When Should a Growing Business Stop Guessing and Start Forecasting? The Hidden Value of a Virtual CFO
Until financial decisions turn trickier to predict, growth feels exciting. A business may be selling more and more while not being able to figure out what cash they will have next month. Founders will decisions based on experience when it comes to hiring. Instinct also can play a role in inventory and expansion. You can do that initially. As revenue and complexity grows, it becomes more risky. For existing businesses, the U.S. Small Business Administration (SBA) has recommended the preparation of detailed financial projections. These projections can include income statements and cash flow statements.
Warning Signs Are Often Subtle
The need for forecasting seldom presents itself in one dramatic way. Typically builds up over time through a series of warnings. Financial reports are sent monthly, but are late. Funds held in cash vary in an illogical manner. Receivables are outstanding for a longer period than anticipated. No one knows what their impact will be on future cash flow in making a hiring decision.
Predicting numbers to make decisions
Predicting annual revenue is only part of forecasting. A good financial forecast discusses the factors that drive sales and operating expenses. It also takes into account capital expenditure and working capital. Scenario analysis can help to illustrate the results of unexpected scenarios, such as declining sales or rising costs. This enables management to be ready when pressure is encountered. According to CFA Institute, revenue forecasting and working capital analysis are key components of financial modelling. It also emphasizes the importance of evaluating several scenarios by using scenario analysis.
The areas where a Virtual CFO can help
The Virtual CFO brings high-level financial thought to a company, without the need for a dedicated executive. They can be involved in budgeting and management reporting. It can also be a structured monthly process which incorporates cash flow forecasting and financial analysis. But not just to make more reports. The virtual cfo services can therefore fill the space between the day-to-day accounting and strategic financial management.
The key is in the cash flow – that’s where forecasting matters
Not all that profits is cash. Customers may take longer to pay and payroll and supplier commitments won’t change. It can seem profitable, while the business actually has cash flow difficulties. A rolling cash forecast assists in detecting any cash shortages in advance of them turning into a crisis. It also can help with collection and expenditure decisions. A financial advisory source says that rolling forecasts are a key component of good financial oversight for the CFO. Cash flow analysis is also acknowledged as crucial to the comprehension of a company’s future financial place.
The Right Time to Stop Guessing
No universal revenue figure exists that will provide guidance as to when a company will require forecasting support. A more relevant question is when has the complexity of the finances surpassed the founder’s instinctive capacity to handle it? In larger expansion the forecasting is more important if there is a huge workforce expansion. This is true of businesses looking to get funding or go into new markets. A Virtual CFO can establish financial discipline before it becomes costly. With a growing business it’s not just about what occurred. Being cognizant of what may occur next and taking steps in advance.
