How to create a financial forecast for an information services company?
Developing and maintaining an up-to-date financial forecast for your information services company is key in order to maintain visibility on your business’s future cash flows.
If you feel overwhelmed at the thought of putting together an information services company 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 an information services company?
The financial projections for your information services company 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 information services company'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 information services company financial forecast?
A information services company's financial forecast is only as good as the inputs used to build it.
If you are creating (or updating) the forecast of an existing information services company, then you mostly need your accounting information, key historical operating non-financial data, and your team’s input on what to expect for the coming years.
If you are building financial projections for an information services company startup, you will need to have done your research and have a clear picture of your competitive environment and go-to-market strategy so that you can forecast sales accurately.
For a new venture, you will also need a precise list of the resources needed to keep the information services company running on a day-to-day basis and a list of the equipment and expenditures required to start the business (more on that later).
Let's now take a closer look at the elements that make up your information services company's financial forecast.
The sales forecast for an information services company
The sales forecast, also called topline projection, is normally where you will start when building your information services company 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 information services companies), and consider the elements below:
- Technology advancements: As technology continues to advance, the demand for information services may increase, leading to higher prices and more monthly transactions for your company.
- Economic conditions: Economic conditions, such as a recession or boom, can greatly impact the average price and number of monthly transactions for information services. In a recession, businesses may be more hesitant to spend money on information services, while in a boom, there may be more demand for these services.
- Industry competition: The level of competition in the information services industry can greatly affect your company's average price and number of monthly transactions. If there are many competitors offering similar services at lower prices, you may need to adjust your prices or increase your marketing efforts to attract more customers.
- Government regulations: Changes in government regulations, such as data privacy laws or intellectual property rights, can impact the demand for information services and potentially affect your average price and number of monthly transactions. Stay updated on any new regulations and be prepared to adapt accordingly.
- Customer needs and preferences: The ever-changing needs and preferences of customers can also have an impact on your company's average price and monthly transactions. Keep a close eye on industry trends and continuously gather feedback from your customers to ensure your services and prices align with their needs and expectations.
After the sales forecast comes the operating expenses budget, which we will now look into in more detail.
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The operating expenses for an information services company
The next step is to estimate the expenses needed to run your information services company 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 information services company's operating expenses should include the following items at a minimum:
- Staff Costs: This includes salaries, benefits, and training for your employees, as well as any freelance or contract workers you may hire.
- Accountancy Fees: You will need to hire an accountant to handle your financial records and ensure compliance with tax laws and regulations.
- Insurance Costs: As an information services company, you will need to protect your business with liability insurance, cyber insurance, and other types of coverage.
- Software Licences: Your company will likely rely on various software programs to provide information services, and these licences can be a significant expense.
- Banking Fees: You will need to maintain a business bank account and may incur fees for transactions, wire transfers, and other banking services.
- Marketing and Advertising: To attract clients and promote your services, you may need to invest in marketing and advertising efforts such as website development, social media management, and print materials.
- Rent/Office Space: If you have a physical office, you will need to pay rent or a mortgage, as well as utilities and maintenance costs.
- Website Hosting and Maintenance: Your company's website is crucial for providing information services, and you will need to pay for hosting, domain registration, and ongoing maintenance.
- Professional Memberships: Joining industry associations and attending conferences can provide valuable networking opportunities and resources, but may come at a cost.
- Travel Expenses: You may need to travel for client meetings, conferences, or other business purposes, which can include transportation, lodging, and meal costs.
- Office Supplies: Your company will likely need basic office supplies such as paper, ink, and pens, as well as any specialized equipment for information services.
- Telecommunications: In order to communicate with clients and colleagues, you will need to pay for phone and internet services.
- Legal Fees: You may need to consult with a lawyer for contracts, intellectual property protection, or other legal matters related to your information services company.
- Utilities: In addition to office space, you may need to pay for utilities such as electricity, water, and internet for your business.
- Employee Benefits: In addition to salaries, you may offer benefits such as health insurance, retirement plans, and vacation time for your employees.
This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small information services company might not have the same level of expenditure as a larger one, for example.
What investments are needed to start or grow an information services company?
Creating and expanding an information services company also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for an information services company could include elements such as:
- IT Infrastructure: This can include servers, networking equipment, and storage devices needed to support the information services company's operations.
- Software Licenses: Information services companies often require various software licenses, such as for customer relationship management systems, project management tools, and productivity software.
- Data Centers: As a significant portion of an information services company's business is conducted online, they may need to invest in data centers to store and manage their data. This can include costs for building or leasing the facility, as well as equipment and maintenance expenses.
- Hardware Upgrades: Technology is constantly evolving, and an information services company may need to regularly upgrade their hardware, such as computers, laptops, and mobile devices, to keep up with the latest advancements.
- Security Systems: Information services companies handle sensitive data and need to ensure it is protected. This can include investing in security systems, such as firewalls, encryption software, and data backup systems.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your information services company.
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 information services company
The next step in the creation of your financial forecast for your information services company 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 information services company?
Now let's have a look at the main output tables of your information services company'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 information services company'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 information services company will look different than for a startup.
The projected balance sheet
The projected balance sheet gives an overview of your information services company'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 information services company. 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 projected cash flow statement
A projected cash flow statement for an information services company 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 information services company'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 information services company 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 information services company's financial forecast?
Using the right tool or solution will make the creation of your information services company's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial projection software to build your information services company's forecast
The modern and easiest way to build a forecast is to use professional financial projection 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 information services company 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 information services company's financial forecast?
Creating an accurate and error-free information services company 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 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 information services company, 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
- A financial forecast shows expected growth, profitability, and cash generation metrics for your information services company.
- Tracking actuals vs. forecast and having an up-to-date financial forecast is key to maintaining visibility on your future cash flows.
- Using financial forecasting software is the modern way of creating and maintaining financial projections.
We hope that this guide helped you gain a clearer perspective on the steps needed to create the financial forecast for an information services company. Don't hesitate to contact us if you 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
- Financial forecast example
- 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
