Forecasting Your Workload and Finances, Part One

In most design firms, the overall workload is uneven from month to month. This makes it difficult to have the right resources in place when they are needed. If you don't have a reliable method of forecasting the workload, you could easily find yourself overstaffed (and unprofitable) or understaffed (and having difficulty delivering on client commitments). In this two-part article, we'll discuss two different types of forecasting for design firms. The first is a short-term projection of the workload based on specific projects and client accounts; the second is a longer-term projection of overall financial activity based on past performance, adjusted for new assumptions about market conditions.

Of course, trying to predict anything is a guessing game. However, if you come to the process with enough relevant information, you can in fact get useful results. The crystal ball needs to clear up just enough to give you an indication of whether your company will be at or near its productive capacity. As soon as you know this, you can make any necessary adjustments-such as accelerating (or perhaps delaying) the start of any large new projects or arranging for more (or fewer) resources. In particular, a reliable projection of the workload can help you determine whether any changes might be needed to your company's head count.

Prerequisites

Before you can begin to predict tomorrow's workload and finances, you need to know exactly where you stand today. This essential business information needs to be coming to you already:

• Daily project balances
• Weekly summaries of new business activities
• Monthly financial statements

Let's take a quick look at each of these individually.

Daily project balances

It's vital to track the time and materials going into open projects. You need easy access to real-time totals of labor and outside costs, which means that daily posting of timesheets and vendor invoices is required. Many different project-tracking systems are available. Among other capabilities, the system you select must compare estimates to actuals and calculate the remaining balances on projects. These numbers are necessary for the workload projection that we'll be discussing in this article. Also, keeping a close eye on the time and materials remaining is an essential part of tracking the burn rate on large projects, as discussed in a previous CPM article on project management.

Weekly summaries of new business activities

Your weekly recap of all new business development efforts should include rough estimates of the schedules and expected billings for pending projects. Quantify each opportunity as best you can. Also, make sure you're capturing all marketing activities. In many studios, several people are involved in soliciting new projects. Preparing and discussing a weekly recap allows the group to exchange information, develop shared priorities, and coordinate efforts.

Monthly financial statements

Your monthly financial statements (balance sheet and P&L) must be timely and accurate. As discussed in another article on financial management, you need to track key financial indicators and watch for trends. To help with this, it's a great idea to maintain a set of monthly charts to visualize the data. (We'll come back to the topic of charts in a moment.)

If you have all of these prerequisites in place, you're ready to move forward to the process of preparing projections. Our discussion will focus on two formats. First let's examine a short-term approach.

Short term

This type of forecast can be described as a "bottom up" projection because it's built up from specific details about active projects and client accounts. It's quite realistic because it's firmly anchored in today's information. The general concept for this is visualized in Figure 1:

Figure 1: The projected workload includes current projects winding down and new projects ramping up. Ideally, the combined total is close to your firm's productive capacity.

In preparing this projection, you'll be bringing together two sets of current numbers: actual projects that are winding down, plus new business that you expect to be ramping up. Figure 2 contains some sample data in this format. As you can see, the upper portion of the worksheet shows active projects. The columns show the approved total for each project, minus the amount already billed, leaving you with the amount remaining. This remaining balance is then spread across the number of months left in the schedule.

Figure 2: This short-term projection shows the workload in terms of anticipated monthly billings. From this, we can develop a rough idea of the head count necessary to produce the work.

Please note that we're looking at dollars rather than hours. This means we're making an important assumption that the two are still largely in sync. However, this might not be the case if you're working on a fixed-fee project that has turned out to be much more labor-intensive than you originally anticipated. The real work might extend beyond the end of the negotiated billings. As you read down this list of open projects, you'll see that some have just begun, while others are almost finished. When each project does come to an end, the individuals or teams involved will become available for new assignments.

Now let's move to the middle section of this worksheet. It shows potential new projects that will be ramping up. Each new business opportunity has been assigned an estimated schedule and a total billing value. To be conservative, these estimated billings must then be factored back to reflect the probability of you landing the assignment. This probability factor is a judgment call. If a potential project is add-on work for an existing client, it's an initiative that the client is definitely committed to and you know for certain that no other studios are being approached, then you'll assign a high probability. In contrast, if you're in a competitive bidding situation to land a new client and you know they're talking to three or four different firms, you'll assign a lower probability. Your chances may be one in three (33 percent) or one in four (25 percent).

Compiling this new business data every week is an ongoing challenge. To quantify each opportunity, you need to be far enough along in your conversations with the client to have sufficient information for your assumptions to be reliable. Any preliminary conversations that are still too vague for you to quantify should only be listed here with zeros.

Regarding schedules: the upper portion of this projection should guide you in setting potential start dates for future work. Obviously, you can't promise to start a big new project tomorrow if you already know that the essential resources for it are still tied up with a previous assignment.

The next step in preparing this short-term projection is to combine the two pieces we've been discussing: project tracking data plus new business information equals a rough projection of the total workload. Based on this projected workload, we can now estimate the total head count that will be needed. At the bottom of Figure 2, the monthly number shown for "head count required" is a very loose estimate-it should be calculated using your own firm's history of average billings per person. This is not an exact science. It's just a very quick and simplistic comparison of total employees to total revenue. The number includes all staff, not just those doing hands-on creative work. Billings per person can vary quite a bit from firm to firm, depending on the nature of the work being produced by your employees and the amount of third-party services being purchased. For example, a media placement firm could have very high billings but a low head count.

As we discussed in the article on financial management, design firms often expect annual labor billings to average somewhere between $100K and $125K per person. This represents a monthly average of approximately $8K to $10K. For discussion purposes, if your projected monthly billings for the entire company are about $200K and your past billings per employee have averaged $10K per month, then you would need approximately 20 people to support the projected workload.

Once you've calculated the head count required, compare it to the actual size of your staff. The two totals will never be an exact match because capacity and demand are never entirely in sync. However, if the discrepancy between the two is large, you should consider making some changes to your resources.

If the projection indicates that you're going to need more people than you currently have, you now have some lead time for booking freelancers or making new hires. In many industries, managers think it's desirable to have demand that is slightly beyond regular capacity because it puts pressure on the company to become more organized and efficient. In manufacturing, a short-term spike in demand temporarily takes the company into overtime capacity. If workers are being paid on an hourly basis, overtime scheduling results in increased costs. Analysis is done to make sure the additional costs are more than offset by increased sales.

In contrast, design firms usually pay creative team members a fixed salary. This means that temporary spikes in the workload can result in additional billings without any change to labor costs. (Some design managers refer to this short-term dynamic as "compression.") However, if such a situation continues for too long, it has the very real potential of lowering morale, which negatively impacts the quality of work being performed. It also leads to employee burnout.

The opposite situation would be a design firm operating below its regular capacity. If there are not enough client projects to go around, a portion of the workforce will be idle. Typically, design firms have limited financial reserves, and they cannot afford to carry labor costs that do not contribute in some way to client billings. If your short-term projection indicates a workload that is too light to support the number of people on the payroll, you might consider several management options:

• Step up marketing efforts to bring in more project opportunities
• Move up the start dates on new projects that have already been approved
• Temporarily round out the workload with in-house projects, such as updating your website
• Encourage employees who are between assignments to begin using accumulated vacation time
• Consider whether or not the overall staff size needs to be reduced

Obviously, staffing and payroll issues are very important to your company and to the individual people involved. You won't make such decisions lightly. Fine-tune the format of your short-term projection to fit your own company's situation more closely, and make sure all of the numbers are as current and reliable as you can make them. Run this projection at least twice over the course of a month before making any decision about resources.

In the field of personnel management, issues related to projected staffing levels are often referred to as "workforce planning." Every business faces the challenge of having the right workers with the right skills at the right time. Head count is only one aspect of this. You must also consider skill sets.

The supply and demand equation for specific creative skills is different in each city. As a design firm owner or manager, you are of course on the demand side of this equation. Keep in mind that the requirements of your organization today may be different from tomorrow. You may need to make gradual changes to the mix of skills if your firm is evolving away from one design discipline and toward another. New project types will require different design and implementation capabilities. On an even larger scale, you might be contemplating a shift in your company's basic business model. If so, the staffing implications could be significant. For example, if you move toward more brokering of third-party services, it's likely that your company will need a much smaller core staff.

At this point in your planning process, you've determined whether different skills need to be brought into your organization. If the answer is yes, we need to shift our attention to the supply side. What are the conditions in your local labor pool? Is the available workforce supply a match to your company's needs? How many good designers are available in your particular discipline and how much competition is there for them? Recruitment of creative staff tends to be a slow and careful process. In the meantime, you might need some immediate assistance in producing short-term projects. If so, it may be possible to bring in one or two freelancers on short notice. To keep this option open, you need to consciously maintain a broad professional network, with information about who is available, their specialties, and their billing rates.

To effectively manage long-term client relationships, however, you'll want to assign staff members to important accounts. If you've done a good job of forecasting, you should have enough lead time to go through a careful employee recruitment process. This can easily take a month or more.

One final note about the format of this short-term projection: when you prepare the worksheet for your own firm, the time frame may vary -- that is to say, you might need more columns on the right side. Four or five months, as shown in our example, would be a typical horizon for many graphic design firms, which tend to have lots of small, fast projects. In contrast, six months or more would be typical for product development or environmental graphic design firms, where projects tend to be larger and have extended schedules.

Now that we've looked at a short-term projection, we're ready to turn our attention to a long-term forecast (that is to say, a projection that covers a year or more). That will be the topic of part two of this article.