NatWest Business Builder: Understanding your finances
Carl Reader provides insight into how SMEs should go about forecasting, including mistakes to avoid, as well as robust financial planning and budgeting.
Predicting performance and formulating forecasts can be a headache for small businesses, particularly when they don’t have the right in-house knowledge or access to financial support.
Carl Reader is a director of d&t, a multimillion-turnover award-winning accountancy firm. He has helped to build it from a small local practice to a national firm. He’s also a highly regarded business expert and author of The Startup Coach: Teach Yourself.
Many small businesses struggle when it comes to forecasting. What’s one of the main things they might be getting wrong?
“From my experience, company owners will often base their forecasts on last year’s figures and then add an arbitrary percentage, but this isn’t the most effective approach. Instead, they should be shaping their forecasts on how the business should and could perform, rather than how it has performed historically. Businesses should always start with a blank canvas.”
Can focusing too much on the numbers get in the way of actually achieving targets set out, then?
“Yes, simply adding an arbitrary percentage isn’t realistic. In order to understand how a business can perform better, company owners need to be thinking about how they will achieve any increase in turnover and how they will cut costs.”
How can companies go about doing this?
“It’s important that they always bring the numbers back to business activities and processes. For example, if they want to achieve a 10% increase in revenue then it might mean £100,000 more in sales, which is 100 more customers at £1,000 each, but this might mean at least 200 new customer appointments. The key question they’ll need to be asking is: how will I get these extra appointments?”
What else should business owners be doing?
“They need to make sure they use their forecast. Many business owners will formulate one and then simply file it away. But forecasting shouldn’t be seen as something that should be done just because they’ve been told to do so by their accountant or because the bank needs it [to approve a loan, for example].”
A survey conducted by finance software provider Exact last year found that 34% of SMEs questioned didn’t have a business plan, including a financial forecast. It also revealed that of those that did have one in place, 70% reported being more profitable, compared with 52% of those that didn’t.
“Things change over the course of a year, so business owners need to keep their forecasts relevant and constantly review and adjust their budgets accordingly”
Carl Reader, director, d&t
“A forecast should be a working document in their business,” adds Reader – one that they can always go back to, refer to and use to remind themselves of their sales targets and growth plans.
So is it important that they continually refer back to a forecast?
“It’s a good idea to try to keep forecasts ‘live’. Sometimes things change over the course of a year, so business owners need to keep their forecasts relevant and they also need to make sure that they’re constantly reviewing and adjusting their budgets accordingly.”
This allows them to compare their projected performance and actual performance against a realistic budget, Reader adds.
How will this impact the business if it neglects to do this?
“By not keeping forecasts, company owners run the risk of having cash-flow problems, which can be a killer for many small businesses.”
Research carried out by Dun & Bradstreet, a firm that provides businesses with commercial data, analytics and insights, revealed that the average SME in the UK is owed £63,881 in late payments. A survey of more than 500 managers at companies ranging from two to 250 employees, showed that a delay in receiving funds is leading to cash-flow difficulties for 35%, consequently, payments to other supplies are being delayed for 29%, and 24% are recording a reduced profit performance as a result.
What’s one thing every business should do to boost its cash flow?
“It’s quite simple. They need to make sure that they have a system for chasing debts, because relying on customers to pay is the worst way of managing debtor ledgers.
“As well as setting out clear payment terms and invoicing promptly, then following up as soon as a payment becomes overdue, it’s worth considering automating chasers, so that there’s no human involvement. Better still, it might be worth looking into whether collection by Direct Debit is an option, as this could remove the risk altogether.”
By being efficient, businesses can forecast more accurately and ensure that they too are able to pay creditors on time and without any problem, Reader says.
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