Hidden Financial Insights Your Business Can’t Afford to Overlook

As the new year approaches, businesses around the globe are gearing up for the annual ritual of financial forecasting and strategic planning. While these practices are undeniably crucial for navigating the year ahead, there's a tendency to miss out on some nuanced details that can truly impact the accuracy of projections. Believe us, we would know. 

In the spirit of making sure your finances for the upcoming year are well taken care of, this article sheds light on often-overlooked aspects of financial forecasting. Going beyond the usual metrics and paths of forecasting income and expenses, these considerations provide a fresh perspective on the intricacies of strategic planning, ensuring that businesses not only survive but thrive in a dynamic landscape. 

1. Revenue

Managing accounts receivables isn’t just about invoices. It is about understanding that there will be peaks and valleys on the horizon, that you will have to be prize-savvy, and that you will need to find ways to keep your customers on board for the ride. Let’s dig into these a bit more. 

a) Importance of Long-term Sales Projections

Understanding the long game is key to having accurate forecasts. Long-term sales projections aren’t just numbers on a spreadsheet but the roadmap for your revenue journey. Think of these projections as having a crystal ball for your business - having this insight will be your secret weapon for making smart decisions about where to invest and how to manage costs. 

Keep in mind that these projections don’t have to be perfect; there are many ways that you can forecast based on historical data. The point is for you to have an idea of what is to come to help you prep for upcoming trends, market shifts, potential growth, or hiccups. If you are able to see those peaks and valleys ahead of time, you will have time to be proactive and smooth them out.

Also, if you know when you are supposed to be getting paid, you can be diligent in your follow-ups to ensure payments are received. 

b) Extended Sales Cycles 

It’s no lie when we say that closing deals can feel like a marathon in today's business hustle. Thanks to more complicated processes, more stakeholders being involved, invisible threats from competitors, or buyers tightening their purse strings as the economy changes, deals take longer to close. Knowing this can save you from financial headaches down the road. 

Longer sales cycles can impact your cash flow and how much money you need in the bank. So, when completing your financial planning, factor in the extra time it takes from landing a deal to cashing in on it. 

c) Softening Prices

As mentioned above, threats from competitors can come in many different forms. Together with economic mood swings, your prices may be the ones that are affected. If everyone is slashing their prices, you may have to adjust to the new norm in order to keep customers. The reality is that when times are tough, people aren’t willing to pay a high price for products, and that can mess with your bottom line. 

Forecasting should be like having a weather app for your pricing strategy. Stay flexible, keep an eye on what others are doing, and be ready to tweak things when the market gets a little stormy. 

d) High Churn Rates

Losing customers sucks, mainly when they result in leaks in your financial boat. With an overabundance of choices, customers can easily walk away and leave you, and your revenue, in a difficult position. In your forecast, make sure that you factor in this customer turnover and have a plan to stop the leak. 

It might mean spending more on keeping customers happy or coming up with new services or products to hold onto them. Furthermore, if you look for past trends, you can anticipate when a customer is likely to churn and boost your sales initiatives to make up for the potential loss of revenue. 

2. Accounts Payable 

Managing your accounts payable is an important aspect of running a successful business. AP is the money you owe to your suppliers or vendors for the goods and services you purchase from them. However, that does not address future projections or the hidden aspects that affect your AP:

a) Strategic Payments

Understanding your payment schedules is key for smooth cash flow forecasting. It helps you plan ahead and ensures you are on top of your financial commitments. By having insight into future bills you have to pay, you can then avoid cash shortages and stay on track of your expenses. 

By knowing when money is coming in (if you followed the advice above), you can make informed decisions on when payments need to go out, aligning them with your cash flow. Smart management of payment timings can greatly impact your working capital, and you will never be caught off guard. 

b) Lengthen Your Payment Terms 

Negotiation leverage can be a beautiful thing, which is why we will touch on this subject more in the next point. However, when it comes to forecasting your payables, adapting the trend of longer payment terms can come in your favor. Be aware of your suppliers’ payment terms and model your forecasts accordingly - you may be able to stretch a payment until your inflows can allow it. 

c) Contingency Plans 

What happens if you do not have enough cash on hand to make payments? Cash flow forecasting should include a backup plan for unexpected cash flow dips, so establishing a contingency plan for cash reserves is a smart move for navigating through tough times. 

Regularly keep an eye on your financial health by catching potential issues early. Be proactive in making swift decisions to address problems before they become major headaches, and make sure you model various sources for cash reserves, such as lines of credit, short-term finances, or leveraging your existing assets. 

3. Suppliers & Capacity

Should you have more or less? That is the question. There are many different “what ifs” when it comes to goods and services, and these are some that you should consider when building your cash flow forecasts: 

a) Relationships with Suppliers

Let’s bring back the topic of negotiation leverage. Your relationships with your suppliers are essential, as they could be the difference between being able to negotiate payment terms when costs change and having no leniency. 

When you want to mitigate rising costs while at the same time preserving profitability, you can explore negotiating long-term contracts with fixed or capped pricing that bring stability. Why not model different options and share your forecast with your supplier? Mutually beneficial relationships can encourage some supplier flexibility. 

b) Shop Around for Better Deals 

Awareness of industry trends regarding costs can also give you negotiating power, further helping you secure terms or costs that work for all parties involved. It doesn’t hurt to foster competition by periodically seeking costs from multiple suppliers and seeing how their terms would affect your forecasts. 

c) Know Your Capacity

This all ties into knowing your expected outflows and inflows. Whether you are a project-based business, a construction company, or even a Finance Pro with multiple clients, knowing how much inventory, services, or manpower you will need to have available is essential. 

By using historical data and analytics to predict future trends, you can then implement systems that would allow you to make agile adjustments based on real-time demand changes. If you can predict that you will have more deals, projects, or clients, then you can predict how much money, product, time, or employees you will need to account for. 

Not only that, but on the people resources side, you will need to account for things such as turnover, training time, and even succession planning. If you are expecting some deals to close, do you have enough manpower on hand? Enough inventory? 

d) Holding on to Inventory

On the other hand, for businesses that center around the distribution of goods, maintaining strategic levels of inventory may help cushion the impact of unforeseen supply chain disruptions. 

For example, with the rising prices of wood, a construction company may want to look into purchasing materials at a wholesale price for larger quantities and hold on to the material for extended periods of time. Would this be feasible? This particular company would have to create a forecast outlining the expected costs of purchasing more materials and keeping them as sitting inventory.

4. World Volatility 

“Dynamic” would be a nice way to refer to the increased unpredictability of today’s global economy. Geopolitical tensions, disruptions in supply chains, and other complexities make cash flow forecasting a real challenge for businesses. Let’s dig into some: 

a) Rising Inflation

Keeping an eye on the rising inflation rates is crucial. Inflationary trends demand precise predictions for effective budgeting, pricing strategies, and overall financial planning, as it will affect purchasing power and the cost of goods and services. 

Ensure you are up to date with your economic trends and include this information in your forecasts. After all, you don’t want to fall short of your projections because you forgot to account for changes in the economic landscape. 

b) Regulatory Changes

Governments play a significant role in shaping the economy. When facing economic pressures like recessions or inflation, expect them to make changes in government spending, taxation, and interest rates. All these regulatory environments directly impact businesses, forcing agile responses. 

Avoid unforeseen challenges by making sure you account for these tweaks in regulations that are meant to stabilize the economy. 

5. Multiple Options 

In the unpredictable global economy, putting your faith in one forecast alone can be risky. Building flexibility into your financial models and adjusting strategies based on multiple scenarios will set you up for long-term sustainability. 

a) Expected / Best / Worst Cases

Don’t rely on a single forecast. Engage in scenario planning, considering all the different outcomes based on all the points we touched on in this article. This approach allows for better risk management and quick adjustments to changing circumstances. 

By having a scenario based on the most expected outcome, supplemented with a best and a worst-case scenario, you can then rely on having a safety net in navigating financial uncertainties. This provides a comprehensive and strategic approach to financial planning, ensuring that businesses are prepared for a range of potential outcomes. 

In Conclusion

The new year is fast approaching, and as a few of our clients have said, “These are weird times.” The global economy is vastly unpredictable, but you can fight this uncertainty by preparing for every possible scenario your business may face. 

So, as you engage in financial planning for the upcoming year, make sure that you approach your forecasting and modeling with a strategic mindset that considers multiple factors. Build flexibility into your financial models and take control of your business in this “dynamic” business ecosystem. 

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