Budgets and forecasts – what are they and why are they so important?
Excerpt from 'How to Wrestle an Octopus: an agency account manager's guide to pretty much everything'. Available now!
If you find forecasting to be one of the more challenging facets of your account management career, you are certainly not alone. Once or twice a year the words ‘budget’ and ‘forecast’ can strike fear into the most stout-hearted of teams. What do these words mean, and what are you supposed to do with them?
A budget is a quantified expectation of what your agency wants to achieve.
- It is a detailed representation of the financial results that management wants the agency to achieve during a certain period (e.g. monthly, quarterly, half-yearly, yearly).
- Management decides how frequently they wish to revise the budget.
- The budget is compared to actual results to determine variances from expected performance.
- Management can take remedial steps to bring actual results back into line with the budget.
A forecast is an estimate of what will be achieved.
- It uses accumulated historical data to predict financial outcomes for future months or years.
- The forecast is typically limited to major revenue and expense line items.
- The forecast is updated at regular intervals, sometimes monthly or quarterly.
- There is no variance analysis that compares the forecast to actual results.
The key difference between a budget and a forecast is that the budget is a plan for where a business wants to go, whilst a forecast is an indication of where it actually is going.
Who sets budgets and forecasts?
The setting of budgets and forecasts will likely involve a mix of your whole account management team, your manager, agency owner(s), and accountant. The extent of the involvement of each will depend on the individual agency.
Some agencies will have all their account managers contribute to the forecasting, whilst others will only involve senior-level account managers. The forecasts will then usually roll up through management to your accounts person who may then work with agency owners to create the budget. The budget is then given back to the account management team as a guideline of revenue and profit expectations.
Why are budgets and forecasts so scary?
There is a lot riding on an account manager to get their forecast figures right. You know your clients best. You know (or should know) what their historical purchases have been like, and you should know what is in your client’s marketing plan over the next 12 months. If you don’t know, then it’s best to ask before you do your forecast setting!
Forecasts are of huge importance to agency managers, owners, and boards. Major business decisions (including capital expenditure and staffing) will be made based on forecasts and budgets, so they are relying on you to supply accurate figures. Although a forecast is an ESTIMATE, you will still be held accountable for the figures you supply.
What information does a forecast include?
NOTE: your accounts person will be able to supply you with a forecasting spreadsheet to use that is relevant to your agency. The following is one example only.
Picture a spreadsheet template where you can record all of your information. Each of your major clients is featured on an individual sheet within the document, and the ‘rats and mice’ (small) clients can be grouped on a separate sheet.
- 1 x column for profit and loss categories
- 12 x months of the year
The P&L categories are then divided into three sections:
REVENUE, which can include line items such as:
- Sales – agency retainer (you may need to split this out into the specific number of hours allocated to different people or departments per month, as – for example – account managers will be charged out at different hourly rates than strategists, and carry different costs).
- Sales – account management.
- Sales – creative, strategy, video production.
- Sales – project management, agency fees.
- Sales – copywriting, content.
- Sales – research.
- Sales – media (this may need to be split out into specific media such as TV, radio magazine, out-of-home, online media, social, etc.).
- Sales – outwork (work completed by external suppliers and on-charged to your client).
- Sales – design and photography.
- Sales – development.
- Sales – web hosting.
DIRECT COSTS, which can include line items such as:
- Google AdWords.
- Internet and software expenses.
- External hosting expenses.
- Equipment hire.
- Media expenses (this may need to be split out into specific media such as TV, radio magazine, out-of-home, online media, social, etc.).
- Production costs – video.
- Production labour.
- Repairs and maintenance.
- Internal design costs.
- Internal development costs.
- External contractors.
- Print/pre-press costs.
OVERHEADS, which can include line items such as:
- Marketing and promotion.
- General expenses.
- Vehicle expenses.
- Staff recruitment and contractors.
- Staff amenities.
- Training and technical advice.
- Salaries and wages.
For each client, you then insert your figures into the months where the revenue will fall, and the months where the associated costs will fall (note, they may not be in the same month).
For the costs, it is important to split out the type of costs as much as possible as different channels (e.g. media, print, outwork) will likely have different commissions, contribution allowance, and % mark-ups.
How can you ensure you get the figures right?
There is no magic formula for getting your figures right, so the best you can do is aim to get them as close as possible. You may be able to base your predictions on past spending patterns, and sometimes you’ll need to go on gut feel.
- Gather together the financial reports for all of your clients for the last couple of years – this is your sales data. Look for campaigns and projects that you can predict will run again in the coming year (e.g. product campaigns, annual report, Christmas promotion, etc.). You can use the old figures as a base, assuming that the specifications will be similar.
- Ignore any large one-off sales from the historical sales data. Including these figures will only serve to set unrealistically high expectations, and put unnecessary pressure on you and your team.
- Know your clients. The better you know your clients, their businesses and industries, and their yearly marketing budgets, the easier it will be to do your forecasting.
- Use people as well as figures to paint your forecasting picture. Numbers will show you where you made money - people will tell you why. Your team and suppliers may be able to give you the history of various projects to better enable you to understand the figures.
- Add in a buffer. You should allow for at least a small margin of error in case of any sudden industry or client surprises.
- Realism trumps optimism. While it is commendable to be optimistic about your revenue for the year, when forecasting it is always better to under-estimate than over-estimate - lest you be held accountable for figures that may prove difficult to reach.
- If your clients are on retainer, your forecasting will be the easiest to do. You already know the total yearly spend for your client; you probably have their yearly marketing plan so you know the months in which the revenue and costs will fall; and you will have a pretty solid idea of the split between channels (e.g. media, TVC production, print, etc.).
Reviewing actuals vs budget figures
Through either the reports that you can generate yourself from your job control system or via reports from your accounts person, you will be able to compare your budget figures with ‘actuals’ - the revenue and profit that was realised over time. It’s important that you do this on a monthly basis so that you can see how you are tracking and if you need to ramp up your revenue at any stage. You should quickly see any areas where the numbers are flat or falling.
Your review should include:
- Budget figures vs actuals.
- KPI expectations vs actuals.
- New business acquisitions.
- Successes and disappointments or failures, and how they have contributed to the bottom line.
- If you haven’t reached revenue targets or expected profit levels, why? Were there issues with any projects? Did your clients cancel any expected work? Are your clients cutting back on their spend?
This is the kind of data and background information that you will likely be required to pass on to your manager or senior management, or include in a Board Report. You may conduct this review for yourself, or for your whole team.
The review should also serve as an opportunity to decide on future strategies for revenue generation.
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