Today, small businesses in Australia are experiencing unparalleled challenges. The combination of high interest rates and inflation is placing enormous strain on millions of Australian enterprises that are still recovering from the impact of the pandemic.
According to data from the Australian Securities and Investments Commission (ASIC), in the four years from June 2019 to June 2023, one in three Australian businesses permanently closed its operations. The figure was even higher for sole proprietors - the smallest business type - who have just a 41.5% survival rate. Notably, in the last 10 years, 65-70% of businesses that entered insolvency were small businesses with fewer than five full-time employees. Collectively, these statistics paint a stark picture of the challenges small businesses face.
During times of economic difficulty, financial forecasting has the utmost importance, as it helps businesses achieve financial stability and make informed strategic choices. Financial forecasting serves as an invaluable instrument enabling business proprietors to anticipate potential scenarios, discern patterns and pivot their attention towards adopting further growth. As we enter 2024, here are crucial components that small businesses ought to integrate into their financial strategy to fortify their operations - whatever the year ahead throws at them.
Where to begin with financial forecasting?
At its most basic level, financial forecasting is what allows businesses to take a proactive approach in planning for the future rather than reacting to circumstances. This practice begins with examining historical data from within their business and combining it with external market trends to anticipate potential financial scenarios. Understanding the intricacies of financial forecasting is significantly important for small businesses, as it serves as a navigational tool for decision-makers in budgeting, allocating resources, and managing risks.
For small business owners, dedicating time to understanding and then building a financial forecast for their operation is imperative. But what specific components should you include?
What are the essential elements to include in a financial forecast?
A robust financial forecast includes many crucial elements, but should also be built with the specific nuances of your business, its structure or industry in mind. For example, you might not need to factor in changes to minimum wage or employer insurance or tax if you’re a freelance business that doesn’t ever intend to hire an employee.
Generally, a forecast should include anticipated revenue streams while meticulously estimating various expenses like operational costs, taxes, payroll, and other overheads. Take into consideration seasonal fluctuations that can significantly influence businesses. For instance, summer months are popular periods for tourists to travel, meaning an influx of money for businesses operating in the tourism sector. Unfortunately, these months are followed by lull periods for the industry which can mean businesses deal with slower revenue. Forecasting these ebbs and flows is essential.
However, the most effective financial forecasts look beyond internal considerations and include external factors such as market fluctuations, regulatory changes, and global economic trends. For instance, the recent COP28 global assembly addressing climate change primarily focused on how the nation can achieve Net Zero and significantly reduce fossil fuels rapidly. In turn, this affects small businesses, particularly ones reliant on fossil fuels, such as the manufacturing or logistics business. It can negatively impact the businesses' sales as more consumers look for sustainable forms of services in an effort to reduce their fossil fuel usage. Taking this into account when drafting a financial forecast improves the accuracy of your forecast, allowing for a more detailed understanding of potential scenarios.
What steps can you take to strengthen your business in 2024?
As we approach 2024, adopting a proactive approach is vital. Utilise technology and tools to streamline your financial operations. Look into software solutions or platforms, for example Zoho Finance, a tailored platform for data analysis and forecasting, which helps boost efficiency and accuracy while saving time.
Regularly revising, refining, and updating financial forecasts is crucial to keep pace with changing market trends. Seek guidance from specialised financial advisors or consultants catering to small businesses. Their insights and customised strategies offer invaluable support in aligning your business vision with financial goals.
Does adaptability offer a competitive advantage?
The dynamic - and often volatile - nature of the business environment demands continuous adaptation. For your business to thrive, adaptability and proactivity must be embraced as core competencies. Financial forecasting helps businesses achieve this. Develop multiple outcome scenarios based on market trends pertinent to your industry. For example, retail businesses are expected to experience a notable surge in sales during the holiday and gifting season, followed by a decrease afterward as consumers shift focus to saving money. A financial forecast should be used by retailers to maximise those peaks and navigate those troughs.
A financial forecast goes beyond just completing a task. It's a commitment to your business, fostering ongoing financial stability and growth. As a small business owner, dedicating time, resources, and effort to compiling your financial forecast will pave the way for success and stability in 2024.