Usually this is the domain of the Finance team on the basis that they know how to run a spreadsheet and put in ‘what if’ scenarios. However the SME needs to be financially intelligent and literate to be able to understand the consequences of these forecasts and the likelyhood of getting the future wrong.
By demonstrating a full understanding of the nature and complexity of the business, quite often the CEO will have an instinctive feel for the future and have his own ideas what to do, the skill required here is to put these down on paper so that his major Stakeholders understand his thinking.
The key to forecasting, as in any size company is the ability of the business to quickly pick up on trends and react accordingly (sometimes pro act).
When economies are booming and margins are good, it generally matters little whether forecasts are`accurate , especially if they are being beaten, what does matter however is the CEOs or main Boards grasp of the detail that supports the Plan.
The SME’’s relationship with the Bank Manager is crucial, this is probably the major stakeholder and having clear and concise and written lines of communication with the funders is paramount to successful planning, the mains reason being is that this is the first port of call if things go wrong.
It is important not only to understand the profit forecasts but also the fundamental business drivers and where these profits come from. The Banks will manage risk only when they understand it. At the SME level the relationship between profit and cash is usually quite straightforward as the accounting issues tend to be about the correct reporting of transactions in the right period, there are no particular fancy derivative type funding or hedging going on as the usual funds that are provided are usually overdrafts or longer term loans , with distinct repayment and interest profiles.
It is the skill of the CEO, backed up by an equally adept accountant that translates the casual maps of success into a straightforward cash flow model, pausing only to make it clear in the relationship between cash and profit want the timing differences are.
Where SME’s fall down is that they are` sometimes at the mercy of larger organisations and economic conditions over which they have no control, imagine you are a supplier of Marks and Spencers and you get told you will have to wait another 30 days for your payment and the cash flow management becomes more difficult, the knock on effect of debtor management and inventory levels can be quite sensitive.
The other area that requires concern is not so much forecasting revenues, but also forecasting costs, the more astute SMEs will try to have low oerationla gearing, ie a low fixed costs base or at least a cost base that is proportionately structured on a pay as you use basis.e.g, mobile phones.
This is the main area for competitive advantage, the ability to ‘variabilise’ your cost base and hence switch costs off and on dependant on sales is an advantage when we are in SME territory, larger organisations are not so nimble. The fact also that there is a blurring of departmental duties and capabilities within the SME means that peer information is much more readily accessible and therefore marketing /sales/production and inventory budgets cand be done fairly quickly and by fewer people than the laborious information gathering process associated with it’s larger brethren.
This leanness in forecasting means that there is a better understanding of the interrelationship of the business drivers and the ability of the business to understand tacitly what to do when things go off plan.
Working Capital Management becomes so much easier if the supply chain of information is clear, short and visible.
The CEOs and main Boards need an Information system that is equally responsive and simple to understand, so the role of IT in this process should not be underestimated. Data usually flows smoothly at the SME level because it is daily scrutinised by the CEO for trend analysis, even if he does not do this explicitly, he looks at this data often enough so that the providers of the data know what informations is required, the more IT savvy SME will have put IT systems in place that produce this critical data at the magic press of a button.
The cardinal sins of surprises therefore do not tend to materialise so much at SME level because the CEO has a handle on the key business drivers and has sufficient instinct to know when his natural entrepreneurial plans are going astray and his speed and dexterity of response comes to the fore to manage the business back on track. Therefore against this background of micro management, the ability not only to forecast the future but to ensure the business stays within the forecast is easier ( this word is used loosely here ) in an SME.
However ask how a CEO does this and you will find yourselves in the unique position of a CEO lost for words, the reason is simple, you are asking a CEO (or main Board) to verbalise their instincts which is a difficult task for anyone. The ability to forecast the future, although it seems as if the CEO has some telepathic powers is largely based on how well the past has been managed and a lot of the skill set of forecasting is based on past activity.
What A ceo will do is take stock of the present situation, juggle with what assets he has and deploy them as best he can, how this translates itself into a good forecasting model is often debated, but it is the tacit undefinable knowledge of the CEO that drives the accuracy of the forecasting. The capabilities of the SME are equally as enhanced by a process environment that allows change to be made quickly and concisely, the diffusion of simplicity throughout all levels ensures that changes are made with the minimum of fuss and time.
This means that a nimble SME must not only be good at forecasting , but equally as adept at reforecasting, re modelling and have sufficient dexterity to put changes of plans in place. Robust SMEs tend to remain focussed and CEOs steeped in a cash accounting education tend to do better than most, so forecasting is about cash management just as much as profits .