By Chirag Shah, above, founder and CEO of Nucleus Commerical Finance and Pulse.io
Data is the lifeblood of all small and medium-sized enterprises. Without it, they wouldn’t be able to get deep and meaningful insights into how their business is performing, better understand their customers’ needs, and identify and respond to key trends in the market.
But one of the most powerful applications for data analytics is being able to forecast for the future. By using predictive analytics tools such as machine learning algorithms or modelling software, SMEs can analyse historical data and make predictions about what may happen further down the line, say in five or 10 years’ time.
Taking into account a host of different factors, they can quickly identify potential customer churn, predict sales growth, or forecast demand for products or services. That, in turn, enables firms to better plan for downturns and periods of high inflation, as well as to find new opportunities to capitalise upon.
Cashflow forecasting
Essentially, there are five main types of forecasting: cashflow, sales, startup cost, expense and demand. The most important is cashflow, which means predicting how much money will come in and go out of the business over a set period of time. The more accurate the forecast is, the smoother the business will run because it’s easier to plan operations according to the money that’s available and where there are shortfalls. That’s critical in light of the fact that 82% of businesses fail due to poor cash management.
Having the right data
It all starts with having the right data available. To ensure greater accuracy, companies need to factor in many 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. As well as the money flowing in, they must also look at expenses, including inventory, rent or mortgages, payroll, tax obligations, supplies and other monthly operational costs, in addition to any large future financial commitments, such as upgrading equipment or machinery.
Regular forecasting
It’s also important to carry out regular forecasts to ensure that they are as up-to-date and relevant as possible. Ideally, SMEs should do one, three and five-year forecasts, keeping track of revenue on a weekly basis. By doing this, they can quickly identify when and which outgoings need to be reduced, as well as prime opportunities to invest in and grow the business.
Modelling different scenarios
Within cashflow forecasting, there are essentially three different scenarios that organisations need to predict. The base case is calculated 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, and finally, the best case, which may include the highest possible revenue growth rate and lowest possible expenses, rates and favourable economic conditions.
Financial forecasting tools
There are many online financial forecasting tools out there that firms can take advantage of to create their cashflow forecasts. They can be customised to show projections over different time periods by plugging in the data from the company’s accounting software and databases. But, above all, it’s key to find a platform that matches the needs of the business.
By being able to more accurately forecast their cashflows, SMEs can start to plan for the future. This last year alone has produced its fair share of economic shocks and that’s why it’s vital for them to keep on top of their finances during these increasingly uncertain times.
