financial forecasting Archives

How a contract accountant can help your business year start right

I recently saw a cartoon with a child asking his mother: “What are new year’s resolutions?” The maternal tongue-in-cheek reply was: “A to-do list for the month of January.”

Many quips are made about the ineffectiveness new year’s resolutions, but research has shown that the start of a new year actually does create a platform for change. According to a spate of studies, a new year creates a catalyst for self-improvement activities. Google searches for words such as diet, gym attendance and exercise peak in January.

“Researchers doing the studies call it the “fresh start effect” – the idea that particular days and dates serve as temporal landmarks, much like physical landmarks serve as demarcations of important places,” writes Lisa Williams for The Conversation. “In the case of temporal landmarks, the demarcation is between a past self, who has perhaps failed to meet goals, and the present self, who has goal pursuit at their fingertips.”

It makes sense then, that we plan for a successful business year in January as well. It’s a time to change the current way of doing things, set goals and aim for improvements. But, just as with your new year’s resolutions, these can either remain a list of wishes or become an action plan for the year ahead. There is a way of ensuring the latter takes place. We recommend bringing on a contract accountant for this period of time. Here’s how the input of a contract accountant can help make the planning process a success.

A contract accountant can help you forecast accurately

Setting goals that are unrealistic is both demotivating and counter-productive. If you currently weigh 95 kilograms, it would be wiser to aim to lose 15 kilograms in a year rather than 30. Your contract accountant will help you know how much your business “weighs” upfront in order to know what goals to set. They’ll help give you a sense of where you’re at and what you can realistically aim for.

A contract accountant can help you budget realistically

If you’ve set a weight loss goal, your next step would be to determine how to go about achieving it. You’d set goals for exercise and goals to eat a certain number of calories daily, or to cut out excess carbs and sugar. Similarly, your contract accountant will help you know where to allocate your resources in order to achieve your profit and margin goals. They’ll help you decide what to spend on sales and marketing and how to much to inject into new capital.

A contract accountant will help guide your decision-making

A trained finance professional, for example, can perform a cost analysis for a product that you’ve been manufacturing over the last year. This will help you determine whether you’ve pitched your product at the right price or should go higher or lower. Your contract accountant should give you a sound basis on which to choose a direction, and the confidence to do so.

As you look for a fresh start in your company this year, consider bringing on a contract accountant to help you plan for it. Contact The Finance Team to find out how one of our associates can help you plan, budget and make decisions that will give you the fresh start you’ve been looking for in 2016.

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January 28, 2016 / No Comments /

Top tips for effective financial forecasting

Does your company struggle with liquidity issues? If so, experts say there’s a good chance you need to spend more time on financial forecasting. Many argue there’s a strong causal relationship between accurately planning your finances and enjoying a healthy level of cash flow.

“Effective financial forecasting is an integral part of a company’s risk assessment process; if you haven’t identified the risks impacting the business and their potential economic impact, then there’s a gaping hole that could lead to dramatic swings in financial performance and liquidity,” says Meshginpoosh, director in charge of the Audit & Accounting Group at Kreischer Miller. “In a difficult or unstable economic environment, effective financial forecasting can mean the difference between building a thriving business and suffering an economic calamity.”

So what’s the difference between financial forecasting – which almost every company does – and effective financial forecasting, which considerably fewer companies get right? Here’s some wisdom from a few seasoned practitioners about what the latter involves.

Effective financial forecasting involves understanding your company’s key performance indicators, and using them

“The metrics that are used to drive the forecast should be the same metrics that senior management uses to monitor ongoing performance and the same metrics that business unit managers are held responsible for managing,” Meshginpoosh said in an interview with sbonline.com. So, if your company incentivises your staff to sell with higher margins, then your financial forecasting should include anticipations about margins. If you’re trying to drive customer retention, make this a factor in your financial forecasting.

Effective financial forecasting involves integrating across departments

“Financial forecasting will never be accurate if it is developed independently of other forecasts,” says business writer Stephen G. Lynch on finance.toolbox.com. “Line items in the financial forecast should have direct ties to forecasts and assumptions made by sales and operations. All groups should be using a common set of drivers and assumptions regarding the economic outlook and the expected demand for the company’s products or services.”

Lynch’s point is a salient one. If the sales and marketing team is working on the assumption that the market is robust and willing, while the finance department is working on the belief that consumers are losing confidence and retreating, there will be a strategic disconnect between the two, leading to inaccurate forecasting and conflict later in the financial year.

Effective financial forecasting is simple

Tomasz Popiel, a business correspondent for QuickBooks, suggests an uncomplicated path of action. “When starting out, keep things simple. Look at your core business and show the path to profitability,” Popiel says. “If things aren’t looking good, take some time to re-evaluate your drivers and make decisions that will help increase profitability.” Lynch agrees, saying most companies could benefit by “dramatically reducing the level of detail” in their financial planning. “Every forecast should minimize the level of detail needed to forecast revenue and profitability,” he says. “Attention should be paid to those key line items that drive changes in the forecast.”

Effective financial forecasting is adjusted frequently

Financial forecasting is an ongoing process which involves frequent reflection and adjustment. This year’s economic performance in South Africa is a perfect example of how difficult it is to predict exactly where trends will take your company. Economic growth has been markedly lower than expected, and businesses have had to regroup and pare down their sales expectations. Do this activity often to ensure your forecast remains relevant.

If your company needs assistance in developing effective financial forecasts, contact The Finance Team. Our associates are qualified, experienced professionals who can provide your company with the level of expertise for the time that you need it and no more.

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January 26, 2016 / No Comments /

What a Chief Financial Officer can do for your business

You may be familiar with the quip: “When times are tough, the marketing budget is the first to go”. If you have any friends in the advertising field, you’ll know that they often feel like they’re walking a long road uphill. “Even when we create brilliant adverts that bring in loads of new business for the company, the CEO dismisses it as an ‘upturn in the economy’”, these friends can be heard to say. “We’re never fully appreciated for our contribution.”

Part of the problem, of course, is measurability. Unless you’re surveying every new customer about whether they’ve chosen your product as the result of an advert, it’s impossible to know – beyond reasonable estimations — whether sales are attributable to an advertising effort or another coincidental external factor. But digital advertising has helped to change this. Nowadays, companies can see exactly how much interest an advert is generating. They can measure the number of clicks, the amount of time a person spends on a page, and – if sales are being driven online – they can often determine whether or not this behaviour translates into a sale.

In a similar way, it’s been historically difficult to determine the impact of a great CFO on a business. If a company does well, it could be due to the combined leadership of the senior management team, or a favourable turn in the environment, rather than thanks to the chief financial officer alone. But nowadays, increased measurability and research techniques have enabled analysts to get a better idea of the impact that a fantastic financial leader can have on your company. Using that rationale, here are some valid (and often un-thought of) ways in which a great chief financial officer can influence your business.

Find and retain great talent

If you’re looking at hiring a chief financial officer for the first time, chances are that your company is currently growing, and will continue to do so. With the global economy finally on the uptick, projections for the South African GDP are slightly more optimistic for the upcoming years than the last. Absolutely key to your success is finding and keeping the right people to grow with you. And that’s where your chief financial officer comes in.

According to a survey cited by the Controllership Group, 66% of finance chiefs are concerned or greatly concerned about talent acquisition and retention. This obviously applies to the finance department, which your CFO will head up. But it also applies to their savvy when it comes to increasing annual pay and structuring bonuses and incentives for the entire company. A clued-up chief financial officer will know how much to offer to keep employees happy and motivated without putting the company under strain in the process.

Find the right balance for advertising spend

We’re all well aware that the finance department and the marketing department often view their objectives as separate and almost oppositional in nature. A great CFO, however, recognises the importance of the marketing effort and drives understanding and collaboration between these two departments. As a result, she is often able to determine the optimal amount that should be apportioned to marketing efforts. The payoff is growth at the right time and at the right pace.

Use technology to create forecasts that are more accurate than ever before

A valuable chief financial officer has harnessed the latest tools that technology has to offer. As a result, he can develop reports based on real-time, rather than historical, information. His forecasts are reflective of the most recent, relevant data rather than outdated material that only offers limited insight for the future. This optimises cash flow and enables the company to save sufficiently without wasting its resources in a cheque account.

A great chief financial officer helps keep staff happy, optimises marketing efforts and budgets efficiently. Contact The Finance Team to find out how this kind of resource can be available to your company on a part-, full- time or interim basis depending on your needs.

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September 1, 2015 / No Comments /

Four tips for your financial forecasting

Financial forecasting is sometimes described as more art than science. In some ways it is attempting the impossible – projecting your business’s success and failures; the threats it will face and how exactly these will affect your bottom line. It’s a given that your projections will never be completely accurate, but financial forecasting remains a key element of a CFO’s responsibilities, and a crucial aspect of business planning. Apart from its use for internal planning purposes, investors will generally want to take a good look at your financial forecasts before coming onboard.

Through their own process of trial and error, various CFOs and business owners have collected what they deem to be some useful approaches to the art of financial forecasting. Below is a collection of some of their advice, along with ours:

1. Plan for both the best and the worst:

A common approach to financial forecasting is to build a base case filled with conservative forecasts and assumptions. This is a practical starting point. But in South Africa, especially with the barrage of negative business news that has been coming at us for some time now, business leaders have a tendency towards negativity. This is reflected in planning and often in financial forecasting, where CFOs consider it their responsibility to communicate to the rest of the business “just how bad things could be”. Of course, a worst-case scenario is useful and very important. But so too is a best-case scenario, if things turn out unexpectedly rosy. In other words, what you really need is multiple versions of your forecasts.

Ethan Siegel, chief executive of New York-based Orb Audio shared his example with inc.com:

“We try to walk the fine line of making sure we are profitable if the worst case comes true, but also have enough product and staff to support the best case predictions,” he said. The company grew by 30% in 2013: foreign sales of the product were boosted by a weak US dollar. “We never would have guessed that we’d grow that much,” said Siegel. “But because we also planned for best case and built up inventory, we weren’t caught with our pants down.”

In planning for the short term, Siegel scrutinises the month-to-month growth rate from the previous year to predict revenue fluctuations for the coming months.

2. Start with expenses, not revenues:

This advice from Asheesh Advani, CEO of Covestor, an online marketplace for investors, is especially useful for startup businesses where financial forecasting is being undertaken for the first time.

In the startup phase, says, Advani, it’s much easier to forecast expenses than revenues. The same could be said of businesses operating in a highly changeable environment, or one that is quickly evolving.

3. Don’t let your annual financial forecasting go stale:

In uncertain economic times, a once-yearly annual forecast is insufficient, says the co-founder of eco products company Seventh Generation. Hollender says companies should consider pushing their financial forecasting further back into the year, to keep it relevant.

“With our year end in December, we used to do our forecast in August but now have pushed that all the way back to November,” said Hollender.

“And in the past six months, we’ve created a new forecast almost monthly. Creating that many new forecasts can take a lot of time, but sometimes it’s necessary. In the end, you don’t want to run a business off of a forecast you no longer have confidence in.”

4. Don’t wander too far into the future:

Josh Tabin, Technology Practice Manager for VCFO, says that although long range planning has its place, it is limited in usefulness for the application of financial forecasting.

“The challenge is that any forecasts over 18 months into the future have too much variability and volatility to be effective for managing the business.

“I recommend having a three-year forecast for a board of directors and investors, with an 18-month forecast for internal management.”

As you consider how to make these tips relevant to the financial forecasting for your business, you will no doubt need to consider the resources available to you to carry them out.

If you need an extra pair of hands to help you carry out the responsibilities of financial forecasting, The Finance Team has a range of experienced financial professionals who can provide assistance on an interim or ad hoc basis.

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September 22, 2014 / No Comments /