How To Re-Cut & Forecast Effectively In A Small Businesses

 

As we head into the second quarter of the year, it’s the perfect time to look at how your cash is working for you and where your revenue and profit is heading. This is important for all businesses, but especially critical for a scale up or small business.

 

The end of a calendar quarter is a perfect time to review your annual plan and how it has developed over the first 90 day rollout, making it a great opportunity to see:

 

  1. Where you can possibly now reduce spend on activities originally planned
  2. Where you can generate efficiency savings on the things you do need
  3. Where to invest over Q2, 3 & 4 to grow profits in 2022

 

In this article we’re sharing some key areas to look at as you enter Q2 to optimise money, budgets and forecasting towards stability and growth  – plus a process we use to get this done.

 

9 Key Reasons To Re-Cut & Forecast

 

Re-cut & Forecast is an industry term that simply means to plan, budget and predict from where you are at right now to where you expect to be at in a set amount of time into the future.

 

While we can’t predict the future of course, looking at data & metrics of areas like sales, staff and marketing, we can get a good idea of the potential over the upcoming period as well as see what is working and what isn’t within business activities.

 

Changes that occurred in Q1 that will impact Q2 could include:

 

  1. Customer failure
  2. Key members of staff who have left / are leaving
  3. Recruitment and hiring not going to plan – losing essential knowhow, needing more support or a combination of both
  4. Suppliers having difficulties or being impacted by changes and are reassessing their engagement with your business in some capacity. This could include timescale alterations on payment or shipping on imported / exported items
  5. External costs rising, like fuel, international currency exchange or rates
  6. Capital commitments e.g. build up of HMRC debt, debt repayment changes, hardware replacement, stock replenishment etc.
  7. Legislative changes
  8. Tax and Government changes, for example R&D Tax Relief (you can read more about that here)
  9. Industry changes, like how consumers are engaging and purchasing

 

Tracking and maintaining an accurate, strong forecast means that with any unforeseen circumstances, you can adjust your plan so your next steps might change, but your longer term goal and vision isn’t compromised in the process.

 

 

What To Look For At The End Of Each Quarter

 

Top Line Sales 

Review sales data to see what’s selling well and what’s not. It’s essential to understand the reasons why sales might be falling, because if sales targets aren’t being met, this impacts revenue and wider strategy, and could cause other quarter or annual KPI targets falling short – like marketing or business development.

 

Ask:

  1. Are the KPI’s appropriate?
  2. Are the KPI’s right for market?
  3. Do they need to be reassessed based on change in market conditions?
  4. Is one sector doing better than another? If so, what are the reasons for this?
  5. Are there any areas to double-down efforts on, improve or halt altogether?

 

Gross Profit

Any cost changes in delivery of services and/or products will impact gross profit, and if those costs go up, your margin is decreasing.

 

If a company is turning over £2m per year and losing 1% through increased costs, they are dropping c. £19k per year – so it’s best to know this on a month by month basis to adjust sales and marketing activities so your profits grow, not shrink.

 

Where gross profit is being made at a sales person/team level and those costs are built into an ongoing forecast, if something within the process is way off, an analysis and re-cut project makes sure it’s accounted for now rather than over 4 quarters – so you can plug the gaps and find the best solution for the short, mid and long term.

 

Ask:

  1. What is the target for gross profit?
  2. Has this been met, and if not, why is there a variance?
  3. Is the service or product and channel used for sales right and understood by the whole team?
  4. Is the positioning and strategy aligned to the KPI’s and target market?

 

Expenses

Categorising expenses into sub-categories and allocating them to the right budget helps to see a lot of those little expenses that quickly add up to big expenditure over the year. This applies to fixed and variable costs for things like software, sundries, legal costs and recruitment.

 

Critically, it’s important to have a detailed view on any business dependencies and what impact these are having on top line figures.

 

Ask:

  1. What are the changes in fixed expenses that we’re aware of, regardless of start date?
  2. Are there pressures coming from office space rent? Is there a rent review coming up in the next 3 quarters we need to prepare for?
  3. Have negotiations on expenses not gone to plan, resulting in paying more than we wanted?
  4. Have there been increases in fixed hosting or subscriptions costs, or have we needed additional hosting or subscriptions / licences?
  5. Are we hiring at the rate you thought we were going to?
  6. If not, what does that mean for the rest of the year salaries?
  7. Are salaries, bonuses and other compensation where we expected them to be?
  8. Are people leaving the business, and if so, are new hiring costs now needed in the budget?

 

 

Capital Requirements

When unforeseen capital changes or needs are presented, e.g. unforeseen office work, stock damage or hardware replacements, it may require additional incoming capital.

 

Ask:

  1. What is the likelihood of capital withdrawing or not being accessible in the foreseeable future?
  2. Do we need more capital into the business to hit the KPI’s?
  3. Do we have a longer term investment or backing requirement we need to prepare for now?

 

 

General Cash Movements 

Good cash flow visibility equals good financial health and forecasting based on real data gives you peace of mind about what cash will be coming in and what you have in the bank.

 

It also means the business can move when you need it to, you can access funds for unforeseen events and, when planned for efficiently, make savings across the year through paying upfront for things like subscriptions.

 

Ask:

  1. Has there been a slow down in the pipeline for new or existing customer sales?
  2. Has there been an increase in churn rate (likely if Monthly/Quarterly Recurring Revenue is a revenue stream in the business model)
  3. Are suppliers pressing for cash or changing terms so we need to pay sooner than expected?
  4. Have there been changes in interest rates that are impacting on debt facilities?
  5. Is there a wider funding need to help with cash flow?
  6. Is revenue slowing down below anticipated levels?
  7. Is there a contingency and critical runway in place?

 

Next Steps: Our Proven Process

Now we know what areas of the business are potentially vulnerable, we can get to work on strengthening them.

 

Here’s the core of how we do this at Nuvem9, stretching across the whole of the business for a detailed and birds-eye view.

 

We do it this way for ourselves and our clients because it’s based in real-time with real-time data (not the old way of desktop-predictions), so we can see clearly how cash and revenue are working, when we need to make changes and what needs putting in place to stay focused on upward trajectory towards those all essential business KPI’s:

 

  1. Build budgets from the bottom up
  2. Identify core cost blocks
  3. Identify the business non-negotiables
  4. ‘Clean slate’ approach to expenses and costs, so you’re paying for only what brings in value to the business, and doesn’t drain cash
  5. Plan in when pay rises or bonus compensation are awarded
  6. Plan for team expansion for additional staff
  7. Identify any known or possible rent changes
  8. Detail a revenue forecast based on key sales KPI’s and know exactly how many sales are needed to increase revenue to hit them, broken down and trackable by day, week and month
  9. Align marketing KPI’s with sales KPI’s so you know how much traffic and sales activity is needed to generate leads and what each sale is worth (revenue and margin)

 

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Are you in need of business financial advice right now?

Service at Nuvem9 goes beyond accounting. We provide a proactive, value-based service that analyses and interprets key business data alongside financial information in a way that’s clear, transparent & understandable, empowering business owners with tools to make effective decisions towards successful growth.

 

We help ambitious, busy business owners look after their company’s financial health so they have the time & resources to look after their vision.

 

Book a free, no obligation consultation to discuss your businesses financial needs

 

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