P&L Forecast that predicts revenue, costs and profit
Most agency founders didn’t start their business because they loved spreadsheets – me included. But ignoring the numbers is one of the fastest ways to lose freedom, joy and end up a busy fool. Tracking your numbers doesn’t have to be over-complicated, you need something that’s clear, consistent and simple to review.
Agency founders sometimes fall into the trap of treating their bank balance as a financial dashboard. If there’s money in there, then we can spend it. But as my friend and FinOps Advisor Rich Brett says, “only looking at the cash in your account is a bit like driving a car while looking through the rearview mirror – it tells you where you’ve been, but not what’s about to hit you!”. You’re lacking the forward-looking data you need to feel secure.
Building a proactive P&L Forecast that predicts revenue, costs and profit, (looking at least 1-3 months in advance) solves this problem, allowing you to see what’s coming way ahead of time!
Now, I am not a qualified financial expert or finance director – I leave that firmly to the experts like Rich. But I do know my way around a P&L Forecast (Profit and Loss Forecast) to see how a business is performing, and I always advise my clients to set one up.
A P&L Forecast should include:
- revenue projection – including detailed sales and realistic estimates of sales
- cost of sales – direct costs tied to delivering services
- staff ratio – all staff costs including tax, pension, freelancers and directors dividends
- overheads
- dividends (if applicable)
- net profit (excluding tax)
Some of you reading this may be self-employed, in which case the principles are the same – try to understand what you know and how much you make – but the forecast structure will differ.
We used our forecast as the core of our decision-making process. I would (and still do) review my forecast daily. I could scenario plan in advance what would happen if a project was won in a certain month, and see whether I’d need any additional support when that work might be delivered.
When you have more clarity on your future numbers, you move away from decision paralysis or bringing in support / making hires based on gut feeling. Decision making becomes proactive and much simpler, which definitely helps me sleep better at night.
And if some of the terminology here feels a little unfamiliar, here’s a handy list from Rich to help.
- Net revenue – turnover less directs costs charged back to client, also know as fee earned revenue.
- Staff ratio – total staff costs / net revenue. All staff costs including dividends if the directors are actively working in the business. (note: dividends will be shown below EBIT in your statuary accounts, but to understand your own performance its important to show the cost as part of EBIT and staff costs. Additional dividends/bonuses paid out on performance can sit below EBIT.
- EBIT – operating profit, earnings before interest and tax. the profit made from operating activities. net revenue less staff costs and overheads = EBIT profit.
- EBIT % – profit / net revenue.
- Net profit – profit after everything has been taken out including dividends and tax.
- Utilisation – how a person time is spent over a period of time. Billable, non billable and internal are typical categories, as a % of total working days in the period less absence.
- Recovery – % of revenue that is paid for time spent.