How to mitigate negative impacts on your business

Richard Francis shares some advice, tips and tricks to help business owners get the most out of forecasting and scenario planning in order to survive and thrive in the ‘new normal’.

The past couple of years have been difficult for small businesses, with the uncertainty of shifting alert levels making it very challenging economically to stay profitable. As a small business owner, you may be feeling overwhelmed with all the different roles you take on, including managing all financial data and decisions—a tall order if you don’t come from an accounting or financial background.

As a former chartered accountant I’ve worked closely with many small businesses across Australia and New Zealand, and I know how difficult juggling all these roles can be —even without the added pressure of a global pandemic.

For small business owners who often wear the hat of the accountant out of necessity, I want to share some advice, tips, and tricks that’ll help you get the most out of forecasting and scenario planning to survive and thrive in this ‘new normal’.

Visibility over the cash flow of your business

‘Profit’s an opinion, but cash flow’s a fact’ as I like to say, and this is especially true in times of economic uncertainty. While many business owners use their profit and loss statements to measure the health of their business, it’s actually their cash-flow that paints a more accurate picture. This is because there are so many different ways you can manipulate your financial data to tell the story you want to hear, but at the end of the day if the cash isn’t coming in when you need it, your business could rapidly decline.

An unhealthy cash flow can be caused by many factors including the effects of lockdown restrictions, overspending, or poor product demand—but whatever the reason, it’s important to know the facts. The good news is that unlike a few years ago, visualising your business’s cash flow no longer means juggling spreadsheets, hefty stacks of paper, and endless reams of disconnected numbers. Instead, you can use accounting software like Spotlight Reporting to surface the insights you need in a fraction of the time, and gain a better understanding of your inflows and outflows. Visualising the numbers will help you pinpoint the leaks in your cash flow stream, and make the decisions that will have your business thriving once more.

Business forecasting

I’ve always said that every business deserves a cash flow forecast, and here’s why: a good forecast will help you make informed decisions about your business by using historical data and manual inputs to generate future estimates and projections. It’s an essential tool to help you understand potential future revenue while factoring in future expenses and other financial commitments, so you can make informed decisions on the direction of your business.

To nail forecasting, start with a budget. You can create one using accounting software like Xero, MYOB, and import it directly into Spotlight Forecasting. Alternatively, import your data and use last year’s actuals. From there, you can refine it further, or create your cash flow forecast directly.

Don’t forget to account for:

Dips and upswings in trading
Inflows from government support
Loans
Changing expense profiles
Capital injections.

Our software then allows you to choose the profile and timing of your revenue and expenses to turn your budget into an overview of your cash flow. This cash flow forecast is a great asset for gaining visibility over the future of your business, including potential cash dips and peaks. You can use this data to make well-informed decisions in advance.

Scenario planning during times of uncertainty

To get the most out of forecasting, you can also take things to the next level with scenario planning. While forecasting gives you an indication of what will happen in your business based on current data, scenario planning will allow you to project the future by looking at more than one option or pathway.

As an example, you could run three potential scenarios for the months ahead—what I like to call ‘the good, the bad, and the ugly’:

A best-case scenario. If everything goes according to plan, what would the future look like for your business?
A realistic scenario. If things continue as they are, where will your business end up?
A worst-case scenario. If there’s another snap lockdown, for example, how can you pivot to make the most out of the situation? Can you resort to online sales? Do you have enough cash in reserve to get your business through this rough patch?

If there’s a take away for business owners from the last two years, it’s to expect the unexpected. In helping you consider your options, seeking the right advice, and ultimately making informed decisions, a robust forecasting process will give your business the best chance to thrive in this new Covid reality.

Richard Francis (pictured above) is co-founder and CEO of Spotlight Reporting.