You are considering getting financial projections prepared but worried about how much this might cost.
You have probably heard a lot of numbers bandied about. I have heard of business paying up to €5,000 for a set of projections. Some of those numbers can be quite scary. Yet, you realise that there are a lot of benefits to come from doing the projections. What are you to do?
You really want to have a good understanding of how much projections will cost so that you can make an informed decision.
Over the past twenty years, I have prepared financial projections for many SMES of all shapes and sizes. It;s quite difficult to give a “one size fits all” answer to that question. It depends on so many things. Before I explain the various factors, it might be helpful for you to read my blog article on How to Prepare Financial Projections.
Factors affecting cost of financial projections.
Your first time to prepare Financial Projections
If this is your first time having financial projections done, it will most likely take a little bit longer. For each set of projections, I have to have a model for that business-usually an excel spreadsheet. If one already exists then that will save some time. If it doesn’t exist already then I will have to build one.
I have some templates for different types of businesses but nearly all businesses have some elements unique to themselves which means that any template has to be customised.
The other factor is that we need to understand the relationships between activities, costs and resources. If you have already prepared financial projections, you are likely to be aware of these relationships. If not, I will have to spend time with you teasing them out.
What type of business are we preparing financial projections for?
The second key area is the type of business that we are preparing projections for. Some businesses are pretty simple but others have a lot more complexity.
Over the years I have prepared projections for the following businesses – professional services, food production, engineering, engineering services, scientific instrument manufacturing, retail, distribution, software developers including SAAS developer. They were all different and each had its unique issues.
The simplest businesses to prepare projections for are retail businesses. In that case, the sales should drive the costs of sales calculations and the overhead is usually fairly stable. Your stock holding levels will usually be the key variable affecting cash flow
If the business is manufacturing, then we need to understand the process. How many different stages does production go through? What are the stock holding levels at each stage? How long does it take to acquire raw materials?
If it’s a software business, then you are likely to have an initial product development costs followed by a period where you will have ongoing product development and maintenance costs.
So you see, that its important that we understand your activities, what they will consume and the payment profile for each of these activities.
Size of the Business
A small business with few employee will be much easier to prepare projections for than a larger business with more employees organised in a number of departments. If there are several locations that will also have to be factored into. If you have a sales team or a service team on the road, then we will have to build up the costs for that.
The greater the complexity the longer it takes.
Stage of development of the business
If you are preparing projections for a start up that usually takes longer than projections for an established business. The reason for that is that with an established business you have a track record and you have historical information that can be used. With a startup, you have no history so you have to invest more time in teasing out what the business is going to look like.
Who are the financial projections for?
The purpose of the projections is very important. If its for investors, then you will have to put a bit more time into making sure that your assumptions are solid and that they can withstand robust interrogation by professional investors. You will probably have to have prepared a couple of scenarios so that you can deal with what if questions.
If you are preparing them for your own internal use, you will still want reliable numbers but you will likely not be as concerned about presentation and you may be more confident in your assumptions so you will not be as anxious to explore as many different scenarios.
Do you have reliable figures for the opening position?
Sometimes I have been asked to prepare projections for businesses that don’t have management accounts. In that case, you have to either start the projections for the last good set of accounts or else estimate the management accounts.
Its obviously preferable and highly recommended that a business have management accounts. However you can only work with what you have. So sometimes, you have to invest more time in trying to establish and be confident about the starting position.
How many reviews will be necessary before you are happy with the outcome?
Once I prepare the first pass, then we sit and review the outputs. At that point, any issues that you will have with both the assumptions and other key inputs will become clear. Depending on the significance of these issues, we will have to invest time in refining the inputs and the assumptions.
For some businesses, there will be no issues. This is usually the case for more mature businesses where the owner has a really good understanding of the businesses.
For other businesses, typically earlier stage businesses or businesses where the owners have not prepared projections before, then the first pass will usually generate a lot of discussion points and the owner may need to take some time to consider the inputs. The owner may also need to have a few different iterations run to better understand the significance of the various assumptions
As you will understand from reading the article, there are a lot of factors that determine the costs. Every business is different and its not possible to give a simple answer as to the cost of preparing projections.
What I can do is give you some guidelines.
The shortest time has been about 2-4 hours to prepare projections for a small retail operation that had already got a good handle on the business. In cost terms, that will work out between €200 and €500.
For a more complex manufacturing business trying to raise money from investors, the time to prepare projections has been 3-4 days. In that case, you are looking at a cost of €2000-3000.
I would usually find around two days, say € 1400-1500, is a good estimate for most businesses but, as you will now appreciate, there are many factors that can change that.
Before offering a firm estimate, I prefer to meet with the client, initially, so that I can understand exactly will be involved. That will give me more confidence in my estimates.
If you are thinking about having projections done, feel free to contact me so that I can give you a cost estimate tailored to your unique circumstances.