Connect with us

Cash Flow

6 Ways to Make Financial Forecasts More Realistic

When starting your business unbounded optimism is essential but keep it in check when making forecasts.

John Boitnott

Published

on

financial-management-forecasting

It’s a rare entrepreneur who enjoys working on financial forecasts. Many feel like the time could be better spent on actually developing and running their business. Still, forecasts truly are a necessity. You need them to attract investors, but more importantly they help you develop long-term strategic plans.

Related: How to Tighten Cash Flow Management in a Difficult Economy

Unless these forecasts are fairly accurate they aren’t helpful at all. Inaccurate forecasts can lead to upset investors, mismanaged expenses and, potentially, running out of cash. Here are a few tips to help you make your forecasts as accurate as possible.

1. Use multiple scenarios

There is a strong temptation to be optimistic when forecasting growth. To counter this, many entrepreneurs end up using extremely conservative estimates. In reality, neither is the only option you should forecast. You should devote your predictive energy to at least two scenarios, one optimistic and another cautious.

This is especially true if there is uncertainty surrounding major factors that could impact your business, such as government regulations, new competition, or even overall economic growth.

It can be frustrating to use multiple forecasts. It clashes with the part of our brain that is hardwired to desire certainty and precision. Still, it helps you maintain flexibility in your strategic planning and create more realistic expectations for your investors.

2. Start with expenses

In general, it’s much easier to predict your expenses than your revenues. Start building your forecast model by outlining your fixed expenses, things like rent, utilities and insurance. You can be almost certain these costs will occur in the coming quarter/year.

From there, think about the costs that could fluctuate directly with revenue. If revenues grow by 5 percent, you can probably expect your cost of sales to also grow by about 5 percent.

There will be fluctuations in these expenses, but for the most part they should mirror revenue to a good degree.

Finally, project the expenses over which you have the most control. This is one place where multiple forecasts can come in handy. Identify which discretionary costs you might slash if business is rough, or where you will invest for future growth if you exceed expectations.

3. Identify your assumptions

Any forecast requires you to make assumptions about things that are outside of your control. The best way to manage these assumptions and avoid subconscious bias is by explicitly identifying and writing them down.

The assumptions you should list include how much the market will grow or shrink, changes in the number of competitors and technological advancements that will impact your business.

4. Outline each step in your sales process

Your revenue projections should go through the entire funnel of your sales channel rather than just guessing at a top-line number. You should create projections for each step of the sales funnel, and use that to arrive at the top line number.

As an example, the revenue projection for a pet supply store might involve the following steps:

  1. Identify the total addressable market (i.e. number of pet owners) in the area.
  2. Estimate what percentage of that market can be reached through marketing efforts.
  3. Estimate what percentage of pet owners exposed to that marketing actually come into the store.
  4. Estimate what percentage of people who come into the store will actually make a purchase.
  5. Finally, estimate how much the people who do make a purchase will spend on average.

Related: Healthy Cash Flow. Great, Now What Should You Do With It?

5. Find comparisons

Assess the plausibility of your financial forecasts by comparing your projections to the results of comparable companies. For certain niche businesses, it can be hard to find data on comparable businesses, but at the very least you can compare your projections to your own operating history.

Look at certain key financial ratios such as gross margin, revenue per square foot (for retailers), and total headcount per customer. These ratios aren’t set in stone, but they can be very difficult to meaningfully change.

If your projections include one of these ratios improving by over 10 percent, you might be getting too optimistic. The same goes for when your projections for these ratios are significantly superior to every single competitor in your industry.

6. Constantly re-assess

These forecasts should not be static. Don’t make one at the beginning of the year and then ignore it for the next 12 months. Regularly evaluate how close your operating results mirror those forecasts, and make changes to reflect any new information.

The more up to date your forecasts are, the better prepared you will be to make informed strategic decisions. Also, you’ll become more skilled in the process over time and will correct mistakes in your methods.

Related: The 3 Decisions That Will Change Your Financial Life

 

As you become adept at forecasting costs and revenues, you’ll be more confident about making future projections, even if not all business developments that occur are desirable.

This article was originally posted here on Entrepreneur.com.

John Boitnott is a longtime digital media consultant and journalist living in San Francisco. He's written for Venturebeat, USA Today and FastCompany.

Cash Flow

Should You Buy Second-Hand Luxury Cars?

Not convinced? Read on below for reasons why you should choose a used luxury vehicle.

Entrepreneur

Published

on

second-hand-luxury-cars

As an entrepreneur or business owner, you are likely interested in keeping up your image to current and future clients. This can be done by wearing a sharp suit to meet an investor, ensuring that your office space is kept clean, neat and modern, or by driving a luxury vehicle to a client meeting. Now, a luxury vehicle might sound expensive, but pre-owned cars and used cars for sale provide you with an affordable option for any luxury vehicle.

You will be able to find cars online that will suit your needs and budget. For example, you can search for used cars on a dealership website and find a diverse array of luxury car options. Remember, just because you are looking at second-hand cars, it does not mean that you are compromising on quality.

Additionally, your vehicle finance and car insurance payments will be more affordable if you choose used, pre-owned or second-hand cars. Not convinced? Read on below for reasons why you should choose a used luxury vehicle.

You’ll be getting more for less

Whether you will be purchasing a pre-owned vehicle for company use or for your own transport purposes, you will still be spending less and getting “more” car. Second-hand luxury vehicles are more affordable but you will still be driving a high-quality car. And you might even be able to afford car finance for your dream car if you search for second-hand cars for sale.

Brand new luxury vehicles can often reach exorbitant prices, with some costing as much as R300 000. A used luxury vehicle might only reach R150 000, which is much more affordable. While you might not be getting the latest model Mercedes Benz, you will still be able to buy a vehicle with all the bells and whistles. The lower price tag will also bring with it a lower insurance quote from some car dealers. Be sure to keep an eye on the latest car news to find used luxury car deals in your area.

There is slower depreciation

One of the major issues of buying a brand new car is that it will depreciate almost immediately after you drive it off the sales lot. Some vehicles can lose over 20 percent of their value within the first 12 months of ownership, but this is much lower when purchasing used cars, whether they are luxury vehicles or not.

This means that the car’s value for money will not change as drastically, saving you money in the long run. While a used or pre-owned car will still experience depreciation, it will not be as swift as a new car. You might lose a significant amount of the value of a new car, meaning that if you decide to sell your car after five years, you will be losing a lot of money in the sale. Ask the dealer what the depreciation rate will be for the car you would like to purchase before making a final decision.

You will receive all the same features

Simply because you are buying a used luxury car, this does not mean that you are compromising on quality. In fact, you will still be receiving the same features as a new car but for a lower price. And this includes all the safety features, which are vital if you will be using the car for business purposes.

Some of the features include electric windows, a central locking system, leather seat covers, and a USB and Bluetooth sound system. You will find that even a five-year-old luxury car will have these features and you will be able to have a smooth and comfortable ride. This is especially convenient and cost-effective for business owners who want a company car to suit their image and their budget. You will be able to provide a comfortable car for your employees without overspending.

You will still be covered by a warranty

Many pre-owned luxury vehicles will still be covered by their warranty, which means that any damage that occurs while it is still covered will be paid for. For example, there might still be coverage for dents on your warranty which is useful if you are in an accident or if there is weather damage done to your vehicle.

You could also invest in an extended warranty, meaning that you will be covered when the current warranty expires. Be sure to do some research into what the best options are and ask for one which suits your specific needs and budget. You should also look online for reviews of different warranties to see which will best suit you. Look for a cover that has all the essentials as well as some of the extras which you feel you might need. Speak to your employees for advice on what they feel would be the best option for how the vehicle will be used, if it will be a company car.

Continue Reading

Cash Flow

How To Avoid The 3 Plagues Of The Financially Disabled

The quickest way to make more money is to better manage the income you already have.

Tucker Ferwerda

Published

on

cash-flow-management

How consistent is your cash flow? Seventy-eight percent of Americans live paycheck to paycheck, and American consumers aren’t the only people affected. Many business owners struggle financially. Twenty percent of businesses go under within their first year of operation. People spend the first 18 years of their lives of schooling and trial-and-error, only to still find themselves in a rut for the rest of their lives – unless they master the art of managing money and cash flow.

Don’t become a part of a measly percentage. Rise to the top, and create something that will last. Create something that is evergreen that will also stand up against the powerful winds of the economic world.

If you’re looking to fight the financial epidemic and become financially free, whether you’re an uprising entrepreneur or a seasoned business owner, here are the three plagues of the financially disabled that you need to avoid at all costs.

1. They allow fear to guide all their decisions

Negative emotions will slow down your progress. Avoid being angry, negative, fearful and doubtful. Remove these feelings and replace them with hope, faith, power and positivity. Your vision, clarity and judgment become cloudy when you hold onto negative emotions. This prevents you from staying productive and leveling yourself up.

It’s not easy and will take some time to replace the negative feelings with positive emotions. Be patient with yourself and become self-aware of your daily thoughts. Are the majority of your thoughts negative or positive? Catch yourself red-handed in the act of thinking negative thoughts and quickly replace them with positive thoughts. Doing this consistently over time will change your habits which will eventually turn you into the money-making machine that you already are.

Related: Outsmart Cash Flow Problems With The Right Financing

2. They avoid learning from others

One of the quickest and easiest ways to fast track your success is to get help. Avoiding coaching and proper mentorship from the right people will keep you riding shotgun in the slow lane. Just like athletes need coaches and training to quickly reach the next level, you need to find the right help from those who are anywhere from two to 10 steps ahead of you. Don’t do any more than this. If you find someone who is too far ahead of you, you risk spending way too much time and money for something that is far out of reach.

You can recognise the pioneer by the arrow in his back. Don’t be a pioneer. There are people who have gone before you who can show you the cliffs and roadblocks to avoid. Here is what you should do instead – pay to play. You can either pay someone by exchanging your time or services for their specific knowledge or by paying cash.

This should be someone that you trust, that has consistent results and is doing what you want to do. Follow them for at least two to three months on social media to find out if they are real.

3. They spend more money than apply action

Does this sound familiar? You spend thousands of dollars on different products, services and events only to find yourself still in the same place? You become motivated for a short time only to become extremely frustrated that you’re not going anywhere. Stop doing this. Please refrain from buying too many things all at once. What you need to do instead is follow a 3-step method – scan, soak and apply.

First, scan what you need to learn. Just like I teach my students, learn what you’re trying to learn as fast as possible without trying to understand everything. Next, you need to soak it in. Learn what you need to learn for understanding and context. You will notice that you are understanding more, and you’ll catch things that you missed on the first scan of the information. Since you’re understanding more, now is the time to apply what you’re learning. Take time, be patient and apply the steps you’re learning. Do this repeatedly until you’re consistently taking action on what you learned.

By avoiding these three plagues, you’ll instantly start to notice yourself getting more done with the time that you have. This will help you stay on track to becoming financially free and living the lifestyle you want. The best time to start was yesterday. The second best time to start is now.

Related: 6 Things You Need To Know About Profit And Cashflow

Do your future self a favour. Pick one of the easier steps above and start working on it. After you feel comfortable with a step, pick the next best. Then complete the last step, and you’ll start to see the cash flow coming in easier and more consistently.

This article was originally posted here on Entrepreneur.com.

Continue Reading

Cash Flow

The Future Of Finance: Are Universities Prepared?

Producing graduates for the world of finance is an expensive, specialised and time-consuming business. Can universities keep pace with the requirements of a rapidly changing industry?

Entrepreneur

Published

on

graduate

Financial services needs a highly-skilled workforce and higher education institutions are struggling to keep up, especially as persistent technological progress disrupts financial institutions and the markets and societies in which they operate.

At the heart of the problem lies a traditional university system that can only produce a relatively small number of graduates for the sector through programmes that may take three to four years to complete. To compound this, universities are expensive and highly selective, which effectively bars many from getting the training they need.

Professor David Taylor, Director of the African Institute of Financial Markets and Risk Management (AIFMRM) at UCT, is considering the long-term. He doubts that the current structure and cost of a traditional postgraduate degree is either effective or sustainable.

AIFMRM is one of the country’s pre-eminent postgraduate training facilities offering three specialised Master’s degrees that produce roughly 60 highly-skilled graduates for the financial services sector each year. The Institute’s MPhil specialising in Mathematical Finance was recently ranked 59th worldwide, and Taylor says that AIFMRM works closely with industry to ensure that the graduates they are delivering are aligned with industry needs.

“We know that AIFMRM’s offering is excellent for current financial industry needs,” he says, “but as a forward-thinking institution, we need to be contesting the status quo too. Perhaps it is time for industry and educators to assess what will be needed in the future and to find a model that will be affordable, accessible, efficient and sustainable.”

 Is a traditional degree sufficient for an exponential world?

Akin to Taylor, Colin Iles, consultant and CxO of the Absa Equinox Leadership Centre, believes the traditional degree system may be too slow to respond to changes in any industry. “Educational content has to be curated in a safe and structured way, with approved credits and standardisation – it is a slow system, and there is a danger of taught-content falling behind what is relevant,” he says.

Iles suggests that some of today’s necessary skills have already deviated from those acquired in a traditional degree programme. He says, “The FinTech movement has given rise to thousands of small entrepreneurial companies trying to solve various problems in unique and differentiated ways. Instead of a comprehensive degree that tries to cover every economic model and mathematical proof, you may become more relevant, quicker, by focusing on what you need to learn for that particular space and time. Then apply your knowledge and learn faster by actually building something in an entrepreneurial environment.”

Iles believes the way forward involves re-defining the purpose of the modern university. “If its purpose is to prepare people to be valuable citizens in the global economy, then the traditional university model, which has been in place for hundreds of years, may be outdated for a world that is exponential.”

He adds that universities could offer more customised, shorter sets of focussed learnings, at scale, online. “Even in complex topics, online learning is proving to be highly effective, with rapid feedback, self-paced learning and class interaction.”

Online education is a rapidly growing field. Class Central, which curates a catalogue of Massive Open Online Courses (MOOCs) recently reported there are currently 11 400 MOOCs provided by over 900 universities, catering to 101 million students worldwide. Business and technology comprise almost 40% of the available courses. There has also been a concurrent increase in online degrees.

Blended and flexible offerings may be the solution

CEO of edX, Anant Agarwal, believes that future-proofing higher education starts with re-inventing the degree. In a recent Quartz series on the future of college, he predicted that employers will soon be searching for what diverse skills people have rather than what degree they possess. So, programmes need to become more flexible.

Agarwal imagines a future where students could, for example, combine humanities skills with tech skills, or analytical skills with design skills – building a degree for a customised skill-set. Smaller, modular credits could combine into a degree from a variety of universities.

“This will be good for higher education institutions. A college or online platform could specialise in certain subjects and offer the components of education their instructors truly excel in. When each university can focus on what it does best, both the educators and the educated will benefit,” says Agarwal.

He also notes that students pursuing on-campus degrees will benefit from this model as they will be able to augment their education with specialised, online modular content from other institutions.

Kumeshnee West, Director of Executive Education at UCT’s Graduate School of Business, agrees that technology can augment face-to-face learning – but not replace it. She advocates a balance of online and classroom learning – especially when it comes to the development of soft skills and emotional intelligence, which are key strengths needed in the workplace of the future according to the WEF Future of Jobs Report 2018. 

The rise of life-long learning

Gert Kruger, Chief Risk Officer at Rand Merchant Bank, believes that institutions such as AIFMRM that provide multi-skilled graduates from a variety of academic backgrounds are the first step in keeping pace with what industry needs.

“Also, we need to teach people how to think and how to learn new skills all the time. Possibly teaching more of the soft skills – collaboration, creativity, flexibility and adaptability – may make people adaptable enough to continue learning and re-learning. Organisations need to re-skill people with higher frequency than in the past. Importantly, life-long learning needs to be organisation-wide.”

He adds that the financial industry is continually evolving, but it is challenging to anticipate how organisations – and the skills they require – need to change. However, one thing is clear – “if we do not evolve, we will stagnate. Organisations need to keep abreast of change by making ongoing incremental refinements.”

This is true for universities as well, says Professor Taylor. “Universities are well placed to use their resources and deep expertise to build on what they have, to remain relevant in the future.”

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending