How Forecasting is Unlocking SMEs’ Cashflow Potential
By Chirag Shah, founder and CEO of Pulse a free-to-use service that helps businesses and accountants gain insights into financial performance with AI-powered data visualisation and personalised dashboards
Small and medium-sized enterprises (SMEs) depend on quality data. It’s the key to understanding how their business is performing and what their customers’ needs are, as well as picking up on to key market trends and developments. While many of these applications are useful in their own right, the most important aspect of data analytics is forecasting for the future.
By leveraging predictive analytics tools such as machine learning algorithms or modelling software, SMEs can look at historical data and make predictions about what may happen in the years to come.
By analysing a range of different factors, they can quickly identify potential customer churn, predict sales growth, or forecast demand for products or services. With that information, they can better plan for downturns and periods of high inflation, as well as to seek new opportunities.
Importance of accuracy
Forecasting falls into five main categories: cashflow, sales, startup cost, expense and demand. Above all, cashflow is the most important. It means predicting how much money a business will take in and outlay over a particular period of time. The more accurate the forecast is, the easier it is to run a business because they know how money is available and where there are shortfalls. That’s critical given that 82% of businesses fail due to poor cash management.
Incomings vs expenses
Good forecasting begins with having the right data available. For greater accuracy, companies need to factor in a host of different variables, such as seasonality, terms of payment, the time taken between finishing work and getting paid, and structures for incentivising people to pay on time. On the one side, they need to look at the money that’s coming in. And on the other they must look at expenses, including inventory, rent or mortgages, payroll, tax obligations, supplies and other monthly operational costs, as well as to any large future financial commitments, such as upgrading equipment or machinery.
Weekly revenue tracking
Carrying out regular forecasts is essential to ensure that they are as up to date and relevant as possible. To achieve the best results, SMEs should do one, three and five-year forecasts, in addition to keeping track of revenue on a weekly basis. This enables them to quickly identify when and which outgoings need to be reduced, as well as prime opportunities to invest in and grow the business.
Predicting different scenarios
There are essentially three different scenarios that organisations need to predict when it comes to cashflow forecasting. The base case is worked out according to a normal business as usual cashflow forecast. Then there is the worst case scenario, which is based on factors such as the highest possible discount rate, inflation rate, input pricing and interest rates. Finally there’s the best case, which may include the highest possible revenue growth rate and lowest possible expenses, rates and favourable economic conditions.
Choosing a suitable tool
The number of online financial forecasting tools available that firms can take advantage of to generate their cashflow forecasts is vast. They can also be customised to show projections over different time periods by using the data from the company’s accounting software and databases. But, in choosing a platform, it’s key to pick one that meets the company’s needs.
By more accurately forecasting their cashflows, SMEs can start to plan for the future. That’s vital in light of the last year, which produced an unexpected number of economic shocks. It’s also why SMEs need to keep on top of their finances during these increasingly uncertain times.
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.
