With the end of the financial year almost upon us, it’s a time when small businesses are doing a bit of financial navel-gazing or downright panicking to get all the paperwork sorted in time. Time spent on financial reporting and forecasting will pay dividends down the track.
So irrespective of where you are on the “panic-0h-meter” it’s worth thinking ahead to help your business to improve its financial reporting and forecasting. It may not help you close off the past financial year, but it will sure help you to improve your performance in future years.
Financial planning for success
These days, businesses have to operate in an increasingly fast-paced and interconnected marketplace. The digital economy has created many opportunities by reducing operating costs such as marketing.
The nature of the market creates many opportunities, but to capitalise on them businesses need to make quick and effective decisions.
To find out more, Yes! Online Magazine recently spoke to Luke Brown, Chartered Management Accountant at Busy Beans Accounting who left corporate accounting to start up his own accounting practice dedicated to helping small businesses to grow through better financial management.
“Large firms can employ teams of analysts and accountants to help maximise those opportunities and they often win business away from the smaller firms who were slower to react or didn’t react at all.
“However, small businesses can also gain access to that same information and advice. By engaging with a commercial accountant, they can truly understand the link between their actions and the resulting business performance. They will have the right tools to make the right decisions at the right time,” Luke said.
Small businesses can benefit from having two key sets of reports created – financial reporting and financial forecasting.
Financial reporting helps a business to understand its past performance. This is important because many small businesses only learn how well they’ve performed when their tax accountant completes their annual accounts.
“This is often too late to influence any decisions,” Luke explained. “The opportunities may have already passed, or the risks may have already materialised into problems. A business may have a standard set of annual accounts, but these often fail to deliver any insights into the underlying reasons for a particular performance. They tell a business what happened but not why it happened or how they can do it better in the future.
“Financial reporting translates a plain set of accounts into meaningful, relevant and useful information. It will include additional information such as sales figures, pricing analysis, margin analysis, job profitability reports, customer numbers or marketing performance. This helps a business to understand truly how their actions are converting through into financial performance and ultimately guiding better decision making,” Luke said.
“Financial reporting is also more frequent in nature, usually monthly or quarterly. This helps a business to be more responsive to changes in the marketplace and allows them to learn more quickly how well any initiatives are performing.
Luke related the following example:
A small business launches a marketing campaign and places an advert in a local paper for $150 and attends a trade show for $400. A month later in its financial report, it learns that it has acquired two customers from an advertisement and eight from the trade show. The financial report calculates that it cost $75 to acquire each customer from the ad and $50 to acquire each customer from the trade show. In conclusion, even though the trade show was more expensive, the customer acquisition cost was less. As a result the business can choose to allocate future marketing funds towards trade shows instead of local papers. That’s the power of planning at work!
A tool to guide future performance, financial forecasting provides a link between the current business performance and the desired future performance. “The key to its success is that it bridges the gap in small steps that are both manageable and measurable,” Luke explained.
“Financial forecasting is important because many small businesses want to grow but don’t have a structured plan to guide them. This leads to short-term decision making that is not aligned to a long-term strategy.”
Luke put forward the following example to illustrate financial reporting:
A business wants to double its profits in 12 months but isn’t sure how. It can decide to adopt a strategy of growing its customer numbers. The financial forecast calculates that to double its profit, it will need to acquire 60 new customers, spend $4000 on marketing and hire one new staff member. A properly prepared financial forecast would break this down further into quarterly targets, with each quarter assigned $1000 of marketing spend and a goal of acquiring 15 new customers. The business knows that if it achieves these quarterly targets then the long-term aim of doubling their profit will also be achieved. All short term actions and decisions would then be now linked to a longer term “double profit” strategy.
There you have it – straight from the bean counter’s mouth. Isn’t it time you looked beyond the end of this financial year to your future success?