How Forecasting can Drive Better Cashflow for SMEs

Posted on 25th May 2023

The success of small and medium-sized enterprises (SMEs) depends on many different factors. Data is a key one. When properly analysed, it not only provides them with detailed and meaningful insight into how their business is doing, but it also enables them to better get to grips with their customer’s needs, and see and respond to key market trends.

Above all, data analytics allows companies to forecast for the future. Thanks to the advent of predictive analytics tools such as machine learning algorithms or modelling software, SMEs can now look at historical data and make projections for what may happen in the years ahead.

By assessing a host of different factors, they can soon identify key performance indicators such as potential customer churn, predict sales growth, or forecast demand for products or services. As a result, firms can better plan for downturns and inflationary periods, in addition to seeking new opportunities to capitalise upon.

Cashflow is key

Forecasting can be broken down into five main categories: cashflow, sales, startup cost, expense and demand. Cashflow is the most important. It allows businesses to predict how much money they will bring in and spend over a defined period. The more accurate the forecast is, the better the business will operate because it can plan ahead more easily depending on the money that it has and where there are deficiencies. Given that 82% of businesses fail due to poor cash management, it’s paramount that companies get their cashflow right.

Ensuring accuracy

Accurate forecasting starts with having access to the right data. To make sure that it’s as accurate as possible, firms need to take into consideration many different variables, such as seasonality, terms of payment, the time taken between work being completed and getting paid, and ways to incentivise people to pay on time. But it’s not just the money flowing in that they need to focus on. They also have to look at their outgoings. These can range from inventory, and rent or mortgages to payroll, tax obligations, supplies and other monthly operational costs. It also encompasses any large future financial commitments, such as upgrading equipment or machinery.

Keeping up to date

But it’s not enough simply to carry out a forecast every once in a while. It’s vital to conduct regular forecasts to ensure that they are as updated and relevant as possible. For best practice, SMEs should ideally do one, three and five-year forecasts. On top of that, they need to keep track of their revenue on a weekly basis. This allows them to quickly identify when and which expenses need to be reduced. It also flags up prime opportunities to invest in and grow the business.

Communication is also key to accurate cash flow forecasting. An effective forecast requires input from a variety of different stakeholders throughout the organisation who can provide important figures and valuable insights that will increase the understanding of what drives the numbers. For example, if a company decides to expand into another market, by using real data and figures , they can forecast their cash flow to see if they can afford it.

Assessing different scenarios

There are primarily three different scenarios that organisations need to predict within cashflow forecasting. The first is the base case, which is calculated according to a normal business as usual cashflow forecast. Second is the worst case scenario, which is based on a range of factors including the highest possible discount rate, inflation rate, input pricing and interest rates. Finally, there is the best case, which may include the highest possible revenue growth rate and lowest possible expenses, rates and favourable economic conditions.

Choosing the right tool

Firms have access to many different online financial forecasting tools that they can use to create their cashflow forecasts. By plugging in the data from the company’s accounting software and databases, they can be tailored to show projections over different time periods.

With so many different solutions to choose from, it’s vital to pick one that meets the needs of the business. What may be right for one company may not be for another, even if it’s in the same industry.

If SMEs can more accurately forecast their cash flow, they can start to plan for the future. If the last year alone has taught us anything, it’s to be prepared for unexpected economic shocks. That’s why it’s vital for companies to stay on top of their finances during these increasingly turbulent times.

BIO

Chirag Shah, founder and CEO of Nucleus Commerical Finance and Pulse.io has over 20 years of experience in the financial services industry and a deep understanding of the needs of UK SMEs.

In 2011, he founded Nucleus, a leading alternative finance provider, to offer flexible and tailored solutions for SMEs across various sectors and stages of growth. With an understanding of the challenges that UK SMEs face in the current economic climate, Chirag launched Pulse in October 2022, a free-to-use service that helps businesses and accountants gain insights into financial performance with AI-powered data visualisation and personalised dashboards. Chirag is not only committed to driving growth and innovation in the UK business ecosystem, but he’s also helping SMEs better understand their data to boost their profitability and guide them towards success.