Business and Cashflow Forecasting has Value
Do you, as a small business owner, see the benefit of business forecasting?
Do you see how the business forecast helps you to become proactive instead of passive and reactive?
Do you realize that the business forecast allows you to take a look into the business’s future using multiple what if scenarios allowing the small business owner to understand what is going to happen and arming the business owner with multiple strategies ready to implement depending on which scenario becomes reality?
Do you see how commonly asked questions like:
Should I add or cut a product line?
Should I add or cut a location?
Should I add or cut an employee?
Should I Lease or Buy Equipment?
Should I add a truck or van?
Will I need more cash in 6 months?
Could all be answered by simply having a business forecast?
Can you comprehend that you have the ability to solve virtually all problems with business forecasting?
These are all questions I have as a CFO.
And through experience I can guess that most business owner’s answers to every last one of those questions is a resounding NO.
Sorry for the rant, but I just do not understand why the value of business forecasting is underestimated by the small business owner. Fortune 500 companies and large businesses are always forecasting and they see tremendous value in it. To the Fortune 500 Company everything is about what is going to happen next and how can we strategize for what might happen next. Everything is about being proactive because if you are reactive the quality of decisions go way down and the value of your stock and the value of the company go down and people get eliminated! To many small business owner’s who have viable businesses the lack of business and cash flow forecasting will reduce the quality of their decisions and the value of their companies and they will be eliminated. Do you think these Fortune 500 companies would spend the huge amounts of time on forecasting if it was not important, if it did not add tremendous value, if it did not work? It is not valuable only to the Fortune 500 Company because they are big. It is valuable to the Fortune 500 Company because it is an effective way to operate a business!
Many small business owners will say “Gee I wish I saw that cash flow problem coming”. The point is, it would be very likely to identify a cash flow problem in advance with the right business forecasting tools. In addition, you will be able to avoid other problems like for example, inventory problems, because for each level of sales you plug into a forecasting model you will get an optimum inventory and receipt plan. If sales start to slip or increase, you will be able to adjust to a new and different receipt and inventory plan. It is widely known and accepted that the quality of decisions are much better if they are made proactively versus re-actively. Is there such an urgency to simply survive one more day in your business and block all possibilities for planning and for being proactive? Even if you wanted to do that and just survive another day there are part time CFO’s and business consultants out there who can do the forecasting and planning for you in order to give you the immediate and long term picture you need. I know, this sounds very self-serving because I do business forecasting, but as a small business owner who has owned retail, manufacturing and service companies all of my life I constantly relied on business forecasting and strategic planning to run my businesses and it was valuable.
The proper business forecast is a solid predictor of the future not because the forecast or person doing the forecast is some kind of soothsayer or gypsy lady that has ESP, but because one can enter multiple “what if” scenarios covering as many different likely possibilities as one would like. With each scenario a strategic plan can be developed. As any one of these scenarios start to unfold, the business owner can work the strategic plan devised for that unfolding scenario.
One of those scenarios that you want to look at could include something like “what would the financial picture look like if you cut or added an employee, cut or added a location, cut or added a truck, cut or added a product line, leased or bought equipment and what will the impact on cash flow be for anyone of those scenarios.”
And guess what, I have a solution for those small business owners out there who are only worried about the problems of the day and wants to be in reactionary fire drill mode all of the time. For those of you only worried about the problems of today, a business forecast can help identify how to solve those problems that are happening right now! The proper business forecast that prepares monthly projected income statements, balance sheet and cash flows encompass everything that is happening in the business and therefore can solve any problem and/or answer any questions. This includes identifying the best course of action and the softest landing for troubled businesses as well.
A client was having a cash flow problem and there were a number of factors on the surface that were causing the problem. They were:
1. Too much debt
2. Owners Salary too high
3. Selling prices too low
However while doing the forecast for a scenario where sales were flat to the previous year, the forecasted inventory receipt plan that correlated with those flat sales was much less than what happened the previous year. This forecast showed that inventory turns could improve by 1.5 times and this efficiency in inventory receipt and turns would increase free cash flow by $40,000 per year. This improvement would have never been made if the forecast was not done. Furthermore, finding this kink in the armor took pressure off the owner to have to reduce their salary and it took pressure off the business to have to increase prices too much in a competitive environment.
By the way I want to repeat something. The proper business forecast will have projected monthly income statements, monthly balance sheets and monthly cash flows all tying into each other. If your forecast does not have cash flows, then throw it out with the bathwater. It is no good!
Attention Small business owners. See the value in being proactive versus reactive. See the value in answering questions you ask yourself every day, see the value on putting together a strategic plan based on what the forecasts tell you, and for those of you who are just trying to survive one more day, see the value in solving today’s problems today through business and cash flow forecasting.