As the twin crisis takes it’s grip on SME businesses, desperate owners are turning to their trusted advisors to decipher the vast array of issues they are confronting.
Broadly, there are 2 separate problems : How to survive now that the ‘music has stopped’ and how to start up again when it’s safe to press ‘play’.
For many immediate survival is centred around the raft of Government support and stimuli. Jobkeeper payments, PAYG reduction, payroll tax waivers, land tax relief, bank loan freezes, tenancy evictions moratorium, early release of superannuation. Essentially this is a compliance exercise. Fill in an application and wait for approval. This will allow most people to ‘hibernate’ until it’s safe to emerge. Bunker down, cut costs to the minimum, reduce inefficiency, eliminate waste and get some income support if you can.
But starting again is going to be a whole different problem. Things aren’t going to just go back to ‘normal’ like a on-off toggle switch.Some businesses in some industries are going to find their feet much quicker than others. Businesses that rely on consumers discretionary spend are going to struggle.
It really highlights the need to be able to properly forecast. This is not a compliance exercise.
Forecasting is a planning tool. It is a creative process using analysis, estimates and assumptions to predict ‘A future’. (Nobody can predict THE future).
Good forecasts allow you the user to drill down into the granular detail to examine the analysis underpinning assumptions and test their ‘reasonableness’. (things like sales volumes, pricing, wages, materials, capacity, utilisation etc).
Usually the starting point is a detailed revenue forecast that pushes right up into the sales funnel to show, who, what where and when the work is coming from. This is then mapped back against capacity calculations to double check that it’s achievable. Ultimately you need a 3-way forecast, where the Profit & Loss, the Balance Sheet and Cash flow Statement are all integrated, because cash flow is what determines solvency.
Best practice is to run scenarios, of the best, worst and likely case. It forces you to think strategically of the future and gives you the ability to anticipate, evaluate and navigate. This allows you to have contingency plans in place “if this or that happens” to mitigate and seize opportunities, rather than be reactive and hope things work out. (NB hope isn’t a strategy)
A lost of business owners won’t have ever confronted an empty forward order book as they look to re-start. If you’re one of them make sure your trusted advisor has sufficient expertise in forecasting and knowledge of your industry or the likely scenario is that you’ll feel like you’re blindfolded as you fight for survival.
David Dillon is the President of the Virtual CFO Association.
The Virtual CFO Association is an elite peer network, advocating and promoting the emerging Virtual CFO sector within the accounting profession. Collectively the association currently has over 500 years of industry experience, with highly qualified and experienced specialists spread across more than 20 industry verticals. If you would like any more information regarding the Association of Virtual CFO’s, please visit our website www.vcfoassociation.com.au