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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 /  
financial-forecasts

Tips for setting your financial forecasts for 2015

The silly season is over and as we all recover from a few seasonal indulgences, it’s not uncommon to resolve to do better in the upcoming year. We set goals to spend more time in the areas where it matters most; some of us want to be fitter, others want to work harder, spend less or make more. Our businesses go through the same process, but for the latter, it’s not in the form of new year’s resolutions, it comes in the form of a financial forecast.

Business writer and entrepreneur Eric Parker describes financial forecasts or financial projections as a set of pro-forma financial documents – usually consisting of an income statement, a balance sheet and a cash flow statement – which projects the expected performance of the business over a specific period.

When setting up your financial forecasts for the year ahead, the projections should be as detailed and accurate as possible, says Parker, and take seasonal fluctuations and the impact of holidays into account.

Financial forecasts part one:

The income statement. While an income statement usually reflects the financial performance of a company at the end of a period, this income statement will outline the expected performance of the company looking forward over the next year. It will include the expected revenues (or income from turnover) of the company, the expected expenses of the company and the net result that would be derived when comparing revenues with expenses.

Financial forecasts part two:

The balance sheet. The balance sheet is also referred to as the statement of financial position. It shows where the “balance” of assets lies. In your financial forecast, consider first the current (or short term) assets that the company will have over the next year. This includes things such as how much cash the company will have on hand, what short term investments it is likely to make use of, and what inventory will be available. Then, look at the fixed or long term assets that will be carried over from preceding years. These include things such as equipment and property owned by the company.

The assets, or the things that are used to operate the company, must equal the company’s financial obligations (liabilities) plus the equity of the company.

Financial forecasts part three:

The cash flow statement. This refers to how much money you expect will move in and out of the business. It isn’t necessarily linked to the profitability of the business, or to the level of sales you expect.

Watch out for times of the month or year when large payments are due. Will your cash flow be able to sustain the payments you will need to make? Even a profitable company can have a negative cash flow if a lack of planning means there is not sufficient cash on hand. Remember at this stage you’re making a prediction about the future, so it’s up to you to pre-empt times that greater cash amounts might be needed. Try to think past the obvious predictions such as month end to other times where extra cash might be needed, such as planned marketing drives for new products, legal fees or the purchase of new equipment.

A realistic, detailed projection involving an income statement, balance sheet and cash flow statement will provide a solid foundation for your plans for the new year. From there, your company’s “new year’s resolutions” are more likely to become a reality.

If your company needs direction in putting together accurate financial forecasts, The Finance Team can assist. Our team of qualified, experienced finance professionals can provide your company with ad hoc or ongoing financial insight, according to your business’s needs.

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January 28, 2015 / No Comments /  

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