Financial forecasting can be challenging for tech companies because of the landscape’s fast-paced, constantly evolving nature. Technological advancements and changes in consumer preferences can quickly disrupt the market. This can make it difficult to accurately predict future trends and revenue streams. High research and development costs can add to the complication, making it tricky to accurately forecast expenses and profits.
Robust financial forecasting is critical for the long-term stability of tech companies. Only with a realistic understanding of their financial situation is it possible to have a clear growth plan, allowing for informed decisions about allocating resources, effectively managing risk and attracting funding for growth.
An accurate projection of future revenues, expenses and profits is based on careful analysis of financial statements, market trends and a thorough understanding of the company’s products, services, and the competitive landscape. Flexibility is also required to make allowances for rapidly changing landscapes.
How reliable is your financial forecasting?
Whether you’re a startup or an established tech business, you will know the importance of financial forecasting and how this can help with cash flow management. As a result, you will likely have a forecast or budget already in place, but how reliable is it? Would it stand up to external scrutiny?
9 tips to become a master of your own financial forecast
Set out below are nine tips that you can use to become a master of your own financial forecast. Though they have been written with a technology business in mind, they can be applied to businesses of all types and across a range of industries.
1. Review historical data
Whilst this may be more relevant to established tech businesses than startups, your historical data can help you identify trends and provide valuable insight into your company’s performance. By looking for patterns, trends and fluctuations in revenue, expenditure, and profit margins, you may be able to identify opportunities, manage threats and where cash “pinch points” may occur.
2. Monitor your forecasted key performance indicators (KPIs)
You likely know what your KPIs are in your management accounts, but are you tracking these in your forecast, and do you know how you will achieve these in future? Regularly monitoring KPIs allows you to tweak your forecasts and remain responsive to trends and fluctuations in the market.
3. Use reliable data
A forecast is only as good as the information it is based upon. If the underlying accounting records are poor, you can expect the end forecast to be the same. Having good, timely management information means your forecast is based on the most up-to-date, reliable information. That should, in turn, mean that your forecast is much more reliable. With your company having a reliable forecast, you then have something that allows you to make more informed decisions.
4. Take advantage of supporting technologies
Whilst Excel is commonly used, it’s ultimately not built for forecasting. There are much better alternatives that integrate with your accounting software. These applications can help you produce meaningful three-way forecasts (a P&L, Balance Sheet and Cashflow model) on the fly. They make it easy to update for changes in assumptions and scenarios whilst also being much less prone to error. With the right applications in place, the first three tips become easy to do as many of these applications will use good, historical data as a baseline and calculate KPIs for you. Examples of these applications include Futrli and Fathom.
5. Play around with assumptions
If you do have your forecast within an application that allows it, play around with the assumptions and build different scenarios that you can use to stress test your business. By changing the assumptions, you can demonstrate the impact of rising costs, fluctuating interest and exchange rates and then be prepared in the event these come to fruition. For example, to identify how much you would need to increase turnover to maintain margins etc.
6. Review your forecast against actual performance
This can be often overlooked but is quite important as it helps identify if there were any weaknesses in the original forecast. Consider how your performance in the past month was against that forecast, and where did it deviate? Understanding the reasons for these deviations can then help produce more reliable forecasts in the future.
7. Budget for R&D and innovation expenditure
R&D and innovation often have tax benefits. As a technology business, you likely invest heavily in research and development and may already be making claims for tax relief. These claims can lead to significant cash repayments or reductions to the amounts of tax you need to pay. The impact of these in your forecast shouldn’t be ignored.
8. Producing a robust forecast
Tech businesses will often be asked to produce a forecast, especially when operating in a rapidly changing and competitive landscape. Funding can be critical, and having an accurate forecast for potential investors is essential. Your forecast also needs to be presentable. Whilst you may have your forecast in a format that you understand, if it’s not in a format that a lender or investor can easily understand, they may decide to invest elsewhere. The forecast must then stand up to scrutiny with reasonable assumptions that can be backed up with credible reasons. You should be expected to be challenged by large spikes or variances, so make sure you understand what these are before presenting your forecasts.
9. Involve key stakeholders
Forecasting shouldn’t be a lonely exercise. You sometimes need a critical friend to challenge your assumptions, gain fresh insights and validate your prepared forecast. Collaboration across departments means you have a balanced input. If you feel that you are on your own, particularly where you might be just starting up, a trusted advisor can be someone you can share your forecast with.
Mastering financial forecasting is crucial to successful tech companies, and a reliable, robust and credible forecast can be the difference between a company that successfully scales and one that ultimately fails.
Next steps
Financial forecasting for tech companies requires careful analysis, flexibility, and a deep understanding of the marketplace. For more information about mastering forecasting, please get in touch with David Crowe from Menzies Technology Sector Team
Offering the full range of accountancy services, Menzies is headquartered in London (with a network of offices across Surrey, Hampshire and Cardiff), and has a global reach through the HLB network. Described as the ‘best performing firm outside of the top 10’ by Accountancy Magazine, Menzies has over 500 employees and an annual turnover of more than £50m. Menzies is a member of HLB International, a global advisory and accounting network.
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