Everyone knows the story. In 1987, Michael Fish in his now infamous forecast told the nation not to worry as there wasn’t a hurricane on the way. That night, one of the worst storms in living memory hit the South Coast of England, killing 19 people. Oops.
Sometimes the weather forecasters don’t get it right. But we’re not talking about the weather here, not at all. We’re talking about financial forecasts, and specifically, forecasts for your creative agency.
You’re probably thinking that forecasting is just a load of guesswork right? You can’t predict the weather and you can’t predict the future; it certainly never worked for Mystic Meg. But forecasting isn’t just about guess work or predictions. Not at all, it’s much more specific and statistical than that.
Forecasting uses the current numbers from your books to estimate what things will look like for your agency in a few month’s time. They’re perfect for knowing what’s going to happen next. You might not be able to see into the future, but you will be able to see if anything critical is going to happen… like a potential storm for your business.
Of course, you’ll also be able to see if things are looking up too. There’s nothing more exciting than to see your creative agency going from strength to strength and predicting how much money you’ll be making in a few month’s time. It’s a bit like when you were young, putting your pennies in and watching your money jar go up and up!
You can forecast for the next month, or the next year, and forecasts can be applied to any number of scenarios. But just remember to make sure they’re realistic.
Forecasting Is Good For Profits
You already know the creative industry marketplace inside out don’t you (right!?), and so you’ll know what kind of trends you can expect to see, and how you expect your business to do in relation to that. From that, you’ll be able to make a pretty good forecast about whether you can expect to keep all your current clients, and if you’ll add any new ones. Then, it’ll be easy to work out the average revenue from each client, and forecast your profit when you factor in your outgoing costs.
Forecasting Is Good For Raising Money
If you want to review your cash flow, raise money for your creative agency, or even sell it one day, then having the forecasting work done will save you hours of time. A proper cash flow forecast helps you see if there’s any danger of the money running out. And if you see shortfalls, you can take steps to correct them. Naturally you want to do this before the potential investors come in.
Seeing Growth is Fun and Exciting.
If you do your forecasting properly, it’s fun and refreshing. But not the kind of fun and refreshing as when Michael told us all not to worry. That was fun for a little while, and then it was terrible. You may have to batten down the hatches a bit, and call your team to sort themselves out, or put in extra hours yourself. But as you begin to see growth, that’s the exciting part.
What Forecasting Numbers Should You Focus On?
For creative agencies, we would recommend that you look at key numbers such as:
- Revenue per head
- Revenue per hour
- Profit per head
This means you’ll be able to look reliably into the future, and decide whether you need to rearrange some desks to bring in more creative talent, or look at ways to trim your expenses to get more profit from each member of your team.
Because once you’ve got the forecast showing how things are looking, you can compare it with your budget. Remember, that really important thing we discussed last week? Your budget will show you your ideal business plan – does your forecast match up?
Cloud based accounting makes forecasting a cinch
Of course you could compare your budget and forecast by putting two sheets of paper next to each other, or you could just use cloud based accounting software like Xero, which will help do your forecasts and averages for you, and compare them with your original budget. Yes we keep telling you Xero is really easy to use….because it is.
So, after reading this, you’re going to go and do some forecasting aren’t you? But you’re going to do it better than Michael Fish.
We recommend that you pick three key numbers (the ones we suggested, or perhaps three of your own). Use your budget to forecast them for the next six months, and then check back every month to see how they’re holding up.
Or, you can just talk to us and say “I need some help forecasting”, and we’ll set you all up on Xero and make it happen magically. Either way, whatever works for you.
