We were certainly hoping this would not become a reality, but it looks as though a ‘second wave’ is upon us and new measures to help curb the COVID crisis are coming in thick and fast.
Your business may only just be recovering from the impact of the last six months, and now we are all facing the uncertainty of the next six.
We hope that you have found some value in our Cash and Cash Flow information over the last month. Our free mini course is still available, you can go here to find out more information and to request the resources.
After speaking to Business owners, it’s clear that we have all experienced the crisis differently, some have experienced growth, and sadly, some have been completely devastated by the pandemic.
Wherever you are, it’s more important than ever to put contingency plans in place.
For those that are still trading and pushing ahead, now is a good time to tighten up on some financial tools and good practice to help navigate these coming months.
Some places to start are:
Although the next few months are critical, it’s important to monitor the medium and long term as well - think about what can you do now that with give you a return in a few months?
Through the first wave I saw a lot of businesses investing in technology, branding, online content and passive income streams, all intending to add value down the line. This could be something to consider.
Asking the Hard Question - Is My Business Profitable?
We may face some tough times ahead whilst still trying to rebuild from the first wave. I suspect an enormous question for many businesses is how do we stay viable or even profitable?
A common problem I have seen is business owners putting in 50 or 60+ hours a week but ultimately only taking home less than minimum wage. This may be acceptable in exceptional times, but it is not sustainable in the long term and suggests that your business may not be profitable in the future.
So, how do you know if and how to get to breakeven or when is the business no longer viable?
We are not really the experts at business recovery (in the content of insolvency), ultimately, there are other professionals to assist when it has become that serious. But we can help you before that stage, by giving you tools to check where you are now and predict where you may be in the future.
This way you can be proactive about the way ahead, and, if the numbers don’t add up, make those tough decisions.
We feel one of the best ways to gain control, develop clarity and ultimately be confident in your decisions ahead is to develop a Financial Forecast or Model.
So, What is Modelling and Forecasting?
Forecasting is the act of preparing your reports/tools for the future, often using the best guess approach to the numbers in it.
As we don’t have a crystal ball, we can’t predict the future, but we can learn from the past and make predictions based on the data in front of us.
Ultimately we are guessing, but the point is to get better at guessing and to use targets to drive your performance to achieve the results you want.
So when you prepare a business plan, forecast, projection or model, you are taking all the information, strategic objectives and actions to guess what financial results you will end up with over the next 1, 2, 5 or even 10 years.
Personally, I’m fascinated at how ‘big data’ and ‘data’ are making it into financial roles. Data analysis has always been there, but I recently attended a digital conference that emphasised the role of data scientists within business and how accountants are going to be key translators for utilising that data to come to a single truth about the performance of a business. This could ultimately save a lot of time, energy and money further down the line.
One way to inform your forecast or model is to start regularly using your Management Accounts within your business.
What Are Your Management Accounts?
Management accounts are a wide, encompassing term but basically, they are the internal financial report prepared for your Management to decide about the direction of the business.
They can take many forms because they are an internal document, as opposed to the set of accounts prepared by accountants at the end of the year which have strict accounting standards that determine how those should be prepared, classified, presented and reported to the authorities.
For both your Forecast and your Management Accounts, you want to keep a consistent format throughout. This keeps information comparable and easy to follow between the two.
So the key thing here is what information do you need so you can decide what the next steps are for your business?
Dr Stephen Covey’s quote, ‘Begin with the end in mind’ has always stuck with me.
When building the format of your Management Accounts, you need to think about what format and level of detail are going to best help you work with your numbers, so you need to have ‘the end in mind’ for your format.
This is such a wide area that it’s too much to go into here, we can do this in a future Blog Post or we can help you with in a working session, you can find more details here.
When to Start?
As a busy business owner, you most probably wear several hats. Your time and energy are precious, I get that, but ultimately, you want to do this as soon as you can!
Depending on your systems in place, who you have to help you, what stage your business is at, what’s on the horizon and how savvy you are with the financial tools, it will affect how much you do.
If your time is limited and you want to keep it simple, a good starting point is a 12-month rolling Cash Flow Forecast. If you are managing the cash in your business and taking measures to never go negative, it is a fantastic safety net to stay out of trouble.
If you are a business that receives any external funding, whether it’s a big project grant, investor income or loan, then you probably had to prepare a Forecast to secure funding. You can convert that into a tool you regularly check-in with monthly, so update the actuals and monitor that the forward-looking projections look right at this point in time.
If you didn’t, then I would suggest that this is something that gets put in place fast, as now you have other people involved in how well you manage ‘their’ money.
The rest of the time, it depends on how fast-paced your business is and how often you need to make big purchases or financing decisions? Checking the numbers beforehand as a sanity check is a good habit to develop.
How Long Should My Model/Forecast Be?
As with many things about Management Accounting, this depends on your business and what you need to stay on top of it.
When building this, questions to ask are:
The length of your Model will depend on what you want to achieve, but typical durations are 1 - 3 years.
It is worth noting, the longer the time period, the more uncertainty there will be in your numbers, after all, we can only guess or set a target for what will happen 3 years from now.
I’m not sure many business owners planned for a Pandemic and its after-effects of this magnitude!
What Tools Can I Use?
First, what budget do you have to invest in setting up a Forecast?
Are we talking just your time, a consultants time, a one-off project fee or possibly a monthly ongoing fee?
If you have a budget, I would highly recommend investing in a piece of software that integrates with your accounts.
Yes, the initial setup may take a little more of your time to get in the system however you get that time back when you’re updating it (because of integration) and flexibility with scenario planning (through the software tools) which ultimately means you can test out scenarios on your model without affecting your base budget.
If this is not possible to begin with, then a low-cost option is using a spreadsheet. These are often included in your office applications suite or open-source online.
Just remember to keep it as simple as you can as finding a formula error in a huge spreadsheet can be a nightmare and is a time stealer.
One tip, most accounting platforms allow you to export your reports as a PDF, if you line up your format from the accountancy platform to your model, updating your actuals becomes a whole load easier with hopefully a simple ‘copy & paste’ or two.
If you are a Xero user, have you found the ‘Budget Manager’ feature? This is a great way to model your Profit & Loss over a two-year period and then can be extracted from your reports section with a few clicks, it’s a great time saver.
You’ve Built Your Model – What’s Next?
This is where the value really comes in.
I previously mentioned a great way to use your model is if you have a big decision to make which will have a financial impact. By referencing your model beforehand, you can see if you can afford it, when you can afford it, and how might the return on investment impact your results.
You can then decide whether the financials stack up.
If you are using a spreadsheet for your model, and are looking at a scenario or one-off decision, it is worth taking a copy of your forecast before amending it, so that if you decide not to go ahead you haven’t got to reverse all your entries on the original spreadsheet.
Another great use of your Forecast comes down to good housekeeping. If you check in with your forecast or management accounts monthly, you can see if you are on track to achieve those targets you set.
By being proactive with your results, you can plan ahead, look at whether you can extract more profit at the end of the year and have a good guess and what your tax liability may be and start planning to put that aside now.
You also can spot problems earlier enough to do something about them. If you can see that there is a potential problem on the horizon, say in 6-12mths, then taking action now will help avoid difficulties down the line. Maybe you reduce spending commitments; put that needed purchase on finance as opposed to paying outright; or put off hiring until sales reach a certain level.
Finding yourself surprised by a problem makes it a lot harder to find a solution. It’s always better to be proactive than reactive, which may make solving your problem more costly or demotivating; like having to pay for an expensive loan because the bank won’t offer you a good/decent deal, or having to make surprise staffing cuts which can be devastating.
By having some of these simple tools in your business you will gain more clarity and control and feel more confident in both the business direction and your decisions.