Should Small Businesses Forecast?

Should Small Businesses Forecast?

The short answer is ‘yes’. The longer answer is ‘absolutely yes’.

Seriously, there are multiple reasons why smaller businesses need to forecast and implement a FP&A (Financial Planning and Analysis) framework. First, cash is generally the most delicate asset of any small business, especially those under $20 million in sales. Cash (and the corresponding line of credit) has to use forecasting regularly so that potential shortfalls can be addressed as quickly as possible.

The second reason is not as readily apparent. Businesses who plan revenues, margins, and operating income regularly and compare actual results to these plans will do significantly better than those who do not. The former will seek answers to why plans fall short or are even exceeded. In such cases, strategies and action plans are the result of plans which are not met. Conversely, those businesses doing little to no planning are typically ‘winging it’ or flying by the seat of their pants.

A FP&A Checklist for Small Businesses

  1. Daily treasury management is a must. That means reconciling cash every day and drawing or paying down on the LOC each morning. Other daily processes need to be adhered to in the areas of billing, collections, purchases, and cash disbursement. No shortcuts allowed.
  2. Cash should be projected 8 to 13 weeks each week on a rolling basis, and this is not the job of the accountant or just the CEO. This should be done by everyone in the business who has an impact on cash (whether producing or consuming it).
  3. A few key metrics should be maintained and monitored weekly, but only a few which can lead to actionable change.
  4. Financials MUST be completed on a monthly basis within a reasonable time frame after month-end. There are no excuses to not making this happen.
  5. And finally, ensure your actual results are a part of your FP&A tool. What went right last month or quarter? What did not go according to plan, and why? Running a causal analysis is an incredibly powerful tool to use when answering these questions. At this time, re-forecast the P&L and relevant balance sheet items over the next 12 months.

Check out Harvard Business Review’s: Why Budgeting Fails: One Management System is Not Enough below to learn more about best budgeting practices. 

HARVARD BUSINESS REVIEW

Learn what is wrong with the current approach to budgeting and how to fix it. 

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Missing Metrics:  The Hole in Your Donut

Missing Metrics: The Hole in Your Donut

Good Decision-Making is About Having and Using The Right Information

If you are missing metrics you need when you need it, your business will experience difficulty reaching its full potential. So here are two important questions:

  1. Do you have the view you need of your business?
  2. Are you missing out on important metrics that could make the difference for you?

If you answered “No’ to the first question and “Yes” to the second question, it is likely time to upgrade your firm’s accounting and reporting software.

Accounting Software Solutions Are Often Limited

They may be fine for a certain select range of functions, but they won’t deliver a complete, 360 degree view of your business. And the comprehensive view is essential for optimized decision-making. For example, operational data, which includes everything from energy usage to inventory and beyond, is a critical part of your business. But does your accounting reporting incorporate this data? Can you see operational data side-by-side with your financials in your reports? If this information isn’t incorporated in a visible, intuitive manner, you won’t have the complete picture when making strategic business decisions.

The same is true when it comes to financial depth. After all, there are many layers of financial data that need to be analyzed. Do you have access to real-time up-to-date business performance metrics from any venue? Can you slice and dice your accounting information to make comparisons and tracking even more effective? Or is your accounting software static? Do your reports have limited metrics? Can you only see a sneak peek of your company’s performance, instead of the whole story?

The more flexible and comprehensive your accounting and financial reporting software is, the better. In fact, you can gain a serious advantage over your competitors if you upgrade to a more adaptable, in-depth solution while they’re stuck with rigid, unrefined tools – or, even worse, still using spreadsheets for their accounting. So what software solution should you choose?

Related: Cloud Accounting Software: Ultimate Guide

Intacct Dimensions

One of the software solutions that we employ for our clients is Intacct Dimensions, a cloud-based application that delivers best practice accounting and reporting solutions for companies of any size. Intacct’s accounting and reporting software is based on the notion of dimensions. Multiple dimensions of data provide a deeper and far more accurate picture of your company’s financial situation. With Intacct, you can look at all transactions through eight distinct filters:

  • Department
  • Location
  • Customer
  • Vendor
  • Employee
  • Item
  • Class
  • Project

Integrating all of this information into unified reporting ensures that business leaders have the ability to examine their financial operations from many different angles. Reports can be modified to incorporate any or all of these different dimensions, depending upon what the user is trying to discover. And because of the high degree of integration, examining this wide range of metrics is a simple matter. Business leaders become more agile, more informed and more confident in all of their decision-making.

This isn’t just an accounting issue. There should never be any blind spots or mysteries when it comes to your company’s performance, finances or operations. Choosing the right software solution – such as Intacct Dimension- ensures that you will know what you need to know when you need to know it. 

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Why Excel Can Be Bad for Your Business

Why Excel Can Be Bad for Your Business

Why Do Businesses Use It?

The main reason a businesses still rely on Excel is familiarity with the program and the extremely low cost. When it was first released it had a huge impact on the way businesses operated, as it greatly reduced the time it took to maintain financial records

Today; however, the situation is very different. The business world has changed, but many businesses continue to use it for a multitude of different purposes for which it was not intended, and at which it is not very good.

Can It Be Bad for Your Business?

Close to 90% of Excel spreadsheet contain errors. Ray Panko, professor of IT management at University of Hawaii wrote in his article What We Know About Spreadsheet Errors that “spreadsheets, even after careful development, contain errors in 1% or more of all formula cells… in large spreadsheets with thousands of formulas, there will be dozens of undetected errors”.

The reason why errors occurs with Excel is because every file is created by a person, and people make mistakes. Additionally, the opportunity for mistakes grows as the files get bigger and more employees are involved in editing the file.

There are multiple examples of Excel blunders that have caused businesses billions of dollars due to errors in Excel. Business Insider reported in April that almost one in five large businesses have suffered financial loss due to excel errors. JP Morgan, for example, lost $6.6 billion due to alleged manual copying and pasting of incorrect data with multiple Excel spreadsheets.

How Can You Avoid Errors?

Ask yourself the folllowing questions regarding your company’s use of Excel:

  1. Will the spreadsheet be used by more than 2 people?
  2. Is the information contained in the spreadsheet critical to my business?
  3. Do I rely on this information to make my company or department operate effectively?
  4. Do I need multiple copies of the data for concurrent access or for data security concerns?

If you answered “yes” to any or all of the questions above, the good news is that you can replace Excel with other cost-effective alternatives. Cloud-based and SaaS licensed products have lowered the cost and commitment of replacing Excel to a point that most organizations will be able to find a solution suitable.

Download our free guide to Why Financial Planning Belongs in the Cloud below.

LEARN ABOUT FP&A IN THE CLOUD

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