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Reforecasting back on the agenda as inflation bites
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Downturn sends planners back to their forecasts

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With economic indicators shifting in the wrong direction, the country’s finance managers and their advisors are reviewing their plans for the year. How are those reviews playing out?

20th Jul 2022
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The impacts of inflation, uncertainty and weakening demand are beginning to show up in listed company profit warnings, insolvencies and belt-tightening across the UK business spectrum.

The latest CFO survey from Deloitte this week revealed the mood in the UK’s corporate boardrooms. Most of the respondents were unanimous in expecting rises in operating costs, accompanied by falls in discretionary and capital spending.

Nearly nine out of 10 (87%) CFOs expected operating margins to be squeezed over the next 12 months, compared to 71% in the previous quarter. When asked how they were responding to the inflationary pressures, the most common responses were to pass on price rises to customers, strengthen cashflow management and absorb higher inflation through those margin reductions.

Deloitte chief economist Ian Stewart commented: “The chief financial officers of the UK’s largest companies are braced for a recession. Finance leaders have edged towards more defensive balance-sheet strategies, particularly cost control and building up cash.”   

Amber warning zone

Meanwhile, down in the small business engine room of the economy, the indicators are nudging into the amber warning zone, according to new research released this week by Xero.

Using a very simple money in/money out model to analyse “cashflow crunches” among small businesses, the Xero report estimated that UK small businesses averaged 4.5 negative cashflow months per year. According to Xero’s analysis, “One in four businesses in the UK is experiencing more intense cashflow stress, being cashflow negative more than six months each year.”

Furlough grants and Bounce Back Loans actually helped most small businesses improve their cashflow positions during 2020 and 2021, but many of them are finding it harder to weather the subsequent economic slowdown without government aid to fall back on.

As is often the case, adverse market conditions stimulate more frequent budgeting and planning cycles. Since March, we have seen several threads in Any Answers about forecasting software. All these different indicators of economic stress present an opportunity to explore how macroeconomic trends filter through to business planning at the ground level and the techniques accountants are using.

More interest in cost control

Commenting on the growth in mid-market accounting software sales, AccountsIQ chief revenue officer Nick Longden told AccountingWEB: “Inflation and cost of living increases have stimulated more interest in cost control, budgeting and forecasting across many multi-entity groups.”

One reason mid-size software developers were seeing a surge of enquiries was because “these organisations need more detailed cost analysis than they can get from SME bookkeeping systems like Xero and QuickBooks”, he added.

There’s also a deeper focus on spend management, with companies looking for more robust approvals processes and workflows to manage expenses, Longden said: “That focus isn’t so prominent in good times, but is increasingly prevalent now.” 

Insight research confirms growth

AccountingWEB head of insight Julian Green has tracked “slow, but steady progress” of forecasting activity since last autumn, with signs that specialist apps are making inroads among larger organisations and early adopter/small practices in our quarterly insight surveys.

The latest insight survey now taking place includes a section on forecasting and cash management software. While there is growth among specialist add-ons, Green said Excel and the forecasting apps built into cloud accounting platforms still dominate, and are used by 69% of accountants who have taken part in the survey so far.

Xero and QuickBooks Online each gained more than 10% of the responses from forecasting software users in the Autumn 2021 insight survey, less than two years after they introduced basic cashflow tools. Those figures were more than double the levels achieved by specialist forecasting add-ons. In what might be a tacit endorsement of this trend, Futrli became part of Sage’s cloud portfolio in May and is expected to be integrated very shortly into the parent Sage for Accountants platform.

But the accountant’s favourite forecasting tool remains the trusty spreadsheet, accounting by means of elimination for more than 50% of current activity.

John Toon, Beevers and Struthers confirmed this scenario with his observations from the field: “If larger organisations do their own forecasting, rather than getting their accountant or auditor to do it, the majority will use Excel or Castaway,” he told AccountingWEB recently. Castaway was one of the few apps that could produce reliable, three-way forecasts (P&L, balance sheet and cashflow) that are demanded by corporate planners.

“If you drop down to the SME cloud platform tools like Float and Fluidly, they have little presence in that larger company segment, because they don’t have those capabilities,” he added.

In Any Answers, Kacey2015 added some first-hand observations to support Toon’s comments when asking if Castaway would work for them: “Need a three-way forecasting tool for multi-entity and multi-currency. However, struggling to find one that allows forecasting based on additional client unit sales, losing clients (churn) and growing existing accounts rather than a general percentage increase in revenue.

“We use Xero (and a lot of Excel) and don’t have the budget for something like Vena but Futrili, Spotlight, Fathom, don’t seem to tick all the boxes.”

Nuanced view

Rather than countering these assertions on behalf of the SME forecasting software community. Float founder Colin Hewitt took a surprisingly nuanced view. “We’re realising that you can’t be a generic forecasting solution. If it’s too generic, the business isn’t going to be able to live with it in the short-term cashflow space,” said Hewitt. Instead, the tools are gravitating towards different levels of the market and different niches.

According to Hewitt’s anlaysis, the built-in SME forecasting tools were appropriate for very small companies that just needed a basic cashflow projection, while cloud add-ons like Futrli, Fathom and Spotlight Reporting catered for advisory accountants who worked with those kinds of companies. Float has shifted away from the advisory accountant channel and was focusing instead on selling direct to £1m+ businesses, while Oracle NetSuite, AccountsIQ, Intacct and their like took care of businesses that had outgrown SME accounting and planning tools.

“The two sectors that we see growing are project-based businesses and product-based companies who sell via ecommerce platforms,” he said. The latter are now facing rising supplier costs and delays that are causing a lot of stress on their cashflows.

Float is also testing a new project scenario routine that lets users study the impacts of winning and losing projects. “They want to see what happens if they win a bid, or a project gets pushed back due to the economy. We’re allowing them to take a bunch of income and move it back, turn it on and off together to see the results,” Hewitt said.

Not just a template

Back in the AccountingWEB trenches, DKB-Sheffield warned in May that a forecast that is ill thought out, ill researched, and ill planned is little more than a guess. “So often the views of businesses (small... and in some cases, large) is that business plans and forecasts are simply a case of sitting down with a spreadsheet for a couple of hours. ‘Do payroll, process AP, chase some debts, pay some suppliers... and just knock up a forecast.’

“The template (bespoke or bought) is useless if the correct personnel and the significant amount of time is not built into the equation,” DKB-Sheffield wrote.

“Can an accountant forecast – with any degree of accuracy – what sales will be in three years without there being a strategic sales framework or business plan prepared by, or with, the sales team? Can cashflow be assessed without the premises manager highlighting the expected building renovation/repair costs? Is there any possibility of projecting staff costs if HR has not announced their intentions to contract out the entire production team? The answers are invariably ‘no’, but you get some funny looks when you ask the floor managers to help with forecasting.”

We want your opinion. Any accountant can contribute to the findings of the AccountingWEB software reports by completing our regular surveys. This interactive project is community-powered and in return for completing the survey you’ll get access to our insight reports and the chance to win a £500 Amazon voucher. Take part in the latest quarterly survey.

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