Financial forecasting is a simple tool that fast-moving tech companies can use to take control and get some clarity about the challenges and opportunities on their horizon.
Most tech companies know that predicting what will happen in their market over the next few months – let alone the year – is futile.
New Zealand tech companies are often selling products in hyper-competitive, global markets and the potential for disruption from emerging competitors and as-yet undiscovered technologies is ever-present.
But there is an antidote to the unpredictability of the markets and rapidly emerging technologies. Financial forecasting.
Familiarity breeds clarity
Forecasting seems to get written off as, alternately, too complex or too simple to bother with, but it is one of the best tools a company can use to create a more resilient business model.
Companies that make a habit of financial forecasting can build a clear, detailed understanding of their costs and where their money comes from – then they can act on that information.
If that sounds basic, it is. But it’s powerful too. Consider a SaaS company that identifies that 80% of its revenue is coming from just five key customers. If it loses any two of those accounts, it will have cash flow problems. Three of those accounts are in a single sector.
With the facts in front of it, the company can run different scenarios. What happens if its key client sector faces a downturn? How many smaller accounts would address the cash flow gaps? What if a competitor emerges? What sort of resource should be put against retaining key clients? Do subscription periods need reviewing? Is it time to talk to shareholders about a cash buffer?
Finding answers to questions like these and taking action to prepare for the ‘what ifs’ is the easiest step you can take to build a more resilient company.
Forecasting won’t give you powers to predict what the market will do, but you will be far more likely to know how to respond when it changes.
Prepare to grow
Forecasting isn’t just about withstanding financial shocks either. It is a vital tool for preparing for growth and new business opportunities.
One of the most common mistakes we see tech companies make is failing to forecast when their cash runway will run out and underestimating how long it takes to raise capital.
The fallout is two-fold. Running out of cash puts a handbrake on growth plans – giving competitors an opening to take market share – and it puts unreasonable time pressure on the capital-raising process leaving companies in a weak position to negotiate with investors.
On the flipside, companies that regularly carry out forecasting can plan for growth.
Aside from having more time to find the right investment partner, these companies have another crucial advantage to use with investors: accurate financial information.
Investors want to see financial modelling and cash flow forecasting. Any company that can readily share this information – and point to a track record of using these simple tools regularly – gives itself an important head start in the capital-raising process.
For all these upsides, forecasting is still a massively underused tool. Tech companies that embrace its deceptive simplicity will find it delivers some very easy wins.
Marshall Maine is Investment Capability Lead with New Zealand Trade & Enterprise.
With the launch of NZTE Money Matters, companies can access free, uncomplicated financial guidance – including one-to-one sessions with Marshall.
Book in for an NZTE Money Matters one-to-one session or expert panel here.
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