It’s surprising how many small businesses still don’t have the tools to understand their finances correctly. A large number still don’t believe that even cash flow forecasts are worth having! However, the better you can predict the future, the better you can plan to reduce risk and exploit opportunities.
So here are some of our tools that we regularly use to ensure we’re looking forward as accurately as possible.
1. Waterfall Forecast
A very underused tool. Waterfall forecasts may seem a bit pointless for start-ups who are constantly changing their tactics. However, they are useful for start-ups, VCs and large corporations. They’re great for getting a sense of what the end of year result is going to be. They’re also a very useful tool for improving your ability to forecast and budget accurately. As the year goes on, you can actively see how close or how far away your forecasts were the actual results. If your forecasts were way off and there was no force majeur to make the result an outlier, you need to ask yourself some questions: Did you fail to anticipate a surprising direct cost? Were you too optimistic is predicting whether a lead will close? This approach means that you will gradually improve your forecasting by asking the right questions and being more realistic.
Typical waterfall forecasts will show your budgeted, forecasted and actual amounts for revenue, direct costs, gross profit, overheads, and net profit. They’ll have the budget figures in one colour, forecasts in another colour, and actuals in another. As the year goes on, it will look like a waterfall.
2. Cash Flow Forecast
“Cash is king” is a saying for a reason. You can be generating all the profits you want on paper. But if it doesn’t equate to real money in the bank, then you’re not going to survive. You can’t pay employees or suppliers with paper profits. Cash flow forecasts allow you to get a picture as to how much money is in your account is when. This means that you can manage your creditors and purchases accordingly. Just as with a waterfall forecast, though, realism is key. Be realistic about how much your spending, or you will be caught short. Start Up Loans have a free cash flow template to get you started. If you are just starting up and cash is likely to be tight, you probably want to forecast weekly, as in the example above.
3. Pipeline Report
You might think that the ‘pipeline’ is just something that matters to your sales team. It does. But you might want to have a more strategic-level pipeline report too. This will give you a feel for the likelihood of new revenue coming in and when, and will help with your cash flow forecast and your waterfall forecast.
For those who don’t know, pipeline reports are where you put a value against a potential deal according to its position in the sales process. For example, if the opportunity has just been identified, you may only want to give it a score of 1, which may equate to 10% of the estimated final value of the deal. That 10% will be what appears on the pipeline report. Once the proposal has been made, the opportunity will progress to 2, or 25% of the final value, and so on. For many businesses, it’s as close to scientifically predicting your actual revenues as you can get.
4. KPI Dashboard
This isn’t just that part of the monthly report that shows a ‘red’ when things haven’t gone as planned, or a ‘green’ when they’ve gone exactly as planned. It’s also important to have a scorecard that tracks those reds, ambers and greens across the year, and how many you have compared to last year. This will help you get a strategic view of performance against plan, as well as helping to determine whether it’s your budgeting that’s wrong, or how you put them into practice.
Only on the list because it’s so essential that it can’t not be. Your budget shouldn’t be a substitute for a well considered business plan. Your business plan should also come first. Otherwise, you will to be too driven by the numbers, and lose that all important strategic view. As with everything, your budget should be stretching, but achievable.
There are plenty of free budget templates around. Microsoft Excel has one built-in. You may also want to read up on how to write a budget just to make sure you’ve considered everything.