The importance of and how to do financial forecasting

Financial forecasts, cashflow and budgets for SME business

Cash is the lifeblood of any business and access to enough cash to meet needs is essential for survival.

Many businesses which are otherwise well run and have an excellent product or service unfortunately fail due to a cash shortfall or cash crunch. In some cases, this is difficult to avoid but in many cases, a clear plan, strategy, monitoring and measuring and good risk analysis can minimise the risk.

Cash flow forecasts, budgets and management accounts can help assess and identify likely positive increases in cashflow, which may signal the opportunity to strategically invest or expand but may also identify potential weaknesses such as how quickly vital new stocks are arriving after being ordered or how long it takes debtors to pay.

Good habits in financial recording and forecasting

Ensuring that information is up-to-date is a very good habit to have for your business as is analysing the information and spotting trends or issues early, either positive or negative. For example, if your cashflow analysis shows that your customers are starting to pay more slowly, this could be an indicator and warning that they are struggling and that you need to tighten credit or perhaps that your industry or the economy generally are facing a difficult period ahead.

Cashflow and sales forecasts

Key aspects of good cashflow and sales forecasting are :-

• Keeping the information updated as regularly as is necessary and ensuring information is always comprehensive.
• Not relying on a forecast which was prepared some time ago. Business needs differ but a forecast, just like a business plan, is not something to obtain and then forget about. Forecasts need to be monitored and updated as necessary;
• Good analysis – it can be very tempting and understandable for a busy small business owner to want to just cast an eye over latest sales information financial reports for headline information. Deeper analysis is often where the best insights come from to keep your business in good cashflow shape and ahead of competitors. This is where an external set of eyes and ears can be really useful – it is an exercise we at Accounts & Legal undertake for many clients.
• Forecasts that contain more than one outcome - Including best, worst and most likely scenarios and their likely impact on cashflow enables better informed and educated decisions.

Financial reporting and forecasting has other benefits

Most business will, at some point, need to seek finance from external sources, the most common route being bank loans or finance. When approaching a bank for a loan or overdraft your prospects are likely to be much better if the bank is reassured that you have good financial information and disciplines in place and that you use the information you have well.

Approaching a bank with no or poor cashflow forecasts, no or an inadequate budget and lack of planning and strategy may well raise a big “red flag” for that bank and result in significantly reduced chances of securing finance.

The same point applies if you are seeking to grow your business by attracting private equity or preparing for sale. Experienced investors will make judgments based on how you have been running the business and your financial projections and discipline.

Financial modelling

Putting together management information is not just about running figures and creating impressive sales forecasts or nice looking charts, graphs and data. Thought, planning and strategic insights are important for good financial modelling.

A financial model for one type of business can vary hugely from another of a different type or in a different industry. Information is only useful if it provides actionable insights relevant to manage and plan for your business.

Good financial modelling can also mean the difference between impressing potential investors or a bank or other lending institution your business may seek finance from and being turned down.

We combine our traditional accounting skills and experience with the latest software to keep costs down. We then add the most important ingredient - our ears. By listening to you and understanding your business and what sort of reports, management information and data will be useful for you together with our commercial acumen we provide the right solution for you. Our team includes MBA Graduates.

If you are looking for help with financial modelling, please do call or email us, we'd love to assist.

Accounts & Legal cash flow and financial or sales forecast services

Accurate forecasting is the key to financial peace of mind and our accounts team are very good at it.

We can help in setting up the right reports for your business, using the latest software for efficiency and costs savings. We also provide tailored yet affordable services to assist clients in understanding, forecasting and interpreting financial data whether from management accounts, cashflow or otherwise. In many cases we have provided clients with insights which help to minimise hidden risks, save costs or plan ahead to outperform expectations and competitors.

Talk to us about how we can help your business.