How to create a financial forecast for an IP licensing company?
Creating a financial forecast for your IP licensing company, 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 IP licensing company 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 IP licensing company?
The financial projections for your IP licensing 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 IP licensing 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 IP licensing company financial forecast?
A IP licensing 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 IP licensing 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 IP licensing 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 IP licensing 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 IP licensing company's financial forecast.
The sales forecast for an IP licensing company
From experience, it is usually best to start creating your IP licensing company financial forecast by your sales forecast.
To create an accurate sales forecast for your IP licensing company, you will have to rely on the data collected in your market research, or if you're running an existing IP licensing company, the historical data of the business, to estimate two key variables:
- The average price
- The number of monthly transactions
To get there, you will need to consider the following factors:
- Economic Conditions: You should consider the state of the economy when forecasting your average price and number of monthly transactions. During an economic downturn, companies may be less likely to invest in new technologies, leading to a decrease in demand for IP licenses and potentially lower prices.
- Industry Trends: Keep an eye on the trends within your industry. If there is a shift towards open-source software or other alternative methods of acquiring technology, this could impact the demand for your IP licenses and affect your average price.
- Patent Expirations: The expiration of patents owned by your company or competitors can greatly impact the average price of your IP licenses. If a competitor's patent expires, it may flood the market with similar technologies, driving down prices.
- New Technologies: The introduction of new technologies can also affect your average price and number of monthly transactions. If a new technology is seen as a better or more efficient alternative to your IP licenses, it may decrease demand and drive prices down.
- Legal Changes: Keep an eye on any changes to intellectual property laws and regulations. These changes can impact the value of your IP licenses and affect your average price. For example, a change in patent laws may make it easier for competitors to obtain similar patents, leading to a decrease in the value of your IP licenses.
Once you have an idea of what your future sales will look like, it will be time to work on your overhead budget. Let’s see what this entails.
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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 IP licensing company
The next step is to estimate the costs you’ll have to incur to operate your IP licensing company.
These will vary based on where your business is located, and its overall size (level of sales, personnel, etc.).
But your IP licensing company's operating expenses should normally include the following items:
- Staff costs: Salaries, benefits, and other expenses related to hiring and retaining employees such as HR costs, training expenses, and recruitment fees.
- Accountancy fees: Fees paid to external accountants for services such as tax preparation, financial reporting, and audit services.
- Insurance costs: Premiums for insurance policies that cover risks specific to an IP licensing company, such as liability insurance and intellectual property insurance.
- Software licenses: Fees paid for licenses to use software programs necessary for the operations of an IP licensing company, such as licensing management tools and patent analysis software.
- Banking fees: Fees paid for banking services, such as wire transfers, foreign currency conversions, and bank account maintenance fees.
- Legal fees: Fees paid to legal counsel for services such as drafting and reviewing contracts, conducting due diligence, and providing legal advice on intellectual property matters.
- Marketing and advertising expenses: Costs associated with promoting the IP licensing company and its services, such as advertising fees, trade show expenses, and marketing materials.
- Travel and entertainment expenses: Costs related to business travel, including airfare, lodging, and meals, as well as expenses for client entertainment and networking events.
- Rent and utilities: Costs associated with leasing office space, including rent, utilities, and maintenance fees.
- Professional memberships and subscriptions: Fees for memberships in professional organizations and subscriptions to industry publications and databases.
- Office supplies and equipment: Expenses for office supplies, furniture, and equipment necessary for day-to-day operations, such as computers, printers, and stationery.
- Training and development: Costs for employee training and development programs, including conferences, workshops, and online courses.
- Outsourcing fees: Fees paid to third-party service providers for services such as IT support, marketing, and customer service.
- Taxes and licenses: Taxes and fees paid to government agencies, such as business license fees and intellectual property taxes.
- Consulting fees: Fees paid for consulting services related to intellectual property, such as patent search and analysis services or licensing strategy consulting.
This list is not exhaustive by any means, and will need to be tailored to your IP licensing company's specific circumstances.
What investments are needed to start or grow an IP licensing company?
Once you have an idea of how much sales you could achieve and what it will cost to run your IP licensing company, it is time to look into the equipment required to launch or expand the activity.
For an IP licensing company, capital expenditures and initial working capital items could include:
- Patent acquisition: As an IP licensing company, you will likely need to acquire patents from other companies or individuals in order to license them out to your clients. This can be a significant capital expenditure, as patents can be expensive to purchase.
- Software and technology: In order to effectively manage and license your intellectual property, you will need to invest in software and technology. This could include licensing management software, patent search tools, and other technology to support your operations.
- Legal fees: As with any IP-related business, legal fees can be a significant expense for an IP licensing company. This could include fees for patent attorneys, trademark registration, and other legal services related to managing and protecting your intellectual property.
- Office equipment and furnishings: While not directly related to your intellectual property, you will still need to invest in office equipment and furnishings to support your operations. This could include computers, printers, desks, and other necessary items for your office space.
- Research and development: In order to stay competitive in the market, you may need to invest in research and development to improve your intellectual property and create new, innovative products or services. This could include hiring research staff, purchasing equipment, and conducting experiments and studies.
Again, this list will need to be adjusted according to the specificities of your IP licensing 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 IP licensing company
The next step in the creation of your financial forecast for your IP licensing 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 IP licensing company?
Now let's have a look at the main output tables of your IP licensing company's financial forecast.
The projected profit & loss statement
The projected profit & loss shows how profitable your IP licensing company is likely to be in the years to come.
For your IP licensing company 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 IP licensing firms, there is some leniency for startups which will have numbers that will look a bit different than existing businesses.
The projected balance sheet
Your IP licensing company'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 IP licensing 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 IP licensing 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 IP licensing 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 IP licensing company's financial forecast?
Creating your IP licensing company'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 IP licensing company'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.
Hiring a financial consultant or chartered accountant
Hiring a consultant or chartered accountant is also an efficient way to get a professional IP licensing 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 IP licensing company's financial forecast?
Creating an accurate and error-free IP licensing company 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 forecast templates for inspiration
The Business Plan Shop has dozens of financial forecast examples available.
Our templates contain both a financial forecast and a written business plan which presents, in detail, the company, the team, the strategy, and the medium-term objectives.
Our templates are a great source of inspiration, whether you just want to see what a complete business plan looks like, or are looking for concrete examples of how you should model financial elements in your own forecast.
Takeaways
- A financial forecast shows expected growth, profitability, and cash generation metrics for your IP licensing 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 IP licensing 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?
- Sample financial forecast for business idea
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Founder & CEO at The Business Plan Shop Ltd
