Financial Forecasting and Capacity Management For Agencies
Can you forecast your agency’s cashflow, on any given day—in a few clicks?
Are you aware of the KPIs and formulas that agencies like yours need? Do you know how much revenue you should have on hand? Do your project managers have a real-time overview of team availability?
Without a doubt, cashflow planning is important to make the best possible decisions for your agency. But to balance your agency’s cash flow, there are a few more metrics to keep an eye on, and a couple best practices to implement into financial planning, too.
In this article, we bring you six tips on financial forecasting and capacity management for your agency.
See also: 11 Top Capacity Planning Software for Agency Project Managers
Support Your Agency’s Financial Success
Get the most out of your resources with Productive’s forecasting and capacity planning features.
#1 Know Your Forecasting KPIs
Tip number one is to define your agency KPIs and profitability metrics. When it comes to financial forecasting, there are dozens of metrics you’ll want to track, but here we’ve highlighted three crucial key performance indicators.
- Agency Operating Cash Flow
Agency operating cash flow is a part of a company’s cash flow statement that comprises the amount of cash a company generates (and spends) from carrying out operating activities through a certain period of time. This metric shows whether your agency has enough capital to grow or should reduce expenses for the purpose of boosting cash flow and investing somewhere else in the future. - Agency Burn Rate
The burn rate is a key performance indicator for agencies which provides insight into your spending patterns on a weekly, monthly, quarterly, or annual basis. This metric can be useful for small to medium-sized businesses as it helps determine operational costs without the need for detailed financial analysis. - Agency Gross Profit Margin
The gross profit margin shows the remaining capital after deducting costs associated with sold products and services. This KPI evaluates whether your agency has sufficient funds to invest in expansion (after accounting for operating expenses).
#2 Hold 10-30% of Your Agency’s Revenue
Why, you might ask? Well, this covers your agency’s cash flow cycle and helps you save money for anything that may impact your business. For example, around 10% of your agency’s revenue should cover about 2 months of expenses.
While the 10-30% range is a good starting point, the percentage of revenue you will need to hold depends on your specific business and goals.
Having this amount of your agency’s revenue on hold allows your business to endure tough times—whether it be a partner leaving the company, losing a major client, or unexpected hiring plans. You should also monitor market trends to see if you should be saving more.
#3 Negotiate Accounts Receivable
Lowering your agency’s accounts receivable days will improve your cash flow. It’ll also prevent any overdue invoices from confusing you in your financial forecasting. The aim here is for your agency to get paid as soon as possible.
Reducing the number of days it takes to receive payment from clients can improve your agency’s cash flow. Implementing this will ensure that overdue invoices do not impact the accuracy of your financial forecasting. The aim here is for you agency to get paid as soon as possible, so setting payment terms with your clients upfront will save your agency the hassle of chasing unpaid invoices and ensure your clients know what they can expect.
#4 Factor In Investing in R&D
Perhaps your agency wants to hire an expert in a new field you’re looking to expand to. Or maybe you want to invest in research and development through some internal projects you’ve been developing. In the shorter run, you’re already aware that you won’t see concrete profit from these investments, but you need them for your agency to stay at the cutting edge during certain periods.
A good way to forecast capacity planning and cashflow with investments is by factoring them into your budgets at the beginning of the year, or even to factor it into your agency overhead costs.
See also: 11 Top Capacity Planning Software for Agency Project Managers
#5 Compare Your Monthly Forecasting With Actuals
This is, most commonly, a blind spot in financial forecasts for many agencies.
Comparing your agency’s monthly forecasting with actuals is also known as budget variance. This metric is commonly used in project and capacity management and shows how your agency’s estimated budgets compare to actual budget totals. This determines whether your company’s budgeting is accurate and meets expected revenue and expenses.
In Productive, resource management, budgeting and time tracking are integrated with forecasting reports so that you can easily get a pulse on your agency’s financial status.
#6 Do Your Resource and Capacity Planning Properly
Capacity planning refers to the process of assessing the resource needs in the short or long run, plus understanding whether the current capacity is sufficient to meet those demands within the specified time frame.
Although the capacity planning process may be different across agencies, there are steps that are generally followed. For instance, if you’re aware of an upcoming project, you should make an informed projection of the necessary work required for the project, which will, in turn, help with time management and resource scheduling.
A proper resource management tool will give valuable insight into project budgets and the actual time your team spent working on the project. Knowing your resource availability over a certain time period will help your agency achieve optimal utilization rates, plan better for future projects, and deliver projects on time.
Having an efficient capacity planning strategy in place that’s able to forecast future capacity is crucial for the long-term success of an agency. You could also check out some capacity planning tools that’ll help with calculating resource capacity and achieving optimal resource utilization.
Learn how Infinum manages resource planning in Productive for over 350 people.
Financial Forecasting For Agencies — Key Takeaways
A steady and predictable cashflow is crucial for your agency to make smart business decisions. To make those decisions and to have clear insight into your financial forecasting, it’s important to take into consideration a number of agency KPIs and follow industry best practices.
Your utilization rates and current capacity play a big role in workload management and can directly impact your financial performance which also affects future revenue.
Implementing a capacity planning tool might make your project managers lives easier, since they’ll be able to see their team capacity in real time and make sure project plans will be followed through.
Proper financial forecasting and effective capacity planning are essential to achieving your digital agency’s business goals.
Learn more about agency management in Productive.
Support Your Agency’s Financial Success
Get the most out of your resources with Productive’s forecasting and capacity planning features.
