Tarka Duhalde, Vice President, Financial Controller, IRIS Software Group

Volatility and uncertainty are still looming large. In late March the Bank of England raised interest rates from 4% to 4.25%. While many think interest rates will peak at 4.5% in Summer 2023, no one knows for sure. Likewise, no one knows what the price of fuel or the price of energy will be in six months, despite the UK not falling into a recession, as announced by the Chancellor in his Spring Budget.

Nevertheless, the high level of uncertainty will not disappear overnight, making the tasks of budgeting and forecasting even more difficult than they normally are, as there are simply so many unknown quantities at play. However, senior business leadership are continuously looking to their finance team for clarity – often asking them to generate accurate forecasts at a faster pace. In many ways, this request makes sense. After all, in a climate of uncertainty, who doesn’t want visibility?

However, generating multiple forecasts can put a lot of pressure on already-overworked finance teams. What’s more, when it comes to budgeting and forecasting, speed and accuracy can be at odds with each other. Too often, finance teams feel they have to choose between turning around an accurate forecast at a slower pace or a less accurate forecast at a quicker pace. Obviously, neither option is ideal.

That said, hope is not lost. If the right tools are in place, it is possible to turn around accurate forecasts at a rapid pace.

Eliminate guesswork and assumptions

Businesses and finance teams should want their forecasts to be as close to reality as possible. Yes, forecasts are about predicting the future, but they’re not magic, they’re science.

Tarka Duhalde

There are many ways to generate an accurate forecast, but the first step should always include cutting out wishful thinking, guesswork, and assumptions. If this isn’t done, businesses run the risk of inaccuracies. The ‘single truth’ is the goal and a wildly conservative forecast is just as incorrect as a wildly optimistic forecast.

Instead of relying on wishful thinking, guesswork, and assumptions, finance teams and businesses should base their forecasting on robust quantitative and qualitative techniques, including strong research, reliable data, and facts. As well as assessing the accuracy of previous budgets and forecasts, looking at the business’ historical data, checking the latest industry analysis, and seeing how the competition is doing. All of this will help get forecasts as close to reality as possible.

Embrace artificial intelligence

In addition, businesses should consider investing in automation, artificial intelligence (AI) and machine learning as the right tools will be less error-prone than humans. On top of this, they can help with eliminating conscious and unconscious bias and will spot data patterns finance teams cannot. They can also vastly reduce cycle times – freeing up team members’ time to focus on adding strategic value.

It is crucial to remember, the aim is not to replace employees with AI tools, rather the ultimate goal is for AI to work with people – helping to optimise the budgeting and forecasting process.

What’s more, the tools are only going to get more sophisticated as time goes on. Businesses and finance teams should seriously consider getting ahead of the curve and adopt these technologies sooner rather than later.

Adopt rolling forecasts

Instead of finance teams just generating a yearly static budget, they should also look to adopt rolling forecasts – ideally revisiting and reforecasting on a quarterly or even monthly basis. This will maximise visibility, giving leaders the crucial insight into how the business is performing in real time or near-real time, allowing more informed business decisions to be made. Especially in more uncertain times, it’s important to stay agile and rolling forecasts can facilitate this.

Whilst static budgets have their place, they cannot adapt to change. For example, if shortly after generating a budget, the business loses a major client or the wider economy takes a turn for the worse, the budget will already be out of date. However, rolling forecasts can adapt to change. In this way, they are more accurate and, by extension, more useful than static budgets.

Once a business is up and running, rolling forecasts can be highly efficient. What’s more, if AI and automation have already been embraced, there won’t be a need to sacrifice accuracy for speed.

If businesses and finance teams want to generate accurate budgets and forecasts during these uncertain times, they will need the right tools, the right strategy, and the right mindset. For maximum visibility, casting aside assumptions, embracing automation, and adopting rolling forecasts are three great places to start.

“Entrepreneurs, particularly those in the supply chain in Europe, the United Kingdom, and indeed the rest of the world, frustrated with the lack of access to traditional financial streams should consider invoice financing,” writes Morgan Terigi, Co-Founder and CEO of Incomlend

While the COVID-19 pandemic negatively impacted many businesses, the crisis was a moment of opportunity for others: As norms related to work, schooling, and life changed in the blink of an eye, many entrepreneurs started businesses to address related needs.

Many of these businesses grew dramatically. Now that the pandemic has settled, however, some of these businesses are hitting a plateau. Despite being profitable, they do not have enough working capital to grow the business further. They only have enough to maintain their current levels of profitability, but nothing more.

Some of these entrepreneurs will seek financing the most common way, via a bank loan. Unfortunately, this avenue will likely be inaccessible to them. Bank loans will favor organisations that have been in business for a long time, not those newly formed within the last few years. They may also require collateral that such businesses will not have right now. Some businesses created during the COVID-19 pandemic may meet the bare minimum requirements and go through the lengthy application process. They will meet with a banker, submit the necessary financial documents, including everything from financial statements to trade references, and then wait. This waiting period is actually the longest part and may encompass anywhere from a few weeks to months. After all this bureaucracy, the entrepreneur will get a denial from the bank. But, they will not be getting any financing.

Such time represents a major opportunity cost for the business leader. They could have spent the same amount of time either focused on the operations or seeking capital that is more friendly to newer businesses.

Entrepreneurs, particularly those in the supply chain in Europe, the United Kingdom, and indeed the rest of the world, frustrated with the lack of access to traditional financial streams should consider invoice financing. Many may have heard the term before but may be unsure how it actually works. Invoice financing is simple. Upon onboarding, exporters upload the export receivable that they want to be factored into the invoice financing platform, which then pays them cash in as little as 48 hours. They are spared the need of having to wait anywhere from 60 to 90 to 120 days to collect in a traditional payment cycle. They get working capital, which can be used to grow their business beyond the current plateau.

Invoice financing is also friendly for importers. Following a buyer-led approach, they can also upload their suppliers’ export receivables that they wish to be paid. Their trade partner will likewise be paid within 48 hours, and the importer gains a longer runway, anywhere up to 120 days depending on the terms, to pay back the platform. The importer can thus enjoy more working capital today, rather than worry about paying off vendors. As a result, they can also focus on revenue-generating activities that grow the business.

Investors benefit from both importer- and exporter-led invoice financing because they can back individual receivables or groups of receivables. Either situation represents a promising asset class that offers stable returns.

While invoice financing is subject to similar requirements as more traditional forms of financing – it is a financial instrument after all – it is arguably more accessible. To be eligible, importers or exporters need to have a trade history with their corresponding trade partner. They also do not need to be corporate (i.e. which is the preferred lending partner of banks), invoice financing platforms generally work with SMEs and other enterprises. It also does not require any form of collateral, so it is friendly to businesses without significant assets that they are willing to take a loan against. Finally, invoice financing occurs off-the-balance-sheet, so it does not saddle businesses in debt at a time they need positive income statements the most.

For all these reasons, I think invoice financing should not just be looked at as a financial innovation. It is very much a social one as well, opening up access to financial streams to entrepreneurs in the supply chain who may otherwise not have had access. Invoice financing, in short, has innovated how we extend inclusivity.