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Financial forecasting – the key to increasing profits

I know of many design studio owners who hate to do financial projections beyond one year. They say that no one can predict the future. I point out that they are predictions, not hard and fast commitments.

In reality, you need to set these projections as goals for your own use, to show you have a sustainable business. In the The business of design I show a Design business model canvas where the financial projections come as the last two sections; Cost structures and Revenue streams.

There are a few factors to consider when developing the Cost structures and Revenue streams:

  1. Start with profitability. Margin is everything. You need to know your hourly cost rate and then add 30% or greater to be profitable. Then you need to calculate the value-add that you are bringing to the project and add that in.
  2. Then look at sales volume by client. Use your historical data but also look at the potential for extra sales from each client or client segment. It’s tempting to simply calculate a ten percent increase, and assume “we can do at least that much”. It won’t happen without a more detailed analysis. It’s also the time to look at how you can increase sales through selling value, not just hours.
  3. Carefully allocate overheads. It’s amazing how office costs add up, then you have insurance, utilities, and administration. Add in computer and software costs, professional service fees and you start to see how it can all run away. Be realistic in predicting these costs but also use it as a chance to question them.
  4. Cash flow is critical. Your net cash flow out is usually the single most important calculation. As you prepare your forecasts you need to calculate the cash flow income in the Revenue stream alongside the cash flow out in the Cost structures.

This is how we do it

We do financial forecasting for three years because we think it’s essential to our business success. This process is based on the actual results from the previous three years and it helps us to plan the growth of the business in a structured way. We set strategies and tactics as part of this planned growth.

The long term forecasting helps us avoid major financial problems by warning us if our performance is not up to scratch. Forecasts are also a good management tool when applying for a loan or overdraft. As a business expands, there may be a need for more money than can be generated from profits. By planning the growth and the money needs we can predict when we need to get extra funds and how much.

The forecast

When we prepare forecasts we get together a bunch of facts about the business and its past performance. These include:

Data from prior financial statements:

previous sales figures and trends

past gross percentages

average past administrative, and sales expenses

trends in our need to borrow (trade credit eg printers, and bank credit or overdraft).

Unique company data

studio capacity – we look at how many hours each person can bill each month

competition – what our competitors are doing

financial constraints – how much debt we can carry

personnel availability – how easy is it to get designers, full time vs part time etc.

Industry-wide factors, including:

overall state of the economy

economic status of the design industry within the economy – find this in The business of design

population growth – general population plus the design population – more designers, more clients doing their own design and more freelancers.

Once we have all of these factors we can prepare our forecast, which estimates the level of sales, expenses, and profitability that seem possible for the next 3 years.

Our forecasts show that there is a downturn in the market for basic design work. We have seen this coming for some time and we’ve been using a design value approach for a number of years to overcome this downturn.

If you would like to know more about how we sell design value you can join me in the Selling design value workshop. See more here…

 

GB

forecasting profits in a design studio