How I Forecast in My Accounting Firm

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In the last issue, I covered How to Start Forecasting in your Accounting Firm from my presentation at QuickBooks Connect. I'll share how I build forecasts for my clients in this issue.

Check out a modified version of the presentation that I did with LiveFlow.

Overview of my Firm's Clients

First, here is a makeup of my clients for perspective.

• Revenues range from $1M - $15M

• 6 - 60 employees 

• Industries are a variety of service-based businesses, e-commerce, and medical

• 57% get some form of forecast

I often get a question: how do I do 3-tiered pricing when all I do is fractional CFO work? Forecasting is one way I differentiate my tiers. I typically only put forecasting in my top tier unless I hear the client needs a forecast in my discovery process. Then, I will differentiate based on the frequency in my top and mid-tiers. This is why not all of my clients have a forecast.  

Forecasting Methods

I want to start conversing about the forecast with my clients as soon as possible, so I will start by doing either 3- to 6-month averages. I will do 12-month averages if I need to pick up seasonal activity. 

Next, I will start filling in the forecasts with actuals: 

• Employee wages, including overhead and benefits. For hourly employees, I look at their last few payrolls to get an average of hours worked. A difference of a few hours should not be a concern. A client in a cash crunch should be mandating hours worked to their employees.

• Projects that have been won. 

• Fixed expenses such as rent and software.

A lot of times, this is where I will stop. 

CFLOLC Forecasting Methods

The CFOs I surveyed were doing the following: 

• 38% historical growth (straight-line method)

• 19% moving average

• 5% multiple linear regression (driver-based)

• 38% hybrid approach

The hybrid approach was a mixed bag but was mainly a combination of the three methods above. 

Interestingly, only 5% were doing multiple linear regression, which I call driver-based forecasting. Driver-based forecasting gets sold to many accountants of the approach to take. 

Driver Based Forecasting

I will do driver-based forecasting if deemed necessary. I refrain from doing driver-based forecasting because getting it accurate can take time and effort. However, it can be highly effective in industries like SAAS. 

There is also value in walking a client through what drives sales. The simple example below is what driver-based forecasting would be like in a consulting business.

I predict revenue based on lead-generation activities. I occasionally factor variable expenses into driver-based forecasts, for example, sales commissions or adding additional employees when a certain amount new clients are on-boarded. 

Driver-based forecasting relies more on other people tracking leads and conversions, which can be tricky. However, it can be valuable to the client because the sales team is now reporting the pipeline to someone else.  

My Forecasting Process

I typically meet monthly or quarterly with at least the owner to review the forecast with the financials using this meeting agenda. I only show clients 3 to 6 months in graphical form, as shown in the image below. I will only go past six months if a client needs to raise capital. 

I have found updating the forecast monthly is easier for my team. And keeping my clients out of the weeds of the forecast is easier for their minds. This is why I only present forecasted revenue, cost of sales, operating expense, and cash in the graphs, which are similar to the revenue chart above. 

CFOLC Forecasting Process

Most of the CFOs I surveyed were forecasting for a year to two years out and updating it quarterly. The year to two years make sense because most were leading well-capitalized businesses. I am still interested in the fact that most were updating the forecast quarterly. 

Here are what the others are doing: 

• Length

  • 53% 1-year

  • 19% 2-years

  • 8% 6-months

  • 8% 5-years

• Update frequency

  • 47% Quarterly

  • 39% Monthly

  • 8% Bi-weekly

How to Start Forecasting in your Accounting Firm

Before you start offering forecasting in your accounting firm, you need to talk with your clients to ensure they want it. Then, start doing scenario planning that I covered in the last issue. This will ensure people in your firm want to do forecasting. Once everyone is on board, start playing with the abovementioned forecasting methods to see what works best.

Thank you, Lisa Dionisio, for sharing the last issue! 🙏

Thanks for reading, Luke Templin!

P.S. There are four ways I can help you grow your CAS offerings when you are ready:

1. Automate your CAS offering with daily financial digest on autopilot

2. Mini-courses on CAS

3. Book a 1-hour CAS consulting call

4. Join Megan Tarnow and me at the #CASsaloon every fourth Thursday at 2 PM CST on “X” to talk all things CAS.