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Why Successful Business Owners No Longer Rely on Historical Financial Reports

Posted on 3rd June 2016 in Forecasting

Written by Hannah McIntyre

Successful Business Owners no longer rely on historical reports, instead combining the power of the Cloud to look to the future and monitor the present and past

There are two main types of financial reporting: historical reporting, which looks back at past financial performance, and business forecasts, which proactively look ahead to future financial performance.

Sadly, up until recently, combining the two has been a manual, time-intensive process which, as any small business can identify with, means it goes on the to-do-list but it stays there too. FUTRLI changes that.

Historical Financial Reporting

Historical financial reporting is the preparation of traditional financial statements – the balance sheet, income statement (or profit and loss statement) and cash flow statement.

For small business owners the main drawback of financial reporting is that it encourages you to look back on past performance and rely on this data to manage the business. This means you are always looking backwards in order to make decisions about the future, so you’ll never see what’s coming up on the horizon.

If you have great support from your accountant then they are, at least, trying to provide you with monthly financial reports. But too often even these are received seven days or more from month end. As a business owner, you are in reactive, not proactive territory. With unstable economies, competitors and staff issues, there is already enough to focus on without making critical decision-making harder for you.

Take, for example, the infamous financial calamity by the SuperGroup’s ex-CFO Chas Howes, best known for the Superdry brand. An erroneous ‘plus’ sign rather than a ‘minus’ figure found in the financial forecasts for the group’s wholesale business resulted in financial errors that amounted to some £2.5 million, and was a key reason for the retailer warning of a shortfall of about £8 million in its forecast annual profits of 2012.

How can financial forecasting make it easier?

Financial forecasting, or predictive future reporting, is the preparation of scenarios and forecasts based on objective and supportable assumptions. Not reviewing and using your financial data to drive your business forward is the equivalent of running your business in the dark.

 

Cash Flow

 

Scenario planning, if made easy, is an extremely rewarding experience. It’s hard to always feel as though you’re on top of your business – even as a manager on the ground, there is always so much more that can be done to make it better. Scenario planning allows you to think through different outcomes and be prepared for different eventualities. It also provides more value to the running of a company by enabling both business owners and executive management to collaborate on the future of the business and be more proactive in their financial operations and daily decisions.

How do forecasts work alongside budgets?

If you set an annual budget, you’re putting a stake in the sand for what you expect your expenses will be in the next 12 months or how much you predict to generate in revenue. Budgets typically relate to last year’s performance, which is of course hard if you’re just getting started, and they are optional.

The cash flow forecast and associated scenario planning is particularly important and, if you create one forecast, we recommend this is it.

By projecting your future cash flow you can identify and plan for future cash flow shortages well in advance. Cash is the lifeblood of your business so whether that includes obtaining a loan from the bank, reducing stock intake or increasing seasonal promotions, the sooner you can anticipate this financing need, the better prepared you are and the healthier your accounts will be.

However, so much more can be gained by looking to the future and preparing for it. Scenario planning takes the humble forecast up several gears to a working forecast and versions that visualise ‘what-ifs’. It’s a virtual, forward-thinking business plan. Whereas the budget may have shown that you need to sail through an iceberg, the cash flow forecast will highlight where you are today so that you can steer in a different direction by reacting to your business needs. The forecast is for the immediate future.

What if we Expand

A great example is Moneypad, an accounting firm that applied for business financing using FUTRLI. They later set up Boards (a live Dashboard) to show the client how they are trending against their projections on a daily basis. What’s more, the whole team are involved and taking responsibility for the figures. You can read that case study here.

Why you should stay connected to the market around you

There is so much new technology entering the market to make businesses more efficient. As a business owner, keeping an eye on TechCrunch’s Start-Ups list is one of many ways to track it and keep ahead of your competition. You need to be able to see, react and be part of the ride. If you’re looking at 12-week-old data to run your business and not scenario planning for the future, what is this costing you? And how is your competitor using that to their advantage?

And it is important to forecast not just the expectations of the best scenario but also the worst scenario. Forecasting isn’t based on your business performance and predicted performance alone, but also that of the market around you. You need to know your customer base and competition inside out.

Flexibility is key to running a successful business. Having financial foresight not only keeps you on top of your own business needs, but also helps to keep you one step ahead of your competition. Challenging your accountant if they don’t meet your expectations is in the best interests of your business.

How to make your employees accountable for their figures

Future predictive reporting may also include critical success factors (CSFs) and key performance indicators (KPIs). These are the essential areas of activity that must be performed well if you are to achieve your business objectives.

If your management and key personnel are used to focusing most of their time and attention on historical reporting instead of business forecasting, you can impart some invaluable knowledge by helping them to understand the difference — and then shift their attention to focus more on the latter.

By enabling your staff to achieve their own business goals and KPIs, you offer empowerment, accountability, and motivation in the workplace, which in turn leads to good team morale. Keeping staff morale up is a frequently overlooked aspect of the business owner’s role. The mental wellbeing and general happiness of your employees are important contributing factors to the general success of your business. Unhappy employees are unlikely to be productive employees, and this will have a knock-on effect on your company’s prospects.

It’s not where your business has been, but where it is heading that counts. Financial forecasts allow owners to see where the company is compared to targets, and provides more options to fine tune and adjust the company’s course in the future. It’s about running your business with your eyes open. And that means re-forecasting on a regular basis.

The main benefit of FUTRLI forecasting, of course, is that the data is received in real-time – it is ‘live’. This makes it more actionable, and business owners can respond immediately to what is happening on a day-to-day basis. This means identifying both risks and opportunities, with no time-delay affiliated with the figures at all.