With the 2017/18 financial year only a couple of months away, many SME businesses will start the year without a well built 3-way financial forecast.
Why Prepare A Financial Forecast?
As we go into the new Australian financial year for FY18, are you equipped with a robust financial forecast for your business? A financial forecast or budget is the essential pathway between the goals and objectives in the business plan and the ultimate business goals of management and the business owner.
…But this task is often neglected, only addressed from a profit & loss perspective or not subsequently used effectively to monitor business performance during the year.
Without a robust and well built financial forecast it is very hard to:
- Assess performance of the business throughout the year
- Adapt to changes in business environment without understanding the financial impact
- Model alternative business choices with information about financial impact
- Determine how changes to prices or your revenue model will cascade on to cash flow
- Project the future financial needs and capital requirements, and
- Assess performance against key success factors in the business plan and target business KPI’s.
What Tools Do We Use To Set Financial Forecasts?
Okay, so there are many tools out there, and I confess that I’m a bit of a dinosaur in this area! More on this below.
Firstly, you should consider the level of complexity in your business and try to match this to the complexity of the available tools. The number of business units, whether you manufacture or use standard costing or are involved in offshore markets with multiple offices may affect your choice of budgeting tools.
Secondly, cloud-based solutions are usually simple to use and can generally access your data directly to help you project results and track performance mid-year. I have found these tools to be most suitable for smaller companies and allow financial projections to be built really quickly. Don’t overlook these powerful tools.
For me, I still rely on the spreadsheet. I think that makes me a dinosaur but spreadsheets are very flexible and can be tailored and built specifically to your business needs. They can be a great solution for building a static model. But watch out for a few issues:
- If a spreadsheet gets complicated, it is difficult to amend and there is a big risk of bugs!
- Spreadsheets can be easily shared in the cloud and can be integrated with other systems, however it is clunky to do so and they do not work nearly as well as a cloud based solution.
- If someone builds you a spreadsheet-based budgeting model and you can’t get that person to help you again next year then you are in trouble! Usually these models are time-consuming and difficult to learn.
If you’re going to use a spreadsheet to prepare your financial forecast then please get some help from someone who has experience in this area. Just make sure you can get them back next year.
What Do I Put Into My Budget?
I see many businesses prepare a forecast profit and loss statement for next year. A good start but not nearly enough. Many businesses will also forecast the balance sheet. A step in the right direction but still not enough. The third element is a forecast cash flow statement. The balance sheet helps tell me if I have a funding problem during the year but the cash flow projection will tell me exactly when I should get my cash from sales, when I’ll be paying vendors and how I can choose to fund the growth or shortfall, month by month. A very useful tool!
With this full picture of the 3-way forecast (ie. profit and loss, balance sheet and cash flow statement), we will have a better idea of:
- How the balance sheet will look by the end of next year
- Whether I need to make changes to meet any financial covenants with the bank
- Whether I need to tweak the revenue model to provide a better overall outcome for timing of cash flows
- Whether business growth is draining my cash reserves, and
- As a result, whether I need to look for additional or alternative funding to meet my cash flow commitments.
This last point is critical for growing businesses and gaining this knowledge early by proper budgeting can save a lot of pain later in the year.
So What Should I Do Next?
At the time of writing, it’s a couple of months out from the end of the Australian financial year. If you don’t yet have a 3-way financial forecast model set, with an alignment to your business plan and showing a pathway to your ultimate business goals, then here’s what to do:
- Check out the available tools, preferably cloud-based if your business is cloud-ready or is on that pathway.
- Look at alternatives to cloud-based, but at this time of the year it is probably getting too late to assess, make the investment and implement.
- Get some help. Use the spreadsheet method if you have someone with skills in this area as it is fast. Just make sure you can get that person back next year or find a better alternative in the meantime.