What Marketing Consultants Need to Know About Financials and Projections
It can be easy to let your business run you rather than the other way around. Between meetings, emails, and projects, you may feel like you’re constantly playing catch-up rather than taking a proactive approach to managing your clients and growing your revenue.
Establishing financial projections can allow you to regain control of your consulting business, shape your business the way you want, and identify areas to target for growth.
Below, we’ll start with the basics and work our way through to how you can harness the power of financial projections to make the strongest decisions for your business.
What are Financial Statements?
Financial statements give you a complete picture of the financial health of your business. They allow you to see where money is coming from and where you’re spending it. According to Investopedia, basic financial statements should consist of three reports: income statement, balance sheet, and cash flow statement.
- Income Statement: A report that allows you to see revenue and expenses for a given period of time. From there, you calculate your revenue minus your expenses to find your total income, then factor in taxes to determine your net income.
- Balance Sheet: A tool that shows your business’s assets (actual, tangible items of value held by your company) and liabilities (any debts your business owes). Here you calculate liabilities minus assets to determine your company’s equity.
- Cash Flow Statement: A report that brings together the information on the income statement and the balance sheet to allow you to see all operating, investing, and financing activities occurring within your business.
What are Financial Projections?
The main difference between financial statements in your accounting reports and financial projections is the view they take. While they both cover the same kind of data, statements are backward looking, while projections (as the name implies) are essentially an educated guess of your financial future.
It’s most helpful to create both short- and mid-term projections for your business. The short-term projections should go month-by-month and provide you with a picture through the end of the year, while mid-term projections should be broken down annually and cover the next three years in the life of your business.
How Do You Create Projections?
Sometimes you have to look backward to move forward, and that’s certainly the case when creating projections. It’s important to turn to past financial statements so you understand how your business’s earnings and costs have worked in the past.
From there, you can take into account pipeline and market conditions to understand the trajectory for your business in the future. Creating a realistic financial projection is key; lots of companies undertaking this exercise will aim too high, which not only puts undue pressure on you to meet unrealistic expectations, it also doesn’t allow you to budget your expenses properly and can lead to overspending. So what are the areas you need to consider in your projections?
Gathering the Pieces
You’ll need to create forecasts for the basic elements of each of the financial statements: revenue, expenses, liabilities, and assets. For revenue, ask yourself where you expect your money to come from in the coming years. How will you expand your client base and suite of products, and based on past years, at what rate do you expect your business to grow?
Your expense budget should give a general sense of where you’ll be spending money in the coming years. Whether that’s new equipment, marketing expenses for your own business, added headcount, or systems and platforms to support your growing business, what are the big ticket items?
The same approach goes for assets and liabilities. Estimate the amount of cash and accounts receivable you’ll have each month, plus any physical assets like property or equipment. As for liabilities, do you plan on taking on any loans in the coming years? Or do you have outstanding bills and accounts receivable to consider?
Creating the Reports
Once you’ve created projections for each of the pieces, you can then establish your financial statement projections (income statement, balance sheet, and cash flow). This can be a time-consuming and confusing process, particularly if numbers are not your strongest suit.
If all of this is sounding overwhelming, consider speaking to an accountant who can assist with the modeling. Or if you’re on a budget, there are plenty of resources online that provide worksheets to guide you through the process.
How Do You Use Projections to Define Your Business Strategy?
You put a lot of hard work into creating those financial projections, so whatever you do, don’t stuff them in the back of a drawer! Unfortunately, that’s an all too common mistake that business owners make. These financial projections should be thought of as living documents, and you should refer to them often, making changes and adjusting them as your business changes and you identify new patterns in growth or costs.
Developing projections can be invaluable in identifying and targeting areas for potential growth. Think about the clients you already have: is there a way you can expand the services that you offer to them? As they become more loyal, are you able to turn to them for referrals to expand your client base further?
Additionally, doing your market research as a part of developing a business plan can allow you to avoid potential bumps in the road that your competition might not see. If you’ve noticed that your clients are changing their marketing approach to, say, expand their focus on content creation and thought leadership, then you can tailor your suite of products to better serve the needs of your clients, giving you a leg up on other marketing consultants.
Financials and projections are a major undertaking, and for marketers who might be more verbally or visually inclined, the urge to skip the nitty-gritty number crunching can be strong. However, a set of properly constructed financial projections can give you a deeper understanding of your own business, and can empower you to find new ways to expand that you otherwise would have missed.
If you liked this post, check out our Guide to Managing Your Small Business Finances.