the costs associated with traveling to client locations for on-site audits.
- Marketing and Advertising: This includes any expenses related to marketing and promoting your audit practice, such as website development, advertising, and networking events.
- Professional Memberships: These are the fees paid to professional organizations for membership, which may provide resources and networking opportunities for your audit practice.
- Office Supplies: This includes expenses for purchasing office supplies such as paper, ink, and other stationary needed for your audit practice.
- Utilities: This includes the costs of electricity, water, and other utilities necessary to run your office.
- Legal Fees: These are the fees associated with legal services, such as consulting with a lawyer for contracts or advice related to your audit practice.
- Training and Development: This includes expenses for continuing education and professional development for your audit team.
- Technology Expenses: This includes costs for purchasing and maintaining technology equipment such as computers, printers, and servers.
- Office Maintenance: This includes expenses for maintaining and repairing your office space, such as cleaning services and repairs.
This list will need to be tailored to the specificities of your audit practice, but should offer a good starting point for your budget.
What investments are needed to start or grow an audit practice?
Your audit practice 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 an audit practice, these could include:
- Computer equipment: This includes desktop computers, laptops, servers, and other hardware necessary for conducting audits and managing client data. As technology is constantly evolving, it's important to regularly update and replace outdated equipment to ensure efficient and effective audit processes.
- Software licenses: In addition to hardware, audit practices also require various software programs for tasks such as data analysis, report generation, and client communication. These programs often require annual or monthly subscription fees, which should be factored into the expenditure forecast.
- Office furniture and equipment: An audit practice typically requires a professional office space with desks, chairs, filing cabinets, and other necessary equipment. These items may need to be replaced or upgraded over time to maintain a comfortable and functional workspace for employees.
- Transportation: Depending on the size and location of an audit practice, transportation expenses may be necessary for conducting on-site audits at client locations. This can include purchasing or leasing company vehicles, as well as covering fuel and maintenance costs.
- Professional development and training: While this may not be a traditional capital expenditure, investing in the ongoing education and training of auditors is crucial for the success of an audit practice. This can include attending conferences and seminars, as well as obtaining professional certifications and licenses.
Again, this list will need to be adjusted according to the size and ambitions of your audit practice.
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 audit practice
The next step in the creation of your financial forecast for your audit practice 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 audit practice?
Now let's have a look at the main output tables of your audit practice's financial forecast.
The profit & loss forecast
The forecasted profit & loss statement will enable you to visualise your audit practice's expected growth and profitability over the next three to five years.
A financially viable P&L statement for an audit practice 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 audit practice'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 an audit practice 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 audit practice'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 audit practice 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 audit practice's financial forecast?
Using the right tool or solution will make the creation of your audit practice's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your audit practice'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 audit practice 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 audit practice's financial forecast?
Creating an accurate and error-free audit practice financial forecast with a spreadsheet is very technical and requires a deep knowledge of accounting and an understanding of financial modelling.
Very few business owners are financially savvy enough to be able to build a forecast themselves on Excel without making mistakes.
Lenders and investors know this, which is why forecasts created on Excel by the business owner are often frowned upon.
Having numbers one can trust is key when it comes to financial forecasting and to that end using software is much safer.
Using financial forecasting software is also faster than using a spreadsheet, and, with the rise of artificial intelligence, software is also becoming smarter at helping us analyse the numbers to make smarter decisions.
Finally, like everything with spreadsheets, tracking actuals vs. forecasts and keeping your projections up to date as the year progresses is manual, tedious, and error-prone. Whereas financial projection 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 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 audit practice, 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 audit practice
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 audit practice.
You have reached the end of our guide. We hope you now have a better understanding of how to create a financial forecast for an audit practice. 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
- Sample financial forecast for business idea
- How to project sales for a business?
Know someone who runs or wants to start an audit practice? Share our financial projection guide with them!
Founder & CEO at The Business Plan Shop Ltd
