Is Number Crunching Worth the Effort?

‘Is number crunching really worth my time and effort?’ Here at Irwin Insolvency, this is a phrase we often hear from small business owners when we advise on cash budgeting, forecasts and financial projections.

In our experience as financial planners, we find that small business owners are often dubious about the idea of cash budgeting. After all, cash flow for a small business is seemingly unpredictable, especially if you haven’t been trading long.

But this is one myth we want to finally put behind us. Cash budgeting is one of the most useful tools a small business owner can utilise. While cash budgets can’t be rigid, they can be based on similar business experiences and they can offer business owners a unique range of insights and possibilities.

In this article, we examine why business owners are often sceptical about cash budgeting but why number crunching is always worth the effort.

What Is a Cash Budget?

A cash budget or cash budgeting is an estimate of the amount of cash that’s going to be flowing in and out of a business over a specified period of time. This is what we like to call ‘number crunching’, but some small business owners just don’t see the value in it. 

Cash budgets take the money you’re making from sales and the money you’re spending with expenses and business costs to give you an idea of how much cash you’re going to have in the future. Simply put, a cash budget is a way of seeing if your business can survive going forward.

A positive cash flow shows that you’re making sales and bringing in profits. A negative cash flow shows that you’re spending too much money or not bringing enough new customers on board.

Your business can use a cash budget to estimate its costs, estimate any cash surplus that could be used for future investment and have a realistic idea of whether or not insolvency might be an issue any time soon.

Cash budgeting has a number of useful benefits:

• Be in control of your financial situation
• Forecast future sales and future expenses
• Prepare contingency plans for unexpected cash-flow problems (who knew there was going to be a pandemic, for instance?)
• Identify areas where costs can be cut or improvements made
• Identify areas where business is booming and lessons can be learned
• Set aside cash for future investments or contingencies
• Prioritise business goals and investments

The list of potential benefits goes on and on.

Cash budgeting can be a short-term or long-term activity. The amount of time that a budget forecasts ahead can be as little as a few weeks or as long as a few years.

If a healthy cash flow is a sign that a business is doing well and a cash budget is a useful tool for making forecasts, predictions and contingency plans, why then do many small business owners see number crunching as a futile exercise?

Why Do Small Business Owners Often See Number Crunching as Useless?

Business owners are often rather sceptical about the advice they receive about cash budgeting. Their argument is that cash flow for small businesses is often sporadic and unpredictable. No matter how much time is spent on projections, there is a limit to just how reliable they can be.

There are many different types of financial assumptions that can be made, and they can be made directly or indirectly, using hard facts and figures or estimates. Generally, financial assumptions are divided into revenue assumptions and cost assumptions (cash in and cash out).

These assumptions can be estimated directly or indirectly, and can be estimated as long-term assets, expenses, working capital, etc. Expenses also need to be categorised as short or long term, one-time start-up costs or regular expenditure. For many business owners, all this guesswork just doesn’t seem to add up in real terms!

Small businesses that are just starting out might have little data available to them from which to make an accurate assessment of their future finances. How can you forecast how many sales you’re going to make if you’ve only just started selling?

If you’re launching a new product or service, where is the data going to come from? Isn’t any forecast just going to be hypothetical guesswork at best?

Small business owners might also lack the knowledge or expertise to compile a budget, or to analyse the cash-flow data to take value from the results of a budget. Hiring a professional is the obvious answer to this problem, but if a small business owner sees no value in the results, why would they ‘waste’ their money?

The arguments go on, but the point is simple. Why waste valuable business time and money on a ‘useless’ exercise?

Small Businesses Are More Alike Than Different

However even for small business owners, crunching the numbers and building budgets and forecasts is an essential component of responsible management. Yes, cash budgets are always going to be estimated, but even an estimated cash flow can ultimately save your business from insolvency when you have the right expertise, analysis and decision making to go alongside the numbers.

Even for a small business launching a new product or entering a new market, there are useful forecasts that can be made. It’s important to remember that small businesses are always going to be more alike than different.

This means that there is already existing data, existing analysis and existing precedents to go on when making decisions. Cash budgets can be estimated based on the successes and failures of other similar businesses that operate in the same market, or that have operated in a similar way in the past.

This is where professional expertise comes in particularly handy for small business owners. Business and financial advisers that have operated with similar companies, business models and in similar markets can offer valuable insight that can result in accurate cash budgets and forecasts for your business.

Cash Budgeting as an Exploration of Possibilities

Gerald Irwin, of licensed insolvency practitioners and business advisers, Irwin Insolvency, believes that business owners see ‘number crunching’ in the wrong light. Rather than valuing cash forecasting as a prediction, they are better seen as an exploration of possibilities.

Irwin says: ‘Business owners should not be viewing financial projections as a prediction of the future but rather more an exploration of the range of possibilities based on certain assumptions. Number crunching can be invaluable for a business owner to comprehend the dynamics of how different elements of the total financial landscape are interrelated and understand what effect changes in some can cause.’

Rather than dismissing cash budgets and number crunching as ‘useless’, small business owners can instead recognise that while they will never be 100 per cent accurate, there is an incredible amount of value and insight to be gained from the exercise.

Let’s bring this back to the argument that small businesses owners see number crunching as futile because cash flow for small business owners is too unstable to predict. Often, it can be difficult to spot the patterns until you crunch the numbers. Patterns might not emerge until you analyse trends over several quarters together, rather than in isolation.

Yes, cash flow is seemingly unstable, but sit down, crunch the numbers, look at the range of possibilities ahead of you, and you can ask yourself, ‘what do we need to do to make these sales forecasts become reality?’

Crunch the Numbers and Analyse the Risks Before They Become Real Issues

Ultimately, the number-crunching game is a hard reality that business owners need to take responsibility for. While it may seem unnecessary or useless, it’s difficult to get anywhere in business without at least some sort of planning and financial forecasting!

There is a wealth of data and a wealth of expertise already out there, and savvy business owners know better than anyone that this valuable information can be used to their advantage. Rather than seeing number crunching as guesswork, see it optimistically as a forecast of possibilities, both positive and negative. You can then budget accordingly for those potential situations.

Creating estimated budgets allows you to forecast and analyse risks and, importantly, it therefore allows you to prepare for the worst. Yes, you can leave it to chance and hope for the best, but why take that approach when a little number crunching can yield excellent results?

Contact Irwin Insolvency Today for Your Free Consultation

These are difficult times for any business, but with accurate budgets, reasonable forecasts and efficient number crunching, your business can succeed where others have failed.

The expert team at Irwin Insolvency has decades of experience working across multiple sectors and industries, and we can offer you the expertise and professional advice you need to make your business a success.

For more information on how we can help you, don’t hesitate to contact Irwin Insolvency today for your free, no-obligation consultation.