Gloomy forecast?

While there is the possibility of avoiding a global recession at the outset of 2023, the economic outlook for UK businesses is uncertain at best. Inflation is still in double digits, and the UK is the only G7 economy set to shrink over the year ahead. This will result in companies of all sizes needing to consider the role of forecasting and modelling. The combined effect of rising costs and unpredictable demand for products and services means a beady eye and constant gaze will have to be kept on performance. Smaller businesses may have yet to undergo formal forecasting before but may need to do so for their survival, in particular, to ensure they have enough cash in the bank to keep trading. The situation’s urgency is highlighted by 5,995 companies entering insolvency in the last quarter of 2022, a 6% rise quarter on quarter. Worryingly, a recent survey by Azets shows that 22% of SMEs are not projecting cash flow during today’s economic crisis.

There are several different forecasting and modelling approaches, some more relevant than others, depending on your business. The output of forecasts and models should provide a relatively accurate picture of future performance. Completing these tasks takes a different type of skillset to compliance-based work, but several new tools are available to make this straightforward, even for beginners.

Insight is power

Businesses need fi nancial models and forecasts to give them insights into how they will likely perform over the short and longer term. This can be to both leverage opportunities, and preemptively respond to threats. For example, fast-growing loss-making companies must assemble a financial model that enables them to readily access equity finance when they need it. Correspondingly, the uncertain economic outlook will strain the cash position of many businesses, which will need to put together cash flow forecasts to identify short-term cash gaps or longer-term negative balances that will need to be plugged with debt finance. The mass adoption of cloud accounting software has made it easier for finance directors and controllers to maintain accurate and close to real-time data that can be used as a solid foundation to assemble forecasts and models. “Fundamentally, a modelling and forecasting exercise should be designed to help you make better, more informed decisions,” says Asif Ahmed, head of early stage, tech & high growth at mid-tier fi rm Cooper Parry. “This could be with high-level strategic decisions or even day-to-day operational matters. Before starting, you should drill down into what specific question(s) you would like the model to answer.”

‘The’ tool

While Excel still remains one of the most popular tools for compiling forecasts and models, newer techled solutions simplify creating and maintaining forecasts.

Cloud forecasting

Cloud forecasting tools connect directly to cloud accounting software, mimicking the ‘chart of accounts’ structure and syncing the most recently produced financials. Assuming that bookkeeping is up to date, you can always access forecasts and models based on real-time data. This also minimises the time it takes to put them together. “In industry, we’ve heard reports of short-term cash fl ow forecasts taking days to prepare… but this is no longer the case. “The biggest time saver is when it comes to building multiple scenarios, which is a nightmare to do accurately in a spreadsheet,” says Colin Hewitt, CEO and founder at Float, a cash fl ow and scenario planning app.

Cloud spreadsheets

Spreadsheets off er granularity beyond cloud forecasting apps, and if your business has a complex model, it may be hard to move away from them. However, cloud spreadsheets, such as Google Sheets, have advantages over desktop-based equivalents. This includes being able to collaborate in real-time and ease of use. Robert Collings, a head of finance who has worked for a range of startups, says: “I build financial models in Google Sheets, as startups often use G-Suit already, so it’s very low friction to use. It also has excellent collaboration opportunities such as working from the same spreadsheet and updating it in real time, without the risk of losing control over which one is most up to date.”

Frequency

At a minimum, you should put forecasts together once a year but, depending on your business’s own specific circumstances, this may need to be more frequent. “Taking time out once a year, minimum, to consider external challenges and influences on any organisation’s finances has to be a must, as operating in a vacuum is foolhardy. The frequency should reflect the volatility prevalent at any given time,” says Neil Morling, group fi nance director of Handley House.

Understand your unit economics

Understanding your unit economics, defined as measuring the profitability on a per-unit basis, is critical for all types of forecasts and models. This will give you a better understanding of how you can grow your company by investing in marketing and assessing the impact campaigns will likely have. The easiest way of understanding this is to deduct the variable costs per sale from the price of each product. If you have multiple revenue streams and products, this will be harder to calculate and model. 

Business partnering

You are unlikely to have the necessary company-wide information to create accurate forward-looking projections when modelling. Taking the time to engage with departmental leads can enable you to access better information on which to base them and has the side effect of educating others about finance’s role. 

You don’t need to be an expert to get started

Not all fi nance managers and financial controllers will have experience in putting together forecasts and models. However, cloud forecasting vendors can allow you to get going with relatively little knowledge and provide associated learning materials.