Buyers’ brief: Financial forecasting tech to accelerate growth in advisory services

The coronavirus pandemic has applied significant pressure on businesses and driven seismic shifts across almost every sector of the global economy. Over the next eight months, companies will have deal with the curtailing of the furlough scheme, personal tax bills, March 20 VAT deferrals, CBILS repayments and the return of commercial landlords seeking rent. All of this has heightened the need for companies to carry out much more agile financial forecasting and planning to get a fuller picture of how Covid-19 and other headwinds may impact their overall performance and cashflow needs over the short, medium and long-term.

“Traditionally, clients have told accountants that they need a three-year forecast which has primarily been used as a means of proving that the loan they wish to take out with their bank or another lender is serviceable,” according to Adam McGowan, partner at Mitchell Charlesworth. “But what we are finding now is that that clients increasingly want to look at their short-term cashflow planning and with new financial forecasting software available to them, it is far more possible to provide that sort of insight than ever before.”

In the past, explains McGowan, if an accountancy firm needed to offer short-term cashflow planning to a client, the main variable in the forecast was the debtors days ratio which calculates how quickly cash is being collected from the company’s customers. Typically, cashflow planning would attempt to forecast 30 debtor days as standard, but in the current environment that figure can increase to anywhere up to 90 days. Accountants would then try to identify patterns of when invoices were going to get paid even though that might change on a daily or weekly basis which could easily throw the entire forecast off track. To make matters worse, this entire process would see accountants have to rely on spreadsheets to do the job, which often made it complicated and cumbersome. But advances in financial forecasting technology have dramatically improved short-term cashflow planning.

“New software will look at all the invoices that are due to be paid on your ledger and the system will come up with a payment pattern based on the historic performance of each individual customer automatically,” says McGowan. “It then allows you to play around with the data in real-time, so if a customer suddenly decides to pay an invoice it will update that cashflow forecast immediately to reflect that.”

Increased demand for short-term forecasting

Short-term financial forecasting like this was once simply awkward and arduous prior to the emergence of new software tools, but now it is simple and easy to offer cashflow projections on the fly. For medium-term financial planning, the situation is much the same, thanks to a host of sophisticated technologies on the market that allow accountants to generate a proper three-way forecast that provides a fully integrated P&L, balance sheet and cashflow projection over a time period of anywhere between one to five years. This can help companies not only plan for future growth but serve as an early warning system for potential issues that may lie ahead, which is particularly helpful is these exceptionally challenging times.

The extent to which accountants and their clients embrace financial forecasting technology depends on the size and scale of both organisations, as it ultimately influences the effective bandwidths of their teams and the resources they can call upon.

‘Smaller businesses (particularly those born into the cloud) are embracing this automation technology,’ explains Helen Bassett, Director at Smith & Williamson LLP. ‘We are finding that more established businesses are still wedded to their Excel modelling. This is mainly due to some of the consolidation/currency limitations of the forecasting technology that is available on the market.’

‘Within our transactions team (where we are providing a financial forecasting service), when there are layered complexities with the forecasting, we are still leaning towards the spreadsheet modelling which would start from a pre-built model base,’ she adds.

After all, the benefits of financial forecasting technology are only ever as good as the people and the wider IT infrastructure that supports it, according to Rob Bayliss, head of financial modelling at Grant Thornton.

The slow rise of advisory services

Financial forecasting technology and accounting software more broadly has certainly advanced in leaps and bounds, but the ability and awareness of businesses to embrace the most advanced options available is often quite limited.

“There are still remarkably successful businesses that struggle to use Excel and have not implemented good CRM systems or updated their accounting software from the Sage platform they first adopted 25 years ago,” Bayliss says. “In this new data rich environment, very few businesses have the resources to capture and store the data let alone start to work with it to build sophisticated automated systems.”

Having said that, most accountants admit that in the coming years advances in accounting technology will fundamentally change their day-to-day activities, automating routine tasks like data entry and complex calculations. This will eventually see accountants take on a more consultative role, with advisory services becoming the key to growth in the future.

The bread and butter of accountancy firms has traditionally been preparing company accounts and the handling corporation tax compliance. But that revenue generator is being severely disrupted by software applications in recent years due to their relative ease of integration and superior speed in handling such tasks. And with short-term cashflow forecasting seeing a heighten demand due to the pandemic and a plethora of inexpensive products costing between £10 and £20 per month for a subscription, businesses are likely to accelerate their adoption of such technologies, which in turn will see a growth in advisory services among accountancy firms.

‘Software vendors have pushed accountants to shift towards a more an advisory function. You will likely find accountants that disagree, but we see that as a major trend,’ says McGowan. ‘What you will find over the next few years, is that outsourcing becomes a larger service line for accountants.’

‘As accountants and their clients adopt these new technologies it will open up a wealth of planning advisory services that simply weren’t possible a few years ago.’