How to forecast finances better for SMEs
Better financial forecasting is not necessarily about increasing your growth – it’s more about knowing how much you are growing, so that any efforts you make to expand are based on an accurate and truthful platform.
When a business is very new, it can be difficult to know how fast you are growing. Money may be coming in and going out much faster than it normally would, with a lot of one-off start-up costs, and this all makes it more of a challenge to tell if your cash flow would be considered healthy under more normal trading conditions.
However, a certain amount of uncertainty is inevitable in business, as orders come and go, old clients fall by the wayside, and in some industries you may have little to no repeat custom at all.
Better financial forecasting helps to smooth over the bumps by giving you a bigger picture on your order book and expenses and, hopefully, some insight into how you will perform in the future too.
Better forecasting means better decisions
Knowing how much money your business has means you know what you can afford to spend, and can also help you to see how well you are doing in terms of sales and marketing too.
There are different ways to forecast business finances, so be aware of the pitfalls of the method you choose – no way will ever be 100% perfect. For example, in some common systems you record sales as soon as you receive the order or when you deliver the goods or services, even though you might not invoice until afterwards, and will often wait even longer to actually receive payment.
In these systems, your forecasting will not directly correspond to what’s in your business account, as the money coming in could be 30 days or more behind when the sale is recorded.
A cash-based forecast is an alternative and may be the better option especially for new and small businesses, tying your forecasts to your cash flow so you can make better decisions about what to spend, based on a pragmatic assessment of your earnings rather than your business’s general health.
Get help with financial forecasting
If you need help with financial forecasting, speak to a business accountant or advisor, and make sure you record income and expenses systematically.
You can use a basic spreadsheet to begin with, although there are also plenty of small business accounting packages available to help you record and analyse data as your operations grow and become more complex.
These may even include automatic report wizards to help show you your cash flow based on the transactions you enter into them – and they can make your year-end accounts much easier to compile too.
It’s a good idea as with any important digital data to keep things backed up on an external drive or secure cloud storage, and many small business owners still prefer to keep a paper copy of their accounts just in case too.
Roll with it
A financial forecast is a glimpse of a potential future, but it’s not set in stone, and the present time doesn’t stand still either.
With income and expenditure on a daily basis, your business’s cash flow position is never truly static, so keep updating your financial forecasts and make sure you are basing your decisions on an up-to-date snapshot of your financial health.
If appropriate, change the time scale of your forecasts too. You might want to look at your quarterly performance, especially when considering things like rent or business rates that are charged over that kind of time scale.
But you might equally want to keep a close eye on your monthly or even weekly forecasts in the early days of a new start-up, when those periods of time still represent a significant duration in the total life span of your business so far.
The more past data you have, the more accurate your future forecasts should get, so be aware of ways you can improve on your predictions, for example by allowing for the average length of time it takes for your invoices to be paid.
If you change your payment terms, factor this in too – for example if you stop charging on 30-day terms and start charging on 90-day terms, there’s likely to be a big drop in earnings during the second month following that decision.
By anticipating any such shocks, you can avoid being caught off-guard when they show in your data, and ultimately if you’re one step ahead of your forecasts, that’s an even better position to be in.