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Analyzing Employee Utilization Rates to Drive Profitability for Professional Services Firms

Analyzing Employee Utilization Rates to Drive Profitability for Professional Services Firms

How utilized are your employees? What percent of their time is being spent working on projects that are not billable to the client? How much is that costing your company in productive capacity? If you do not know the answer to these questions, you could be missing out on potential revenue benefits.

For service-based organizations, analyzing employee utilization is imperative. Knowing where and how employees are spending their time enables professional services firms to:

  • Appropriately set their rates
  • Properly assess how much to invoice clients accounts
  • Decide what to pay their employees
  • Determine if they are over or understaffed

Calculating Employee Utilization Rates

The resource utilization rate is a balanced relationship between billable hours and working hours available and is a key metric of employee productivity.

For example, if there are 168 eligible working hours in the month of May and Penny spends 100.80 hours on billable client projects then Penny’s utilization rate is 60%.

Billable Hours / Eligible Working Hours = Utilization Rate

Now let’s say that Penny’s annual salary is $50,000, or $4,167 per month. In the month of May, she spends the remaining 40% of her productivity time on business development efforts (10%) and general and administrative (G&A) tasks (30%). That would mean the company is paying Penny $1,250 in May to work on non-revenue generating processes.

Monthly Salary x Time Spent on G&A (%) = Employee Cost

If this general and administrative time is benefiting the company then it may be worthwhile. Otherwise, this time could be used for other work, clients, or spent attending networking and other events to help grow the productive capacity of the business.

If Penny were to increase her utilization from 60% to 80%, her general and administrative employee cost would decrease to $417 per month – increasing efficiencies AND generating additional revenue.

Improving Employee Utilization Increases Profitability

From a revenue perspective, let’s assume that clients are billed at an hourly rate of $150. At 60% utilization the company is making $15,120 in May; however, 80% utilization would bring in $20,160, or $5,040 of additional revenue. Furthermore, if you have 5 employees who can each increase their employee utilization rate from 60% to 80%, you could generate an additional $25,020 of revenue per month.

Higher Utilization = Increased Profitability

Using Utilization Rates to Guide Business Decisions, A Case Study

Earlier this year, Signature Analytics was hired by a professional services firm in San Diego to provide outsourced accounting services. In addition to performing monthly accounting maintenance and bookkeeping services (preparing financial statements, balance sheets, income statements, cash flow statements, etc.), we put together a Utilization Summary Report so the client would have visibility into their employee utilization rates month over month.

The metrics report revealed that in the month of January the company’s average utilization rate for billable employees was 60% resulting in a $95k loss for the month. In February, average utilization was 63% indicating a consistent low utilization rate for the company. To show how utilization rates impacted the bottom line, we also compiled an “if-then” summary report which revealed that increasing average utilization to 75% would generate a profit of $130k for the month.

Using this utilization percentage information, the company decided to make personnel changes in the month of March that would increase their profitability. This included letting go of an underperforming non-billable sales associate. They also replaced a billable-time employee with consistently low utilization with a new billable employee whose skills capacity could be better utilized by the company. Additionally, the firm set personal billable utilization goals for every employee to help encourage the staff to improve productivity and maximize billable projects and hours.

Following the changes, average employee utilization increased to 76%, resulting in a profit increase of $230k for the month of March.

Read another case study: Unknown employee utilization causing unknown or inaccurate client profitability.

Improve Your Firm’s Utilization

At Signature Analytics, we have helped several professional services firms use utilization rates to make key strategic decisions that drive profitability. Preparing utilization summary reports and “if-then” analyses are one way we enable our clients to visualize the effect of increased utilization rates. We are also able to show the company key metrics for unbilled general & administrative time by applying utilization rates to salaries and separating these wages on the financial statements. Furthermore, we have helped clients implement time tracking systems – which is the first step in determining utilization rates – and assisted with the development of company policies to ensure time is accurately entered by employees.

Want to learn more about using utilization rates to drive profitability for your firm? Contact us for a free consultation.

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Do you know your numbers?

10 Tips to Help Improve Your Company’s Cash Flow

10 Tips to Help Improve Your Company’s Cash Flow

As a business owner, you run the risk of bankruptcy if you’re not on top of cash flow management. A full 82 percent of business failures are caused by poor cash management, according to a US Bank study.

So, is it easy enough to bring in more money than your business is spending? Although it sounds simple in theory, having a positive cash flow encompasses much more than profitability. Even if your company is currently profitable, it is still at risk for negative cash flow. One common example of this is if you have obligations for future payments that you cannot meet because you’ve mistimed incoming funds.

By maximizing your company’s cash flow, you can help your company receive profits faster, meet targets in a shorter time frame, and lower your operating expenses. Wondering how to improve cash flow in your small business? These 10 tips can help you improve cash flow for your company.

1. Anticipate and Plan for Future Cash Needs

Keeping accurate, timely, and relevant (ART) accounting records allows you to build a forecast for your business based on historical results. At the very least, businesses should be reviewing their cash flow monthly.

Being proactive with your cash flow enables you to forecast your anticipated funds and help prepare for historically painful periods or seasonal trends.

For example, if you find that you are anticipating a future need for extra cash, you may want to start talking to lenders about a bridge loan to help pave the way for future financing. Similarly, if you can anticipate large expenses ahead of payout, you’ll be able to plan your other obligations accordingly to avoid cash flow surprises.

2. Improve your Accounts Receivable

By actively managing your accounts receivable, you can stay on top of outstanding invoices and decrease the time it takes to get paid.

One way you can do this is by encouraging customers to pay early. For example, if your payment terms are net 30 days, consider offering a slight discount for customers paying net 10 days.

Are you currently waiting for checks to arrive? Offering a variety of payment options will make it as easy as possible for a customer to pay you, such as ACH or credit card payments. While these options may come with processing fees, getting money faster is better for your business if cash flow is tight and eliminates time & labor spent on collection. These options can help prevent you from stacking up credit card debt to cover expenses.

3. Manage your Accounts Payable Process

Establishing and organizing your accounts payable process will be essential to improving your company’s cash flow. If your accounting department doesn’t already use software to help manage your accounts, it is a good idea to invest in one. Next, you should communicate with your team which invoices are most important so they can be paid first. Remember, do not let unpaid invoices slip through the cracks.

Another tip? Try to get to know your vendors and extend payment terms as long as possible. Most vendors will ask businesses for net 30, but once you build up a positive relationship, they may be more inclined to offer net 45 or net 60. After all, the longer you have to pay, the more time you have to get money in. You can use a simple payment agreement template to help you when creating your financial contracts.

4. Put Idle Cash to Work 

Another way to improve business cash flow is by putting idle cash to work. Your idle cash is money that is not earning any income.

Chances are if you have large balances sitting in non-interest-bearing accounts, you can find a better place for them to live. You could consider moving them to an interest-bearing account that may earn .5% or 1% APY. Another option is to invest the money in expanding your business, use it to decrease your debts and lower your interest payments, invest in new technology, or prepay some expenses.

Read more: 5 barriers of growth every company hits and how you can break through them

5. Utilize a Sweep Account

Most commercial banks offer a sweep account, a type of account to help maximize earnings on your income by automatically transferring money from your business checking account to your savings account. The sweeps happen at the close of business each day, and you can set the amount, typically in $500 increments.

Should your checking account dip below your minimum requirement, the funds will be automatically transferred back into your checking account to cover the outlay. This risk-free option makes it easy to build your savings for a rainy day or your next major investment.

6. Utilize Cheap and/or Free Financing Options

If you are looking to invest in your company through low to medium-cost purchases such as upgrading your computer system, buying new furniture, or replacing your company vehicles, you should take advantage of financing options that have low or no interest for the initial period of the loan.

Using this strategy for a business loan will help you save money by cushioning the cash hit to your business. If you pay off the full loan upfront before the interest rates kick in, you will save even more, therefore, making the most of your investment.

7. Control Access to Bank Accounts

To maintain positive cash flow, it is crucial to protect your assets. The best way to eliminate fraud and unauthorized use of your company bank accounts is to make sure the proper safeguards are in place.

Common safeguards include keeping the number of people who can access these accounts to a minimum, securing your IT infrastructure, frequently updating passwords, protecting your credit and debit card information and bank accounts, and using a dedicated computer for banking.

8. Outsource Certain Business Functions

It’s not necessary to hire full-time employees for every business function. You should evaluate your business needs and identify areas where it may be more cost-effective to outsource. IT management, human resources, accounting, payroll, and marketing are all functions that could be outsourced.

There are many firms, including Signature Analytics, that specialize in providing experienced professionals to handle specific business functions and manage cash flow issues. Outsourcing can save your business money, offers a flexible staffing model during the ebbs and flows of your business cycle, and it can also increase your efficiency.

9. Renegotiate Existing Service Contracts

Another tip to increase business cash flow is to review service plans and contracts regularly. Start by looking at your internet, phone bills, copiers, software support, and janitorial/building maintenance contracts to pinpoint opportunities to save.

Improved technologies and increased market competition have driven prices down on many services, so it’s worth taking the time to shop around for a better deal.

10. Maintain a Weekly Rolling Cash Forecast

A rolling cash forecast is a good practice for improving cash flow overall. You don’t need expensive programs to do this; Excel will easily allow you to project a weekly rolling cash forecast. You should include all estimated inflows, such as customer receipts, and outflows, such as vendor payments and payroll. Record this data on a weekly basis at least.

Your rolling cash forecast will help you plan staffing needs, commit to new vendors, and ensure funds will always be available to make payroll and vendor payments. As a bonus, your forecasting will help you estimate and understand your company’s sales cycle.

Read More: The Top 5 Financial Reports Every Business Owner Should Review

How Signature Analytics Can Help Your Company 

By implementing these strategies when managing cash flow, you will quickly get the upper hand on your company’s finances and learn how to increase cash flow within your business — so you will soon reap the benefits.

At Signature Analytics, we have a team of expert accounting and financial professionals including accountants, controllers, financial analysts, and CFOs; all dedicated to providing the best level of service at a price that makes sense for your business.

For additional assistance with cash flow management, developing detailed financial projections, or identifying capital requirements, contact Signature Analytics today for a free consultation.

When Should You Consider Outsourcing Your Accounting Operations?

When Should You Consider Outsourcing Your Accounting Operations?

  • Do you spend late nights and weekends struggling to keep up with your company’s accounting records? Or worse, does this time intervene with the time spent running the operations of your business?
  • Are you unable to assess the profitability of your business or perhaps have difficulty understanding the cash requirements for the next 60, 90, or 365 days?
  • Do you feel your margins could be improved but aren’t sure how to evaluate them when looking at your financial statements?
  • Would some assistance in projecting your business operations over the next few years help you establish priorities with your employees?

If you answered yes to any of these questions, then you are in good company. Many business owners and executives feel the same way and there are ways you can get the support you need to move your business ahead.

Free Download: Discover how outsourced accounting can provide more visibility into your business

The first step is acknowledging that, although operations are the most key aspect of any business, accurate financial information is vital to making important business decisions. Having visibility into cash flow and knowing where your margins can be improved will enable you to take your company to the next level.

Now the next step is determining if hiring a full-time accounting resource to get your company’s financials in order makes sense from a cost and expertise standpoint.

  • Is there enough work for a full-time accountant? For many companies, a 40-hour a week accountant would be in excess of the time required to perform the basic accounting functions they may need, e.g., monthly close process, issuing invoices, entering and paying bills, performing payroll, etc.
  • Is there too much work for your current full-time resource? And are you asking them to do things beyond or below their skill set? This is a very common occurrence with any role in a growing business. This is a lose-lose situation for everyone involved and can lead to internal turnover.
  • What level of experience will they need to have – CFO, controller, staff accountant? If you are not in a position to support the costs of more than one accounting resource, will you hire a CFO and then over-pay them to do basic staff-level accounting? Alternatively, you could hire a staff accountant and task them with CFO responsibilities; however, both of these options can cost your company significantly and lead to ineffective decision-making.

If your company needs the resources of a complete accounting team but is not in a position to support the costs and management time of that entire, full-time team, then outsourcing your accounting functions is a very viable, flexible, and turn-key option for your business. 

Read more: 3 Ways Outsourcing Accounting Can Improve Your Business

Outsourced accounting companies such as Signature Analytics provide you with flexibility in terms of the number of hours of service to receive, provide a higher level of experience through oversight by more senior-level individuals, and ensure efficient service by experienced accountants (staff accountants through CFO level expertise). The accounting teams at outsourced accounting companies work with multiple clients so they have identified time-saving methods that allow them to complete challenging tasks in significantly less time than a typical bookkeeper.

In addition to acting as the financial arm of your business by providing the resources of a highly experienced accounting department on an outsourced basis, there are a number of other situations in which hiring an outsourced accounting company to handle your financial information might make sense for your business:

Preparing for a financial statement audit or review

Many business owners believe that a financial statement audit is a healthy process for their business and provides confidence to their investors in the financial information; however, most do not realize the resource drain that an audit can have on their business due to the significant number of requests for supporting information and the technical accounting expertise which must be applied to the financial statements. Due to independence restrictions, audit firms cannot assist in performing the accounting functions at the companies they audit and therefore must rely on management to determine proper accounting rules. These issues tend to cause significant overrun bills from the audit firm due to the inefficiencies experienced and can be extremely costly for a business. Engaging an outsourced accounting company can provide management with the peace of mind that they have a team of accounting experts – most of which have previous experience performing audits – that understand what audit firms are asking for and know how to produce that information in a timely manner.

Investors requesting financial projections

Investors love to see what the future of their capital will produce so that they can assist in both financial and operational decisions; however, many business owners do not have the expertise to prepare financial projections and therefore may provide information at a level not detailed enough for the purpose or may be missing significant costs which need to be considered. Outsourced accounting firms that provide support with cash flow management and projections have CFO-level experts who are experienced in understanding a business operation in a very timely fashion and can translate such information into the future potential results of the organization.[gap height=”10″]

Missing out on potential tax savings

When a tax provider receives your financial information they may not search into all of the accounts to find tax deductions. If transactions have been classified to incorrect accounts, tax preparers may not be aware of their existence and therefore not consider simple deductions. A simple example would be meals & entertainment expenses, often a deductible expense, in which some transactions may end up recorded in office expense categories or supplies or miscellaneous. Unless the tax preparer knows that such expenses may be improperly classified, the deduction will go unreported resulting in higher income tax. An outsourced accounting company can organize accounting information and work directly with tax professionals to help identify as many tax savings as possible.

Looking for capital investment from financial institutions

Perhaps you have a capital requirement in the near future and plan to approach different financial institutions. Providing financial information with obvious errors, inconsistencies, or lack of organization could severely impact your ability to raise capital as it may be challenging for the lenders to truly understand the results of the business without transparent financial information. When hiring an outsourced accounting company, you can be confident that the financial statements are timely and accurate. Furthermore, they will provide you with a high-level financial resource that can assist in preparing analyses of the financial information in a professional manner making the lender proposal process less arduous. These statements may be used as a resource to assist in conversations with those providing capital assistance to ensure a complete understanding of the business’s results of operations.

Free Download: Discover how outsourced accounting can provide more visibility into your business

If you think your company could benefit from outsourcing your accounting services, contact Signature Analytics for a free consultation.

 


 

Discover how outsourced accounting can provide more visibility into your business

How to Effectively Communicate Your Company’s Financials with External Stakeholders

How to Effectively Communicate Your Company’s Financials with External Stakeholders

Presenting financial information in an easily digestible format is essential when communicating with external stakeholders such as lenders, investors, and other strategic partners. These communications are vital to the long-term success of a business; however, it can be a struggle for many small and mid-size businesses. To help, below are three keys to successfully communicating the financial state of your business with external stakeholders.

#1 Be Concise

The easier it is for an external stakeholder to interpret results, the easier it will be for the company to achieve its desires from that stakeholder.

  • Banks. If you’re seeking a line of credit from a bank, it is important to distill the financial results of the company into a simple format that shows them they should lend to you. They want to know you have the cash to pay your bills. They want to know you have proven you can collect from customers. They want to see profitability that is consistent and stable. If any of these things require explanation, provide it.
  • Investors. Investors want to understand why and how your business can generate a return for them and provide comfort that their capital is reasonably safe.
  • Strategic Partners. A key strategic partner will want an understanding that they can commit resources to work with you in a manner that will be fruitful.

These stakeholders do not want to weed through a book. Furthermore, simply exporting your income statement and balance sheet directly from your accounting software is not enough. Summary narratives, graphs, charts, and reports can be very effective as they will enable the stakeholder to better interpret the financials of the business, as opposed to allowing them to develop their own conclusions.

At the same time, you do not want to show too much or too little financial information. Voluminous information will likely go unread. While not providing enough information can result in the investor or lender making incorrect assumptions about the business. If more detail is sought, it can be provided.

By making it easier to understand your business on paper, you are far more likely to get the answer that you want.

Case Study: How we improved investor reporting for a biotech client to increase board meeting efficiency.

#2 Clearly State Objectives

What is the business is trying to accomplish with the external stakeholder? You will have a higher rate of success if you anticipate and address the stakeholder’s questions upfront.

For banks, you need to clearly communicate why the money is being sought from the bank. What are the uses of the funds? For example, oftentimes an expansion won’t just require capital to purchase equipment, but could also necessitate additional staff, office space, etc.

The same applies to investors. Can an investor interpret in a quick read the high-level goal(s) the business is trying to achieve? Also, what are the risks involved for the business?

It is also best to take objections off the table proactively. If new competition is coming to the market, what is your plan to combat it? If opening a new market, what makes you think you can be successful there? Laying out potential obstacles tells the stakeholder that you have thought about them and gives them confidence in your business.

#3 Be Honest and Direct

This can often be the toughest of all. No one likes to share bad news. Far too many businesses choose not to communicate at all when this happens; however, when things are not going as well as planned, this is perhaps the most important time to communicate with external stakeholders. Don’t hide a bad quarter; explain what happened and what you are doing about it. Again, this demonstrates that you have a handle on the business and that there is no cause for undue worry. Every business will experience some hard times, but having your key allies informed and confident in your abilities will greatly enhance your ability to weather the storm.

We Can Help

Presenting financial information in an easily digestible format is essential in communicating with external and internal stakeholders. If you’re seeking an increased line of credit, looking for potential investors or strategic partners, or want to improve your internal reporting to management and/or board members, Signature Analytics can help. Contact us today for a free consultation with one of our CFOs.

Important Questions To Ask When Planning and Testing A Business Strategy

Important Questions To Ask When Planning and Testing A Business Strategy

As any good business leader knows, planning for the future is a necessary step to help ensure the company heads in the right direction and reaches success along the way. Now more than ever before, this practice is a necessary step to even ensure its survival. Part of forward-thinking is reasoning through different paths your company could take and visualizing what outcomes would come from those directions.

Being able to draw up a mental picture of this future can enable a leader to make the right choices without spending unnecessary time or money going in the wrong direction. To plan effectively, the best place to start is by creating a plan, a type of financial model, to make predictions on your business’s results over a specific period.

This strategic thinking is what the industry refers to as scenario planning, as Forbes defines “alternate futures in which today’s decisions may play out.” By planning through your scenarios and stress-testing them, you should ultimately end with a clear direction that is best for your business to take. Below, we will walk you through how to scenario plan and then how to effectively stress test your scenarios.

eGuide: What Business Should Expect From Their Accounting Department

How To Start Scenario Planning

To effectively navigate the scenario planning process, you must first create a cash flow forecast to support your business. With your numbers in place, you will be better able to make accurate predictions to take your company in the right direction. We suggest starting here or here to learn more about this process. Once you have a better understanding of your business financials, then you can dive into the three types of models for scenario planning explained below.

Here Are 3 Models For Scenario Planning

  • Original plan – This should be the most straightforward scenario to create, and it utilizes your strategic business plan and budget for the year. The original plan scenario is a jumping-off point for the two scenario types below.
  • Probable case – Given the information you currently have, you should have an expectation for your business’s future. Your expectations could be positive or negative, depending on how you are fairing the current economic climate. Companies with more seasonality should refer to the quarters in the past to draw up a better picture.
  • Worst-case – As the company leader, you know your business better than anyone else. If revenues were to decline and unexpected expenses were to arise, how would those happenings affect your company? The worst-case scenario takes all of the “bad things” that could happen into account, so there are no surprises. Forecasting in this way allows you to take action now so your business can survive later.

Once you have developed each of these scenarios, the next step in the process is to stress-test them to ensure you know what will or won’t work for your company. If you are looking to first dive deeper into each of the individual scenarios, you can read the blog linked below.

Read More: Your Guide To Financial Modeling And Scenario Planning for COVID-19

5 Questions To Stress Test Your Scenarios

Knowledge is power, and with your scenarios mapped out, you can feel more confident as to the direction your business is headed. However, what happens when the unexpected happens? When what you planned for and accounted for may no longer be valid options? By stress-testing with a few proven fundamentals, you can discover any shortcomings or weak points in your business strategy to ensure it is executed to the best possible ability no matter the pulse of the economic climate. Ask yourself and other company leaders involved in this process the following questions:

1. Who Is Your Ideal Customer?

Knowing your primary customer will allow you to allocate resources the right way without being sidetracked. Earmarking funds to multiple types of customers or clients will result in underperformance and less than ideal service. Your ideal customer may change over time, which is ok, but recognize that it may take restructuring to make this happen. For now, focus on one customer and ensure your scenarios cater to them.

2. Who Do Your Core Values Speak To?

Every company is different, and its core values may speak to clients, employees, or investors. Knowing who your values speak to will be necessary when making one business decision over another and having clear company messaging and direction.

3. Are You Tracking Key Performance Indicators?

Not only is it essential to track KPIs, but knowing which KPIs to follow is also critical. Creating a company scorecard is helpful so long as there are specific variables you are reviewing consistently. We recommend tracking six key performance indicators which you can read more about here. Remember, tracking too many variables will drive out innovation, so go with a less is more mentality here.

4. Are Employees Willing To Help One Another?

To effectively build an organization like a well-oiled machine, all the parts need to work well together. In business, this means that while your employees will have individual goals, they must be willing to help one another to drive strategy, collaboration, and communication, all while working toward reaching company goals.

5. What Unknowns Keep You Awake At Night?

Being scared or worried about the unknown is nothing new—as every business leader experiences these feelings. Take a tip from other failed business strategies, as those leaders made assumptions about the future and were wrong. The business strategy you are working so hard to create will not be a blanket strategy you can use for the lifetime of your business. To be successful, you must continually monitor the uncertainties that you are accounting for in your scenarios. Try and stress-test your scenarios annually to address changes and ensure you are successful in any economic climate. Depending on the industry your business is in, you may need to adjust this timeline more frequently.

Read More: Why You Need Financial Scenario Planning for What Ifs

Final Thoughts

Remember, scenario planning alone will not help you find an effective strategy for your business. Strategically thinking through and testing your plan to see where the weaknesses and strengths lie will be vital to come to the right decision. Even after all this planning, remember that life can still throw some unexpected curveballs (COVID-19 anyone?), and adjusting to those unforeseen circumstances will be necessary. While this may feel like a lot of information, this is just a starting point.

If, at any point in the process, you or your team feel overwhelmed with financial reporting, business strategy, defining your KPIs, or need some guidance when facing the difficult business decisions that lie ahead – please reach out to our team of experts.

eGuide: What Business Should Expect From Their Accounting Department

The Signature Analytics promise is to help with all of these areas and go beyond the numbers to improve your business performance and assist you in achieving your goals. Contact our team of experts for business and financial analysis and any other questions you may have during this challenging time.

Resources: https://www.smestrategy.net/blog/what-is-scenario-planning-and-how-to-use-it https://hbr.org/2010/11/stress-test-your-strategy-the-7-questions-to-ask


Do you know your numbers?

Why You Need Financial Scenario Planning for What Ifs

Why You Need Financial Scenario Planning for What Ifs

If you’re not familiar with “what-if” scenario analysis, it’s time you familiarize yourself and jump on board. This type of planning can reveal unanticipated difficulties that can destabilize a project, making it a valuable analytical tool.

By helping you prepare for such adversities, financial scenario planning gives you a proactive edge on the situation. What-if analysis might seem like a daunting process, but it will help you make decisions to help your company thrive – or become more prepared – especially during more undesirable times.

Why You Need To Plan For What Ifs

What-if scenario planning can give you a distinct edge over the competition because your company will be prepared for a quick response and viable solution for problematic situations.

Once you incorporate scenario planning into your operations, you will have strategies on hand for virtually any situation.

For example, let’s say you want to see how a supply delivery at a later date will affect your project costs. You create a scenario around this idea and add in the appropriate circumstances that could impact your business, whether positive or negative. Running through the scenario will show you the potential outcome, and help you determine the best course of action.

Financial scenario planning is also a vital part of the business decision-making process. It helps you figure out the best and worst-case scenarios so you can anticipate possible profits or losses.

eGuide: What Business Should Expect From Their Accounting Department

What are the Three Stages of Scenario Planning?

When you’re planning for various financial scenarios, you will generate several probable future contexts for your company, the industry you are in, and also the economy. These possibilities will include individual scenarios, like variables such as operating costs, product pricing, inflation, customer metrics, and interest rates.

Typically, you will begin with three separate scenarios:

  • Base case scenario: You can use your data from the previous year in this situation, as this is a good predictor for the next twelve months. If you saw growth within your company during the last year, say 10%, you can assume the same growth rate will follow in the next year.
  • Best-case scenario: The best-case is to think outside the box and try to imagine a situation in which your sales projections turn out as you hope over the next year. For example, holding onto your current customers, adding new ones, or making an acquisition. Although you are creating a best-case scenario, the data you use should still be realistic. For example, if your company is experiencing an 85% monthly retention rate, you could increase it to 90% for the sake of this scenario.
  • Worst-case scenario: The worst-case will prepare you for potential problems. It can help you avoid issues or at least prepare for them by creating an action plan.

Read More: How to Effectively Communicate Your Company’s Financials with Internal Stakeholders

How to do Financial Scenario Planning

It’s crucial that you build scenarios into your company’s financial model so you have a full understanding of how different variables can impact your company. Here are some steps you can follow to get started with financial scenario planning:

  • Make a list of all the potential occurrences you want to develop scenarios for
  • Flesh out the details for each scenario
  • Make sure to include the three stages for each scenario: average case, best case, and worst case
  • Make sure you are consistent throughout the planning of each scenario

What are the Benefits of Scenario Planning?

Analyzing your company and predicting its future is a risky business. Financial scenario planning can give you the edge on different possibilities and you and your company can benefit in many ways, including:

  • Planning for the future: Scenario planning allows you to give investors a preview of the potential returns and risks involved in future investments. Your goal is to increase your company’s revenue, and the best way to do so is by using up-to-date calculations.
  • Avoiding risks and failures: Financial scenario planning can help you avoid making poor investment decisions. As you are taking the best and worst possible case scenarios into account, you can make more informed decisions.
  • Keeping you proactive: By being proactive and staying on your toes, you can minimize potential losses from factors beyond your control. Creating worst-case scenarios allows you to assess possible damage and avoid these circumstances, or at least prepare for them.
  • Enabling you to project investment returns or losses: Financial scenario planning gives you the tools to calculate potential investment gains and losses and provides you with measurable data. You can use this data to maximize the outcome.

Read More: Creating the Perfect Annual Budget for Your Business

Who Can Help With Financial Scenario Planning

A CFO is an ideal person to help with financial scenario planning. They can play an important part in this process because they are a successful executive who is an expert in strategic financial management. As an expert, they are responsible for managing short-term assets and available resources and developing strategies to leverage these resources.

Furthermore, a CFO should be able to maintain the company’s long-term financial health and profitability. A good CFO will analyze the cash flow, income statements, and balance sheet to monitor the company’s well-being while simultaneously making the most of the assets.

To do this, they need to have certain information at hand. Financial scenario planning can help them acquire this information by answering the following questions:

  • How can the company combine short and long-term assets to maximize profitability?
  • How can the company best finance upcoming projects?
  • How can the company maintain a healthy balance between debt and equity?
  • How can older assets generate future revenue?

What are the Benefits of a Fractional CFO

If you’re running a small- to medium-sized company, you may believe hiring a CFO is out of the realm of your budget. However, this is not the case. If you hire a fractional CFO, you can reap all the benefits of their financial expertise without it costing a small fortune. Here are a few of the benefits:

  • You’ll save money because you won’t have to pay a salary or benefits
  • You’ll save time because you won’t have to advertise, interview, or train
  • You can ensure that you have a CFO who is qualified and experienced

No matter how effective your company is, it won’t be able to maintain steady growth phases if future projections and developed strategies are not made for when issues arise. Your business potential relies on your ability to evaluate your company honestly daily. This ability includes the evaluation for ways to improve efficiency, minimize waste, boost performance, and develop solutions for how your company can succeed through positive and negative economic conditions.

eGuide: What Business Should Expect From Their Accounting Department

Hiring an outsourced CFO can make a big difference to your company when it comes to these endeavors and securing a financial plan to ensure you’re making the right business decisions.

Having an experienced financial business advisor to run through scenario planning and caution you of the possible outcomes can make the difference between a successful organization and a failing business.

If you are considering hiring a fractional CFO, contact Signature Analytics today. We can provide you with qualified and experienced CFOs, regardless of your industry.


Do you know your numbers?