You Can’t Afford Not to Forecast: Get Started to Unlock your Small Business’ Growth Potential
Financial Forecasting is an integral part of running every organisation efficiently. While it is a primary business activity in larger organisations, it is often neglected by SMEs, so much so that Entrepreneur Magazine listed skipping budget forecasts as one of the 7 deadly sins of business.
So, if it’s so important, why is it the norm to neglect it?
According to Louisa Meredith, Director of Finance and Corporate Services at Accela Finance, “Many founders find it tedious to project future sales revenues and cash flows during the first few years of business, which can be a steep learning curve.” She added, “Clients who approach us are usually intimidated by the effort involved in forecasting and previously considered it a “nice to have” compared to core business activities until they realised, it’s a must-have.”
What is Financial Forecasting?
General bookkeeping or accounting is focused on evaluating current and past financial performance, which demonstrates to shareholders and customers that your business can generate a profit. Planning for the future is equally important, which is what financial forecasting accomplishes.
Financial forecasting is the process of projecting into the future what a company’s financial results will be, based on its historical performance, known trends and relevant market data. In devising financial projections, management examines the past years’ revenue, cash flow, expenses, sales volumes and other success indicators, adjusting targets for the upcoming year based on business objectives. This process often involves speculation since there are many unpredictable market forces that may drive the historical data point up or down in the forthcoming year.
Why You Should Start Forecasting Early
One of the most important reasons for budget forecasting is to identify potential cash flow issues before they become a problem. Cash flow issues are common during the startup and growth stages of business, and can cripple a business if they’re not anticipated. By forecasting future income and expenses, businesses can plan for both known and unexpected financial challenges, and allocate resources more effectively.
Budget forecasting also helps uncover growth opportunities. By forecasting future financial performance, businesses can identify periods when they can afford to invest in expansion activities, such as hiring new staff, launching new products, or entering new markets. This enables better long-term operational and project planning and can help businesses become more competitive in the long run.
The Tools and Techniques You Need
Businesses have the option to employ several forecasting tools, including financial software like Xero, and the classic Excel spreadsheet. Each tool has its advantages and disadvantages, so it's important to choose the one that best meets your needs.
There are several techniques with varying degrees of accuracy and predictive power that businesses can choose from to forecast their financial performance. The main techniques are:
Bottom-up forecasting examines real sales data from the business to generate a focused look at how business activities may impact its financial performance. It allows for a more detailed analysis of a specific product or service’s performance.
Top-down forecasting measures the size of the market that the business operates within and considers existing trends to predict how the business might perform within the market. The business’ strengths and weaknesses are then examined in relation to the wider market’s potential.
At Accela Finance, we understand that every client has different needs, which we evaluate on a case-by-case basis using macro factors to form initial assumptions.
Your Financial Forecast-Ready Checklist
Several pre-requisite elements should be in place before initiating forecasting activities. These include:
Up-to-date financial reports
Clear management expectations for trading over the forecast period
A sales pipeline or order book, if applicable
Understanding of common seasonalities in the business
An organisational chart and staffing rotas, if applicable
Workforce and recruitment plan
Planned capital expenditure (CAPEX)
Copies of loan agreements, if applicable
Any other known activities/events in the forecast period that will impact cash
As most business owners aren’t accounting experts, it’s also advisable to have an experienced in-house bookkeeper or outsourced bookkeeping service. While it is not
essential that either use bookkeeping software, it’s the best practice as the data enables quick trend analysis.
Getting Started
Working with an outsourced financial services provider like Accela Finance can help you move quickly through the checklist and kick off your financial forecasting.
If you’d like to get started, reach out to us at [email protected].