Financial forecasting is crucial for SMEs navigating uncertainties and looking to seize opportunities. Expert advice highlights key strategies for refining your forecasting practices, ensuring that your predictions are accurate, actionable, and strategically aligned.
For small and medium-sized enterprises (SMEs), accurate financial forecasting is not just a numeric exercise but a strategic tool that helps navigate the complexities of growth and market dynamics. Owen Twort, Manager – Business Advisory Services at BDO Auckland, with his extensive experience in advising diverse industries, offers valuable insights on refining your forecasting process. His tips emphasise collaboration, clarity, and the effective use of technology to ensure that your forecasts are both realistic and actionable.Â
1. Engage all your stakeholders
Effective forecasting starts with collaboration. Engaging various stakeholders from across your business – finance, sales, operations, and senior management – ensures a comprehensive understanding of different facets of your business. Your finance team will track the numbers, but insights from sales on revenue generation and operations on cost drivers are equally crucial. Business owners often have a broader view of industry trends and market dynamics that can provide valuable context.
Collaboration, however, does come with its challenges. You might face an overload of data or conflicting opinions on growth strategies. To manage this, establish a structured process for gathering and integrating feedback. This approach will help you create a more precise and strategically aligned forecast by incorporating diverse perspectives and expertise.
2. Understand your what, who, and why
Once stakeholders are on board, it’s important to start your forecasting process with a clear narrative. Define the purpose of the forecast – what you’re aiming to achieve, who is involved, and why it’s necessary. Begin by reviewing past performance to provide context, not as a detailed history lesson but as a backdrop for understanding current trends and drivers.
Discuss the main factors influencing profitability, cash flow, and industry trends, and use these insights to inform your forecast. Focus on current issues within different business areas to tailor your forecast’s assumptions and drivers. This approach ensures that your forecast is not just a set of numbers but a strategic tool informed by a comprehensive understanding of your business environment.
3. Utilise Tools to build better models
Gone are the days when financial forecasting relied solely on spreadsheets. Today, a range of tools and software can enhance accuracy and efficiency. From advanced analytics and predictive modelling to automation, these technologies can transform how you build and manage your forecasts.
Consult your accounting advisor to explore suitable tools that fit your business needs. These tools can simplify complex forecasting tasks, improve data accuracy, and provide deeper insights, ultimately leading to better decision-making and more reliable forecasts.
4. Regularly update and revisit
Too often the preparation of a static full-year forecast is seen as a chore for SME’s, promptly completed for an external party, then dropped in the desk drawer and forgotten about. A forecast should never be a one-time exercise. It’s crucial to regularly review and update your forecast based on actual results and new data. This ongoing process helps you understand variances, track financial goals, and respond to changes in real-time.
Developing a habit of regularly updating your forecast not only sharpens your forecasting skills but also keeps you agile in a dynamic business environment. Consider implementing a rolling forecast, where you continually update your projections by incorporating completed periods and extending the timeframe forward. This method keeps your forecast relevant and responsive to current conditions.
5. Include multiple scenarios
Forecasting should not be about predicting the future with certainty but rather about planning for various possible outcomes. Try using three standard scenarios: realistic, conservative, and aspirational.
- Realistic scenario: This is based on your current assumptions and expected performance. It represents what you anticipate achieving under normal conditions.
- Conservative scenario: Adjust this forecast for potential risks and uncertainties, providing a more cautious outlook. This helps identify potential problem areas and prepares you for less favourable conditions.
- Aspirational scenario: Finally, go crazy! Set ambitious goals to explore what exceeding your expectations might look like. This scenario can serve as a motivational tool, illustrating the potential for exceptional success.
By incorporating multiple scenarios, you create a roadmap that accommodates different possibilities and prepares your business for a range of outcomes.
When executed effectively, financial forecasting becomes a powerful strategic tool for business owners looking to plan, respond to and navigate an uncertain future. A good forecast should extend beyond a mathematical exercise, it should be able to tell the story of where you have been, where you want to go and how you are going to get there.
This article was originally published in the September 2024 issue of NZBusiness magazine. To read the issue, click here.
