Understanding where you're going towards in the future with your business is crucial to determine the success you want to achieve.
Determining goals and KPIs for your business will help you growth.
Forecasting is a wonderful way to help navigate ways to hit your goals. However, many business owners and startups are doing their forecasts incorrectly, or quite simply, don’t do forecasting often enough.
A dilemma many businesses face is asking themselves how they can forecast 6-12 months in advance when sometimes they don’t even know the approximate forecast next week.
Is that meant to say you’re meant to forecast next week?
What things do you need to look into when forecasting successfully?
Are you taking into account the cashflow patterns of your business?
What happens when a client doesn’t pay on time?
We’re lucky enough to interview an experienced business and startup accountant, Elan Pamensky.
It was a fantastic interview and Elan shares some great advice. We will be doing more interviews with Elan into the future :)
Enjoy this post!
“Hi everyone! We work with startups that are scaling up as well as digital and creative agencies. We are helping them with everything from basic bookkeeping right up to CFO work. We help startups understand the financials in order to make a key business decision to deliver growth”.
Visit Cloud CFO to find out more :)
How can a small business owner be able to adjust for costs in the next three to six months?
“I think it's a key aspect of what all business should be looking at no matter what industry the business is in."
"As you start to get bigger and have more expenses, then you have to be much more diligent around the whole process."
"As an early-stage startup, you probably wouldn't be. You might have that twelve-month budget view then every few months, reviewing it."
"However as your business develops and you get revenue and you bring on people, being on top of your forecasts on a weekly and fortnightly level is crucial”.
Any specific types of businesses that should do forecasting on a regular basis?
“I think it's a key aspect of what all business should be looking at no matter what industry the business is in. As you start to get bigger and have more expenses, then you have to be much more diligent around the whole process. As an early stage startup, you probably wouldn't be. You might have that sort of twelve month year then just every few months, just reviewing it. However as your business develops and you get revenue and you bring on people, being on top of your forecasts on a daily and weekly level is crucial”.
What’s the best way to properly identify income and expenses?
“Looking at the last 12 months of your business is a good baseline to start but is dependent on the business”.
“However, it depends on the main revenue cycle during a specific period, for example, a recurring SaaS business is different from a business experiencing a spike in your sales during a Christmas period”.
What percentage or amount approximately should a small business owner have in place to have as a buffer? I know I might be a bit hard to answer there because every business is different. However is there a sort of a rough baseline that you recommend businesses to have in terms of cash?
“With all that’s going on with COVID-19, you have people talking that companies should have at least twelve months worth of runway.”
“That's probably hard for lots of businesses. Ideally, what you want to try to do is maybe have a three month runway that you set aside."
"Ask yourself, ‘Can we manage the business over those three months without generating any revenues?’ If you can’t answer with confidence then usually it’s a sign that what’s currently happening within the business isn’t sustainable and need to work out how to increase the buffer to be at least a minimum 6 months runway.”
“I often tell my clients that when they’re doing well maybe try to go to the bank and try to get a loan; overdraft or line of credit.”
“It helps to set up a healthy bucket of money. You just let it sit there, not pay any interest on that money. All you are paying is an annual fee, that's fine. It's the in case of emergency funds, that if something happens, you can then just go and draw down on those funds.”
“So it's always worth looking at different avenues that you can look at as well to ensure you have a good runway”.
What do you mean by not getting caught up with revenues?
“I think the biggest issue with businesses is when they look at their profit and loss, they think that's cash in their bank and that's not cash in the bank, because in most instances, the revenue that they're generating today is only going to get collected in potentially 30, 60 or 90 days, depending on what stage and type of business they are.”
“I’ve got a client dealing with Coles and Woolworths and those suppliers as an example pay on 90-day terms. So, in this case, you got a 90-day cycle before you receive that cash from those types of suppliers?”
What warning signs or tips would you recommend making sure this doesn’t happen?
“From a general tips perspective there’s lots of things you can put into place making sure to get cash quickly. One would be Xero with their invoice reminders. Setting those up to remind clients to pay when they can is a big help to reduce invoice cycles whether 7 days, 14 days after as an example can help alleviate time for what is an important item to do when running a business”.
“I think the principle of just helping clients or customers to pay you on time. So services like GoCardless or Stripe, or just alternative methods to actually receive that cash and receive it quicker.
“Or better yet being on the front foot by offering a 5% discount to pay within 7 days to prompt action from customers can also be a great way. It may seem a lot but it's actually worth it in terms of the time it actually takes to chase that cash.”
What sort of help should a small business owner or startup founder look for now? What sort of expertise should they look for specifically?
“I think you want to have someone who's been doing this before and been doing it for some time. You want some with relevant experience in this field who understand the nuances of cashflow forecasting"
What sort of questions should they be asking someone when they're looking for this sort of assistance with forecasting?
“I think it’s about asking what sort of the outcomes they are going to achieve? What sort of tips or tricks are you going to give them that they can implement to help them from a cash flow perspective? Also what guidance and ongoing advice can you provide”
“What they can take away is to implement processes and a better way to manage and set long term strategies to improve cashflow. They will also have a few alternative scenario's which they can use to help guide them”.
What sort of forecasting scenarios would you run during a tough period like Covid-19?
“In general with cash flow forecasting you do typically do a couple of scenarios.”
‘For example ‘What does a 50% downturn on revenue look like? Or what happens when costs go up by 20%’?”
“Creating some sort of base case and doing multiple scenarios like the ones mentioned. Finding a way to track it on a chart can help visually keep on top of what’s happening”.