business planning  finance 
Not everything you have heard about financial forecasts is correct. David Underwood argues that approximate and prompt beats exact and slow There are some quite different views about financial forecasts and how to keep the score. One school of thought says you need to know exactly regardless of how long it takes to find out while the other agrees that the approximate position established promptly is all that matters. I go along with the latter view.

In my opinion and from my experience it is better to know your approximate financial position and to establish it promptly than to know the exact situation some months later. If you are following the exact school of thought you may well find that when you have established that you have a problem that it is too late to do anything about it.

If your problem is lack of profitability the delay could well be fatal. If your management insists on the precise financial score then I suggest it is time for a meaningful discussion and a change of approach.

I am aware of a major public company that had an army of staff working on budgets up to five years ahead and monthly reports which even accounted for the paper clips. The information was precise but useless and a change of system resulted in major staff reductions but a major improvement in the supply of timely information for management.

It is difficult to manage without that financial information so the problem is how to get it so you can keep the score. That means that for any business there have to be key performance indicators. Consultants refer to them as K P Is and you may have already heard or read about them. They are actually quite simple to follow.

First though, step back and ensure that you have a meaningful budget for the year. This will cover all income and expenses and should give monthly balance figures for assets and liabilities as well as all the expenses. It is then a matter of comparing your actual cash flows with your monthly cash flow estimates. Variations will show up promptly and in time for you to take action if something is wrong.

For an average New Zealand small to medium business the K P Is should include at least the following.


* Actual invoiced sales V budget for the month.
* Reconciled bank balance V budget figure.
* Are all creditors paid in full?
* If not, why not and how much is involved?
* % collection of accounts receivable V target % and aged analysis.
* Accounts receivable V target total.
* It is then time for the main expense items to be reviewed.
* Gross profit % V budget gross profit %.
* Wage and salary cost V budget.
* Review all expense variations over or under budget by sat 10%.
* Any unplanned capital expenditure?

There may be other readily available figures for you to review such as chargeable machine time or recoverable labour hours. That is however getting down to the detail which you may not need to investigate if the K P Is are all in order. You could seek fully detailed accounts 2 or 3 times a year, twice should be enough if the business is running according to plan.

If there are problems with the K P Is then you will know in plenty of time so you can respond accordingly. One current trendy expression is to “drill down into the detail” when they mean to enquire. Another is “going forward” when they mean in future. There is a window of opportunity to change terminology here!

The real point is that if your cash flow is running according to plan and all your bills are being paid on time then your business should be O K. The question is always if not then why not?

If sales are under budget then you will need to know why. Has the market changed since the budget was done or is it an internal problem? It is one thing for the gross profit to be down but quite a different situation if the gross profit percentage has dropped. You will need to know why and know promptly.

One function not mentioned but assumed is that you carry out a back audit on all work that you price and complete. The back audit will show you what you are doing right and where you are going wrong.

Back audits used with a fair budget and monthly K P I reviews will enable you to keep the score at all times. Remember you need to know the approximate position now, not the exact position three months later. Your survival could be at stake.