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Cash Flow and Financial Forecasts: Why the Difference Matters

Cash Flow and Financial Forecasts: Why the Difference Matters

by | Guidance

When talking about cash flow forecasting and financial forecasting, the two often get confused and the differences get overlooked. We’ve often heard founders talk about their ‘financial forecasts’ when referring to their cash flow forecasts. 

Knowing the difference and preparing two different forecasts will have a substantial impact on how you present your business plan to an investor. Understanding your cash flow and understanding your financial forecast will give you much greater insight into your business as a dynamic entity, not just a collection of numbers on paper.

What Is Financial Forecasting?

When you create a financial forecast, you are creating a prediction or estimate of future financial outcomes for your business, start-up, or project based on revenue and profits, money coming in and out. This is often a useful exercise if you are setting budgets.

What Is Cash Flow Forecasting?

Cash flow forecasting is also about estimating future financial outcomes, but the focus is less on the endpoint (where will you be in 5 years?) and more on the timing of different streams of money ebbing and flowing in and out of your accounts over the next 5 years. This is often used to assess your investment need (cash shortfall) and your ability to cover your costs.

Both forecasts are anticipations of money, but cash flow forecasting focuses on the cold hard fact that ‘cash is king’. Cash is the bloodline of the business, and if you’re not careful, confusing profit with cash can create problems when pitching to investors and securing investment.

Everyone Says “Cash Is King”. So What?

Sometimes it’s easy to think big and focus on the profits. What we sometimes forget to do is look at the reality of your day to day business activity. This is where lack of cash management can be crippling to a business.

When you create a cash flow forecast for your business, you are estimating how much you will have after anticipated (not guaranteed) payments and their timing. You are also looking frankly at the timing to receive your revenue in the bank account (credit you give to customers) and the timing of the costs that you will have to pay either upfront or after a period of time (days of credit). Costs can include:

  • Salaries for employees, freelancers, or contractors
  • Suppliers, for materials, services, or support
  • Other costs, like office rent, travel expenses, conference fees for networking

This list of costs goes on and also varies from company to company.  The point is, you might be rolling in cash in February, but after paying salaries out for 3 months, and with no payments from customers expected until June, your funds could run dry by May. How are you going to mitigate that? How will that affect your ability to deliver your services? 

In worst-case scenarios, poor cash flow management leads to stunted growth, employee layoffs, and even insolvency.

Business owners must have a forward-thinking vision both on their profits (financial forecasts) and their cash flow (cash flow forecasts).

Investors Look at Cash Flow

We have worked with some truly incredible founders who have excellent ideas and a real money-making scheme ready to be kicked into motion. And yet, they have no cash flow plans. They have no concept of the hurdles they’ll face and the inevitable inability to move things forward when they hit six months of no income and still have to pay bills. They also have no clue that investors are also looking at cash flow.

An investor looking at a financial forecast will be able to understand the intended scale of profits and viability of a business in theory and based on your assumptions. But an investor will ultimately focus on the cash flow projections and ask:

  • Can the company actually make money based on predicted incomes and outgoings?
  • How long is it before the company runs out of cash and may need to raise more finance?
  • If this company will make money when will that money be made, and when will that money materialise?
  • Is there a buffer for unforeseen issues that impact the plan?

By asking these questions, an investor can figure out; how much money they’d need to invest; when they’d need to invest it; and whether the company has a viable plan that accommodates for months of no foreseeable income.

Create Cash Flow Forecasts

Writing out cash flow forecasts in Excel can take hours, if not days, of your time. Not to mention the additional work to edit your model to accommodate for the various changes to expected bill amounts and due dates, both incoming and outgoing.

Numberslides uses software that simplifies all these models, allowing you to enter data, generate reports, and adjust and amend your information at a very granular level. This gives you and your investors the ability to clearly see both your financial forecasts and cash flow forecasts. It also gives you control and understanding of what’s coming and going in terms of cash, as you grow your business.

Once you have a clear understanding of the difference between your financial forecasts and cash flow forecasts, you can build better pitches, make better business decisions, and give your business the best chance of survival.

Easy to Use Online Financial Forecasting Software

Easy to Use Online Financial Forecasting Software

by | Guidance

All you need to know when choosing financial forecasting software for your start-up or business

When it comes to financial forecasting software, we often think of Excel as king. It’s a great piece of software that makes the investment world go round. There are, however, two problems that Excel consistently presents when used for financial forecasting;

  1. To use it, you’ve got to understand it. To create forecasts with it, you’ve got to be fluent in it.
  2. There’s no version control between users; so you’ve got to be able to translate different spreadsheets.

Understanding Excel

It takes a good couple of years to master the important tools you need to handle big chunks of data, and work across multiple spreadsheets to produce numbers that say “this business is worth-it, invest in me!”

One small edit can set an entire spreadsheet into a state of #REF! or #NULL! or #VALUE!

Many of us first encounter Excel in its blank form, offering a plethora of possibilities, but no real clear guide on where to begin, how to build forecast templates or what to aim for.

Founders often lean on this software to build their financial forecasts, yet whilst they may be experts in fashion, marketing, gaming, tech, or even fintech, not many come with a degree in Excel knowledge and application.

This means the first of the two hurdles that Excel presents is really quite massive: where do you start?

Excel Alternatives

1. Templates 📏

There are easily over 1,000 templates offering different ways for displaying and calculating your financial forecasts in Excel. A simpler option? Don’t use it. Many advisors simply ‘shoe-horn’ a business into a model that isn’t fit for purpose. 

2. Advisors 🤵

For individuals who can’t find templates and turned instead to advisors, this is a solution of a much greater expense and you will never learn the context or drivers of your forecasts. Months later, a founder returns, requesting updates on their model, and the advisor will usually have to start all over again—for a fee.

3. Google Sheets 📉

Essentially, an Excel with collaboration options, Google Sheets is still as complicated to learn. Plus, the collaboration options are a basic functionality that can actually add more chaos than direction (“who deleted the data out of column J??!”).

Financial Apps

There are some great apps and websites available to help you figure out your numbers and continuously manage them. Because, let’s face it, numbers are never static. They change, one day, one week, one year, to the next. And your financial forecasts and pitch decks will have to change too.

We at Numberslides, offer a much better short-term and long-term alternative. Anyone can log in, add their numbers, and populate their own financial models. There’s no need for financial or Excel knowledge. Instead, the platform is run on simple coding programs, allowing users to input data and quickly work out how much funding they’ll need, or what their cash flow forecast will look like.

The Benefits of Using a Financial Forecasting Platform

There are three key benefits of using financial forecasting platforms instead of advisors and Excel spreadsheets. 

1. Built-in Market Sensitivity Analysis 🔬

This is a really important added benefit: relevant market context. Many assumptions that are made in financial models can be simply plucked out of the air when actually, there’s usually a benchmark for this data that can be found in the market or extracted using other supporting information.

Financial modelling software takes these contextual benchmarks and uses them to offer your financial plan a sensitivity analysis: in the real world, do these numbers look right? Excel spreadsheets can’t do that, and advisors can only offer a static screenshot of the market at the time that they are consulted. Instead, software can continuously assess market conditions and help users benchmark their predicted financial performance against a valuable context.

2. Reduce Human and Software Errors in Financial Forecasting 🙅‍♀️

Even the most adept individuals, including accountants, founders, advisors, and CFOs cannot escape the reality that people make mistakes.

Every spreadsheet can be categorised into one of two types: the ones with mistakes, and the ones where mistakes haven’t been found yet. These can either be human error, or a problem with the software or template. In October 2020, some 16,000 positive Covid-19 test results were lost by the British Government when Excel simply ran out of rows.

Errors in software are not uncommon. Human errors are guaranteed.

Most financial forecasting software uses simple back-end coding and user-friendly front-end data editors that no one can accidentally alter. Some financial forecasting also includes a sensitivity analysis, which helps highlight if you’ve put in a few wrong numbers.

3. Build a Financial Forecast You Can Understand 🔎

It’s one thing to be able to define EBITDA (Earnings Before Interest Taxation Depreciation & Appreciation), but do you really know how it will impact your cash bottom line? Advisors may have insights and some excel templates may include predefined numbers for you to use, but without fully understanding it, your financial forecast isn’t investor proof; one tricky question and you’re left utterly confused.

Give up the Google search and instead focus on your business plan and your numbers.

Financial Modelling Software Saves Your Data, Forever

Let’s say founder Tom finds an advisor Jackie and asks her to build a model for his new business. Jackie builds a model, explains the model to Tom, who loves it, and he goes on his way. Three months down the line, the market changes. Tom needs a new pitch deck backed by updated financial models. He returns to the advisor, who has worked on hundreds of financial models since creating the one for Tom. Instead of simply tabulating some new numbers, Jackie must review the market, review the model, review the business plan, and then repopulate the model. This takes time, and it is likely that Tom will be forced to repeat these steps again in the future.

Financial Forecasting Software Is Expert-friendly

It’s not just founders and CFOs that struggle with Excel daily. Whilst expert modellers may be able to create financial forecasts in their sleep; time and collaboration present two big challenges. Financial forecasting software can reduce the time needed to create a model, with a simple input layout, and also offers a collaborative workspace, allowing modellers to share and build their model collectively.

Financial Modelling Software Is Investor-friendly

Let’s assume an investor looks at 500 pitches a week (at least). Of those, he deep dives into 100 of them. That’s 100 excel sheets, all different in layout, colour, and model. There’s no standardization which means the investor must re-learn how to read each model every time they open Excel. 

Financial modelling software offers the standardisation they need, meaning all outputs look the same, which is greatly appealing to investors who aren’t looking to judge the colours, but really want to understand the numbers. Users of financial forecasting software can share their financial models and pitches, knowing that it makes sense to them and that the investor can get to the bottom line quickly.

10 Mistakes to Avoid When Writing Your Business Plan

10 Mistakes to Avoid When Writing Your Business Plan

by | Guidance

Ever written up a business plan and felt something was missing? Business plans can be tricky at the best of times, and there are several obstacles you need to overcome before you build your best business plan. Before we explore the 10 business plan mistakes that are not all that uncommon, here are three key questions worth answering first

Why do you need a business plan?  What should your business plan look like?  When do you need to make a business plan?

Why Do You Need a Business Plan? 

A business plan or pitch deck or playbook—whatever you want to call it—is a vital tool for any founder or a business owner. Investors interested in your business, new hires looking to join your team, and—most importantly—you need to see where you are taking your business and how quickly you plan to get there.

Both investors and new hires want to know that they are signing up to something that not only has potential but has a realistic roadmap to success, as both parties are taking a leap of faith in you and your business. For you, the business owner, a good business plan can give you a degree of certainty, a clear direction, and the best chances for your business to survive.

What Should Your Business Plan Look Like?

Business plans take on different forms based on who the audience is, the context, and the evolving expectations of the business. Only a few years ago, a business plan was a 30-page document. Now it’s common to see business plans presented as a 10-slide pitch deck. Sometimes, start-ups launch so quickly and gain so much traction off the bat that they bypass doing any plan at all. Eventually, when they can catch their breath, they will need to document their vision, their mission, and where they are going, all in their playbook for the next 1, 3 or 5 years.

When Do You Need to Make a Business Plan?

If you are a new business then before you start your plan it is worth considering the problem your business is solving. Key things to consider include:

  • Is the problem big enough or painful enough that people will pay you to solve it?
  • Are there enough people with this problem?
  • Is anyone else solving this problem?

Answering these questions gives you a sense of the pricing, the size of the market, and the competition you may be up against. If after looking at this you think it is worth committing your time and energy to this business idea, then it’s time to get planning.

10 Business Plan Mistakes That You Should Avoid

(Before we even start it goes without saying that poor formatting, spelling errors and inconsistencies will kill your plan.)

1. Not doing a business plan 

This may be an obvious one, but it’s ridiculously common: having an idea and never formulating a business plan is bad practice. A business plan is much more than a document. When you sit down and actually think about your business and the problem it’s trying to solve, you undergo a process by which you can test your idea, raise finance, build team alignment, and set your business goals. It is an internal playbook that you share externally to raise finance or attract talent. It is a vital cornerstone to your business.

2. Over embellishment 

It is never worth pushing the truth too far. Worse still, stating that you are further ahead than you are is also a bad move. There is a balance between using positive language like “will” instead of “might” (in fact, we would encourage that!) but any over-exaggeration will quickly be identified in the due diligence and undermine your entire plan and risk damaging your relationship with the investor. Stick to the facts, and outline what you plan to achieve.

3. Getting stuck in the weeds 

You have more than likely been thinking about your business for a while (years, if not decades) and hopefully done the research. You are at Chapter 10 of your story, but your audience is only starting on Chapter 1. Avoid jargon, acronyms, and assumptions. Keep it simple, to the point, and digestible. Start from the beginning, and highlight what you want to achieve with your business. 

4. Being the over-optimist

We all want to be the next Slack or Airbnb or get bought out by Facebook but this would probably involve some luck and be your best business case. Whilst it is good to have lofty ambitions, it’s important to remember that presenting best-case scenarios may fall flat in front of an audience who are also tracking the worst business case. Having a balanced view, pre-empting the potential risks and ‘what-ifs’, and offering mitigation will show your audience you are a perfect balance of grounded, realistic, and ambitious.

5. Going to market too early 

You will want to address all the perceived risks in your business plan and make sure you have the gaps filled. This could be gaps in your team, lack of market validation or no financial forecasts. Your business plan offers an opportunity to work to a defined structure and schedule, to help you fill gaps (or at least demonstrate when/how you are planning to fil them). You must get this sorted before you start sharing your business plan. Going out too early with missing parts to your strategy will only limit your success.

6. All strategy, no tactics 

A plan is generally setting long term goals, answering the question ‘where will you be in 5 years?’ or ‘what’s the destination?’. You will outline the broad strategy (the journey) to get to this point, for example; “we will launch in other territories in year 3, then raise Series B in year 2.”

Whilst these steps are a part of the plan, you also need to focus on the short term tactics. What happens in the first 100 days of your business? How are you going to get your first 1,000 customers? Tactics like this show the investor you are in the details as well as having a long-view. These practical tactics also help investors understand that their funds will be put to good use. You’ll be able to show them what the company will look like at each milestone.

7. Spreading yourself too thin 

Your plan cannot be all things to all people. Make sure you work out what is your core means of earning revenue and do that well. Understand the market dynamics, for example, competition, government policy and/or supply chain. It is far better to focus on one business model that is clear and well research than list different business models or broad customer segments. These opportunities may come, but as a start-up, you need to focus on the market where you can maximise traction.

8. Using templates 

Part of your business plan will be your unique writing style. You have to find your own writing style and this becomes difficult when you use templates. Templates might appear to offer some direction on what to write, but actually, they are quite rigid in structure. Some businesses are more complex than others, and to write an effective business plan, you must delve deeper into the business.

Templates are also really commonly used, so they don’t always stand out, and the best ones will have been seen by investors before, just in a slightly different colour. In a highly competitive world, you do not want your business to come across as the same as someone else’s and the same goes for your plan. Use an informed structure but make sure you write the bulk of your plan to suit your unique business proposal.

9. No financial forecasts 

Have you ever turned up to a golf game with no clubs? How about a football match with no ball? It’s kind of impossible to play. Financial forecasts are the ball to your game; the business plan is the narrative for your numbers. Numbers show the investor the ambition and the end game. They don’t have to be spot on (in fact, they rarely ever will be) but your financial forecasts need to be well thought out, well laid out so they’re easy to read and backed by some solid logic.

A few scrawled numbers on the back of a napkin or unfounded determination simply won’t cut it with an investor. Have you confused your profits with your cashflow? (This happens a lot). Have you explained why you need the funding and how it’s going to be spent? (This needs to happy more). You need to have a steer on your numbers to articulate and defend your plan.

10. Writing your business plan once

This might sound bonkers, but you should never consider your business plan finished. Why? Because numbers don’t just freeze, markets don’t stop, and your plan can never be static. A business plan is not a line in the sand nor is it something checked off your to-do list. It is a dynamic tool and serves a purpose to raise a funding round and then is your playbook to reach your next milestone.

As your business grows, you will get feedback from your audience (investors, customers) that make you rethink parts of your strategy. You must take into consideration their views of the risk and potential and you must update and improve your plan throughout your business’s life. It is ever-changing as the world around your business is constantly changing; new technology is released, new laws come out, the year 2020 happens. Such changes will force you to reconsider, update and adapt your plan and your financial forecasts. These may be minor tweaks or full pivots, but either way, your business plan is never set in stone.

Write Your Best Business Plan Ever

To write your best ever business plan, you’ve got to have your numbers sorted. Numberslides can build financial models to support your business plan, plus cash flow forecasting helps give a practical insight to your journey. The founders of Numberslides have worked with founders in all sectors and from all walks of life. At the very basis of the business plan is the need for clear numbers. Will your idea work? Will your product sell? Will you make a profit? Numberslides makes it really easy to answer all of these questions, and get started with building a really great business plan.

How to Secure an Investor for Your Start-up

How to Secure an Investor for Your Start-up

by | Guidance

Securing investment in your start-up can be scary, nerve-racking, and a downright rollercoaster of emotion. When you do manage to secure an investor, it can also be one of the most exciting and exhilarating experiences for a founder. Finding someone who believes in you and your project enough to invest is a great milestone in growing your start-up.

8 Actions to Secure an Investor for Your Start-up

These eight actions are an absolute must for anyone looking to secure an investor for their start-up:

Define Your Strategies for Your Market, Product and Team 

Sounds simple and silly, but this shouldn’t be overlooked. Write out your business plan, draft out your brand brief, think about the market, the product or service you’re offering, and if there’s real money to be made. Evaluate your team; are they a gaggle of passionate people with no clear direction or are they polished professionals, with milestones, KPIs, and a drive to get your business off the ground?

Support Your Business Plan with Your Financial Forecasts 

Forget back-of-the-napkin scribbled guestimates, your business plan needs to have a clear set of numbers supporting your strategy. Do your financial forecasts show your company making money? Can you demonstrate with your projections that your company is profitable in a sustainable way? Can you separately show an investor your cash flow forecast? Without numbers, it’s much harder to secure an investor.

Build Dynamic Financial Projections 

Your financial forecasts are dynamic, responsive, and strong enough to handle all kind of adjustments an investor might make. Investors will want to see what happens when your business costs are higher, the market conditions change, and a worst case scenario hits. Can your financial projections handle that? Do you know your peak-cash-need? Do you fully understand your financing options? Can you adjust your financial model and still be able to understand what all the numbers mean? You must be confident at handling your financial models and presenting them to an investor.

Prepare Relevant Documents for Your Investors 

Whilst business plans may be a simple 10-page PowerPoint, you’ll be unlikely to find an investor that shows more than interest after sitting through such a bare presentation. You need to make sure you’ve prepared all the documents your investor may need to perform their due diligence. That should include financial forecasts (profit & loss statement, cash flow, and balance sheet)), your business plan, a video pitch and a slide deck made specifically for pitching to investors.

Define Profiling Criteria to Select the Right Investors 

There will be hundreds of investors to choose from, but finding the right investor for your business is key. Write up a list of your dream investors, then work through that list and try to understand why they appeal to you. Next, write a list of key criteria that must apply for when you search for investors for your company. Make sure your criteria are reasonable, realistic, and practical. Define and search strategically.

Set up a Process to Address Multiple Investors at Once 

Sending out mass emails and keeping a poor record will only make a bad impression and struggle to secure an investor. Find a way to address multiple candidates at once. Make sure you keep track of what is going on and where each investor is in their journey with you. This way you’re always in touch with them and can anticipate what they might need next.

Understand How Different Company Valuation Methods Work 

Different companies will be valued at varying amounts and different valuation methods will also affect valuation too. Understanding how each valuation method works will enable you to apply these methods to your own start-up. You’ll have a better idea of the changing value of your company, which will likely fluctuate across different methods. 

Understand the Valuation Range for Your Company 

Once you understand that company valuation methods vary, and the valuation outcomes vary too, you’ll be able to under the valuation range of your company. You’ll be able to place your company’s value on a scale and become less attached to a single fixed numbers. You also won’t be caught off-guard if an investor says they think your business values at a lower benchmark than where you’d placed it.

Use Software to Secure an Investor for Your Start-up

Bagging an investor can be stressful, so we recommend that you use software to help you. There are some good options available. For all your financial forecasts and cash flow data, you can use programs to save, sort, and present all your data. Get pitch-ready forecasts, market analysis, and sensitivity tools and demonstrate to your investors that you understand your market and your company’s forecasts.

Why Are Financial Forecasts Important?

Why Are Financial Forecasts Important?

by | Guidance

Financial forecasts are vital to the success of your business. But what are they? And why are they important?

What Are Financial Forecasts?

Financial forecasts are essential tools that allow you to present, analyse, and track the future of your business. Your financial forecast is a vital tool that is at the heart of all your business decisions. Whether you are raising finance, business planning, or assessing a decision, the likelihood is that you will need a financial forecast to support your case.

The main purpose of a financial forecast is to provide users with information about the financial performance of a business. This information is used to assess the financial strength and can determine many core attributes of the business. That is why financial forecasts relate back to an accounting structure to allow quick understanding and deriving conclusions.

Financial forecasts are one of the most crucial tools to succeed in business. If built correctly, your financial projections can be invaluable in understanding, presenting and managing your business. They can help you manage your cash, negotiate with suppliers, build your team, and be the basis of the valuation of your business.

How Many Financial Forecasts Do I Need?

Financial forecasts are not about arriving at a concrete outcome—the numbers are not final—but they equip you to understand the dynamics and relationships within your business and what really drives value. More than anything, they show you that you are not shooting in the dark. You have a trajectory and a target of when and how you will get there.

This means you may need several financial forecasts throughout your business year, as your numbers change, and your purpose for your forecasts change too. If you are trying to secure an investor or figure out your finances after a change in circumstances, then you may need a new financial forecast.

What Are the Reasons to Build Financial Forecasts?

Here are six reasons to build financial forecasts.

Opportunity Assessment 🦄

Forecasts are critical to assessing opportunities and threats.  An opportunity may look too good to pass but do the numbers stack up?  A financial forecast can give you that go / no-go decision.

Business Planning 🎁

To enable management teams and business owners to effectively manage their business and deliver their plan. From building teams, negotiating with suppliers to setting your prices; a financial forecast will give you comfort in the choice you make.

Target Setting 🎯

A business should always be setting targets as this is the measurement of success, if you go beyond your estimations – use forecasting to put your line in the sand. This is also important for your shareholders to show them the direction of travel.

Raising Investment 💸

You need to approach investors with a sound logic and rationale for your valuation and potential. A financial forecast will give you the power to fully articulate your idea or plan. It is important for start-ups to know and understand how the Valuation process works so that they can confidently explain their numbers.

Risk Identification ⚖

Risks are everywhere in business. Financial forecasts help you navigate these challenges by assessing impacts of what if scenarios and ensure that you have enough cash for the rainy days.

Idea Validation ✅

Is your idea an economically viable business? A forecast will enable you to quantify and validate your business plan and business model, assumptions and vision.

Ultimately, a well built financial forecast will enable you to make better business decisions and plan for the future.

Why You Need a Financial Forecast

Without forecasts, you’re flying blind. You are not able to stress-test pricing or look at alternative scenarios. This is where a robust finance model can superpower you and your team to the next level of understanding of the future. You’ll also have a better grasp on the “what if?” scenarios, where things could go wrong. Getting your financial forecast sorted as soon as possible will only bring you better chances of success. Good preparation can be the difference between sink or swim.