While your business is playing out in real life, day by day, opportunity by opportunity, problem by problem, it’s also playing out in numbers.
The bank account and the invoices issued for payment vs your commitments and your take-home.
How much money you’re making or not making short term is apparent when you check your banking app.
How much money this is all going to make over the next 6 months is less obvious, but it’s vital to have an idea.
A ritual to strengthen, if you want to have some visibility of the future, and make better decisions, is that of forecasting.
The role of forecasting
Forecasting is not predicting the future. It’s showing the impact of what you are already predicting looks like.
You already predicting the future when you sit and think, “That big new project could come in, then there’ll be more money in the bank account”. Or, “Let’s give them the salary they want. I think we’ve got enough work to cover it.”
And you are certainly predicting when you imagine this whole agency journey turning out well.
Things don’t necessarily turn out the way you predict them to. In fact, they never do, otherwise, this would be easy and we’d all be millionaires.
Things change.
Forecasting is the ability to see the results of what you’re predicting and the impact of any change.
You’re already forecasting
An estimate for a client is a forecast. You take their brief, work out how many hours it’s going to take and which people you need for each bit, add it all together, and put it in writing.
Sometimes it’s the first time that someone’s actually collected all the information together and produced a number.
That’s a forecast for a particular project.
It answers the question: is this viable? Can the client afford it? And if we do it, is it worth it?
That project forecast also allows us to explore some scenarios:
- What if the client reduces the scope a bit? What’s the cost now?
- What if they negotiate a different rate? What does that do to the cost?
You switch the numbers and you get to see what will happen.
It doesn’t give us certainty because projects laugh in the face of their estimates.
But it tells us that the plan could work, and that’s valuable.
We need to do that for our whole agency.
The agency model seems simple. The team is going to do some work that the client is going to pay for. The team is going to get paid, there are some overheads, and then the founder keeps the rest.
Your model is checking the numbers make sense with the amount of work you’re doing, the amount of people doing it, what you’re charging, what you’re paying, and the amount you need to keep.
It answers the question: will this plan actually work?
Creating a model
Your forecast model needs to reduce the complexity of reality down to a set of moving parts you can adjust (revenue, wages, overheads, etc)
Put all the different moving parts into the same spreadsheet and do the sums. When you change one thing the model updates and shows you the outcome in terms of profit, overall revenue, overall costs.
You start simply and then start factoring things in.
Those extra factors might be things like how many leads you expect to get each month and how long they take to close, or how many billable hours you think each team member will do.
Theoretically the more moving parts the closer the model to real life but there is a law of diminishing returns here, and when your model becomes an attempt to accurately predict the future you know you’ve gone too far.
For example, here are three levels of sophistication for forecasting your revenue:
- Basic: A single line. Think forward, work out all your different projects in your head, and write one number for what you expect to get each month.
- More sophisticated: Break it out into revenue from existing clients and revenue from your pipeline. Maybe look back over previous months and create an average.
- More sophisticated again: Take individual deals in your pipeline, apply a level of certainty to them, bring that number through, along with a client-by-client breakdown of the money they’ve committed and are likely to spend.
You can start simple and improve your model over time.
Time for Crime
Check out the example forecast and a further guide to creating your own here:
Have fun!
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