The start of a new year is always a time for planning. What lies ahead? For many small and mid-sized businesses, 2022 looks promising, but there are some open questions. Will supply chain hiccups continue, and if so, how will it affect the business? Will the labor shortage continue? If yes, will you have the staff you need to grow aggressively? And how will all of these uncertainties affect my business budgeting process?
As a FP&A professional, all eyes are on you to help plan the year ahead, step-by-careful-step, with enough lead time to avoid pitfalls and seize unexpected opportunities. Your ability to provide expert guidance through your business budget and forecasting process will require you to have a deep understanding of your cash flow. How will cash flow through your business? When can you book it? Will you have enough cash on hand to meet your expenses and payroll?
These are critical issues, considering that of those SMBs that fail, 82% fail because of poor cash flow management or poor understanding of their cash flow.
Fortunately, many SMB FP&A professionals are taking a cue from their enterprise counterparts, and beginning to take a methodical approach to business budgeting and financial planning. For instance, 70% of SMBs have created scenario planning to prepare for the future. They’re calculating the impact of changes in business structure, pricing models and supply changes on their financial statements, including the all-important cash flow statement, so they can make smarter decisions.
And like their enterprise-class peers, FP&A teams in small and mid-size companies have an eye towards automation. A large majority of finance professionals (78%) predict that all future accounting methods can and will be automated. This isn’t surprising; every FP&A professional knows that it’s impossible to project the future of their businesses in Excel.
Change is Here; the Risks are Real
The global economy has experienced numerous and unpredictable changes since the start of the pandemic. After a significant slowdown in March 2020, economic activity has sprung back to life, and SMBs are bullish in their 2022 outlook. But as I mentioned at the top of this article, there are numerous unknowns on the horizon, and therein lies the risk.
A bullish economy calls for aggressive growth, which, in turn, demands business leaders take risks. Growth requires investments in people, capital spending, market expansion, mergers and acquisitions. These are big bets, and to make them, business leaders want confidence in their business budgeting and forecasting. How much can a CEO rely on the numbers in the forecast? The answer lies in its level of granularity. The more granular, the more confidence.
What’s more, the economy has gone through rapid changes in a short order. Business leadership wants timely and accurate updates from the FP&A team, which is a tall order for teams that rely on spreadsheets to project their cash flow and P&L statements. Today’s business climate demands FP&A agility, but pulling together data from multiple sources in order to project income, expenses and cash flow is highly manual and error prone.
Which leads to the next stubborn challenge FP&A teams grapple with: a shortage of time in the day and resources to get the job down. If you don’t have enough people to run these processes it challenges your ability to make the bets that will grow the business.
Red Flags in Business Budgeting and Forecasting
How do you know when it’s time to act? One of the biggest issues is the inability to drill down into the granular details of trends, which isn’t possible if you rely on Excel. It’s not enough to note a variance in your plan; you need to know the underlying cause of those variances so that you can respond. Are sales in a particular region soaring more than anticipated? Is a particular product line outperforming expectations? Are supply chain issues delaying delivery to key clients? If you can’t answer these questions with granular detail, you won’t know when pivoting your plan is a safe bet.
Poor cash flow visibility should be a red flag for every company given that it is a key reason why most SMBs fail. FP&A teams can put together their best assumptions around revenue and expenses, but if it’s not linked directly to cash flow projections and capital needs you’re still driving with blinders on.
Another red flag is not having a single source of truth on which to make decisions. All FP&A teams work with multiple stakeholders inside the company and out to build their budgets. Yet when every stakeholder has different systems, it’s difficult to come up with a single source of truth. Can anyone feel confident when siloed data is retrieved and massaged manually for planning purposes?
There’s one final warning sign: creating forecasts in Excel. FP&A teams that rely on spreadsheets to create their budgets, forecasts and scenario plan are setting themselves up for disaster. Excel is an excellent tool, but it was never meant as a business planner. Spreadsheets demand FP&A teams make high-level assumptions about the business, and it’s virtually impossible to tie these assumptions to cash flow, do adequate scenario planning and modeling. And, you can’t drill down into the details needed to provide meaningful reports to the various stakeholders who need them.
How to Combat Business Budgeting and Forecasting Inefficiencies
Here are four steps FP&A teams can take to address these red flags, and create budgets and plans that are efficient and drive confidence.
#1: Get your budget out of Excel
If you’re still building your budget and forecasts in Excel, find another solution ASAP.
Find a SaaS-based FP&A solution that allows you to create plans at the level of detail that reflects precisely how your business is structured, whether that’s by department, division, market sector or product, as well as the reflect expenses you’ll incur so that you always have an accurate handle on your cash flow.
#2: Connect your FP&A solution directly to your source data
Whatever FP&A solution you choose, make sure it can integrate to your source systems (GL, ERP, CRM) so that data is fed into your models automatically and in real time. Keeping up with the pace of business means having real-time insight into your company’s financials, and providing strategic recommendations to decision makers whenever they ask.
#3: Automate your balance sheet, cash flow and P&L statements
Gone are the days when business budgeting was an annual exercise that resulted in a static spreadsheet. Today’s FP&A teams are asked for robust and living budgets and forecasts on a monthly — and sometimes weekly — basis. The only way to meet this urgent business demand is to automate your Balance Sheet, cash flow and P&L statement, so that all incoming data flows to these documents automatically.
#4: Translate your company’s financial health into action items
Build workflows around your ongoing budget and forecasts so that they alert you to variances and emerging trends, enabling you to drill down into the data in order to take action.
Make no mistake about it: every update to actuals is a cause for action. Are you on plan? If not, why? Who needs to know about these variances? Is immediate action needed, or is a wait-and-see approach appropriate? With the right automation tools, tracking your financials on an ongoing basis is easy, and will provide you with more time to consider what the data means for your business.
These four steps — all of which are reasonable with the right FP&A automation platform — will set finance teams up for success. They will enable you to be more agile, make smarter decisions faster, and get more time back in the day to advise business leadership.
Want to explore these issues in more detail? Watch our free webinar Business Budgeting & Forecasting Mistakes Finance Teams Face (And How to Combat Them).
Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.