A few thoughts on financial planning
You can’t easily reduce the uncertainties in your market, but a little financial planning will give your business a fighting chance of success and provide you with some alternative paths to tread on the way to making sustainable profits.
What you need is a simple budget and cashflow forecast for next year.
So where do you begin?
Financial planning – build a budget
Step one when looking forward is to look backwards! Make sure your business has accurate, up to date management accounts for this year to date.
Management accounts will provide a strong foundation from which to build the budget and also give you the structure of your budget spreadsheet – if the budget and management accounts have the same structure you can easily compare actual results to your budget next year and take appropriate remedial action.
Looking backwards also helps to keep you grounded when you predict future sales and costs.
Forecasts for sales and gross profit margins are usually the key drivers for this exercise. Historical performance will be a good guide to the margins your business is actually generating and it’s important to be realistic about the margins you can achieve going forward.
Expect greater competition and pressure on prices.
Having forecast sales and margins, take a look at the overheads. Personnel and premises are usually the big ones, and estimate how much you need to spend on marketing in order to hit your sales target.
A simple cashflow model
Your cashflow forecast may be the most important document in your business. Haven’t got one? You’re not alone but you should build one now.
Cashflows look at receipts, payments and your closing cash balance, compared against any borrowing facility you may have.
Again, look backwards, for perhaps six months, to model the cashflows that have actually happened and then start to look forward, using the budget as a basis.
Watch out for quarterly pinch points – those months where rent, lease payments and perhaps VAT go out at the same time – and don’t be overly ambitious about improvements in credit control.
Having built the two models, ask some “what if” questions.
- What if sales are higher or lower by 20%?
- What if margins can be nudged up or fall by 5%?
- What is the effect of these changes on profitability and cashflow and what decisions will you make in your business if these things happen?
Use the models to improve results – now!
Having built your budget and cashflow model, you should be asking what changes you can make in your business now to improve results. Then go and make them!
Michael Austin @diaryofanomb