For many of us, Christmas is a of year is one when we're looking forward to winding down for a few weeks, but for some businesses Christmas is actually one of their busiest periods in the year.
December and January are, however, typically very disruptive for many businesses, particularly as staff go on annual leave, offices are closed or the summer holidays mean that some businesses run on skeleton staff.
This can often translate into a cash crunch for a lot of SMEs once they return to regular trading in the New Year and realise that they haven't managed their cashflow well enough. The danger of not keeping an eye on the bottom line before Christmas often translates to a poor cashflow by February.
Proper forecasting involves a three-way calculation: Profit and loss, balance sheet and the resulting cashflow forecasts.
While many small business owners use tools such as back of envelope cash flows, Excel or Google Spreadsheets to prepare forecasts, it's a largely inefficient way of keeping tabs on actual data against budget. Much of the data needs to be collated and prepared and that may mean your forecasts are hard to keep up-to-date. Apart from being fairly time-intensive to manage, there is a greater risk of mistakes: errors in formulas can take hours to find and it can mean costly intervention to get it right. Forecasts can get out of date very quickly when your actual results do not meet the budget.
Tools like Winforecast and Castaway have made forecasting much easier, but can still be cumbersome to use, which is why we're turning some of our clients on to Xero
or other online accounting resources. Online accounting tools mean that small business owners can save a lot of time, effort and handwringing by having automated reporting, data collation and simply having better visibility of their financial information. But it's the add-on applications such as the cash flow forecasting tools that are really starting to have an impact on real time decision making.
Recent advances in online accounting technology have vastly improved the capability to see at a glance where you're likely to run into issues in your cashflow, particularly as forecasting tools have improved.
Activities such as staying on top of day-to-day transactions are far simpler, bank reconciliation is made quicker thanks to bank feeds and the reporting tools have become far more sophisticated. The effort in collating all of this information is considerably less since much of the work is being done for you in the background via bank feeds, data management rules an automated reporting.
From a cashflow and forecasting perspective, having this sort of information at your fingertips can make managing more disruptive periods like Christmas far easier, however it can also help your accountant to steer you in the right direction with appropriate advice.
There is a growing number add-ons in Xero that allow for efficient focus on real-time forecasting rather then add hoc or periodic forecasts. Some of these add-ons are developing business smarts, an example of which is the ability of the forecasting tools to review the historical data in Xero and provide historical creditor and debtors days to be used in the forecast model.
One such Xero add-on is CrunchBoards. CrunchBoards allows for multiple forecasts ("boards") to be developed and monitored on an ongoing basis. The forecasts are synced with XERO (3 times per day) to provide a constantly updated position as data changes in Xero. In addition, an autopilot function allows for you to be automatically be notified when certain KPI's are not met (i.e. if debtors balance exceeds certain limits).
If you're ready to get on to cloud accounting for your business or need a confidential chat about cash flow issues you're currently facing, please contact our team on 02 9957 4033.
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Last updated December 2014. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.