More than two fifths of small companies feel that cash flow is an obstacle to the success of their business, according to a government research survey. Of those questioned, 7% believed that cash-flow problems had already impacted their company’s growth.
A financial forecast is critical as it can give you visibility of all the incomings and outgoings, meaning you can plan ahead based on projected cash in the bank. Having a forecast in place also means you’re able to pay for debts as they fall due and your business can survive peaks and troughs. Ultimately, a financial forecast enables you to make informed business decisions.
While budgeting goes some way towards ensuring good cash flow, you also need to be creating a realistic picture of the revenues and sales you expect to generate and the expenditure you will incur along the way.
Factor in seasonality
More often than not this is easier said than done, says Rachel Carrell, founder and CEO of childcare tech start-up Koru Kids.
“Our business is highly seasonal, which makes forecasting challenging. Some families want an after-school nanny only in term time; others really need help in the school holidays, as well. This means for us, every month of the year is different,” Carrell says.
In addition to this, Koru Kids is growing incredibly fast, “so June last year isn’t much of a guide for what June this year is going to be like”. By taking into account the seasonality, however, Carrell has been able to forecast more effectively so that she’s not struggling for cash during the quieter periods.
Set benchmarks
It’s not just predicting year-on-year financial progress that can be a challenge when starting out. There’s also the issue of understanding the demand for your product or service and establishing a pricing strategy based on market research.
“From my experience, it’s important to benchmark the sector your business is in and have a grasp on potential competitors’ numbers, otherwise you might be in for a shock,” says Alessandra Sollberger, founder and CEO of health and nutrition brand Evermore.
Sanjay Aggarwal is the co-founder of Spice Kitchen, an artisan producer of handmade spice blends and loose teas. He says that his company has a unique product set, which means they have no direct competitors and therefore it can be tricky to carry out analysis.
“It’s important to benchmark the sector your business is in and have a grasp on potential competitors’ numbers” Alessandra Sollberger, founder and CEO, Evermore
“We look generally at how companies within the food gifting industry are performing and try to benchmark their growth against ours. This allows us to do some rough forecasting,” adds Aggarwal.
Establish sales targets
In terms of determining future sales, Aggarwal forecasts revenues “with a conservative and aggressive view” and sets various time targets, from one to five years, to achieve sales targets.
Carrell adds that it’s essential that you make predictions as far into the future as you can. To do this you need “a financial model you can play around with, in Excel or Google Sheets. Doing this will help you understand the main drivers of profitability. And then once you start playing around with the numbers, you can identify what could have the biggest impact on sales”, she says.
Keep an eye on outgoings
While the aim of your business is, of course, to generate sales and revenue, you should place as much focus, if not more, on your outgoings, as you have more control over these than you do your incomings, says Aggarwal.
According to Joseph Valente, founder of gas boiler installation firm ImpraGas and winner of BBC’s The Apprentice in 2015, you need to determine which systems and processes will be needed to help you build a solid foundation for your business and deliver your strategy. At the same time, it’s important to bear in mind “not every cost incurred will be covered by your profit, especially when starting out”, or if your business is expected to experience fast growth, he says.
Semsettin Karahan is the founder of architecture firm Zanoply, which specialises in securing planning permissions for residential properties. He says that in order to keep your business model lean, and thus your future expenditure as low as possible, you need to reassess your financial position regularly and conduct audits to refine your outgoings.
“Think incremental adjustments, such as switching tariff providers, not just major changes,” he adds.
Plan for the unexpected
No matter how robust your forecasting plan is, or regardless of how much you’ve prepared, your business can sometimes find itself in a difficult position that you didn’t expect.
For this reason, you should make an effort to plan for worst-case scenarios, says Carrell. This includes monitoring leading and lagging indictors – metrics that will show you if something is going off track – so you have enough time to react.
“While you don’t know how it’s going to play out, you can at least make contingency plans based on the most likely one that could occur. So it’s worth taking the time out once in a while – say quarterly – to consider the various scenarios and imagine what you wish you’d done or known beforehand,” she says.
Article courtesy of NatWest
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