If you want to be more successful in business, you need to know where you’re going
by Htet Myet Oo Feb 07 2018
"Of course I know where my business is going," I hear you cry. Okay, great; then you'll have no problems answering the following questions:
1. What will your turnover and net profit figures look like for the next quarter? The next year? The next five years?
2. What will the sales split look like across your various product lines?
3. How much will your cost of sales (i.e. purchase cost, material cost, and delivery) be?
4. What is your Gross Profit Margin (GPM) per product/service?
5. What are your fixed costs for each month (rent, rates, utilities, insurance, wages, etc.) and your break-even point?
6. Are there any exceptional items or purchases to be made in the next 12 months and how will these be financed?
7. How does your cash flow and working capital requirements roll forward from month to month?
8. Looking forward, are there any sticking points that you may need to cover with a loan or an overdraft facility from your bank?
How did you fair? If you were able to answer all the questions, great; drop me a line and let's have a coffee?
If, however, you're like many small business owners, then you may not know the answer to some of these questions. This means that your cash flow is always going to be a venture into the unknown. Not only does a financial forecast sense check your plan, but also the process gives you a benchmark and something to review against, with the added value of the opportunity to adjust your business activities as it develops.
So, what are the key steps in putting together a robust cash-flow forecast?
First and foremost is gaining insight from previous months or years, which the below steps can help you with:
1. Obtain up-to-date financials for the previous full year, as well as management account P&Ls sorted by month-to-date. Before you look forward, you need to assess what current trading looks like. For many businesses, this can be a major challenge, or tends to be left to financial quarter ends or even pulled together at the last minute just before tax deadlines. If approached infrequently, this could mean a nine to twelve-month lag, and things may have changed drastically since. You wouldn’t drive a car without being able to see out of all the windows, front, back and sides, so don’t drive your business that way either!
I would encourage every business to move to online cloud accounting as soon as possible. Consider Xero, QuickBooks or Sage One software, as digital tax collection will become mandatory within the next couple of years. It’s also much easier to manage your business finances, with the added benefit of linking to your bank account allowing instant reconciliation. If you're adept at using the software, this may even reduce your accountancy fees and some accountants offer packages that include heavily discounted cloud-based software.
2. Once you have last year's and the current trading accounts up to date, analyse if there are any trends. Does seasonality swing sales revenue? Do your costs of sale increase dramatically during busy periods as you hire in sub-contracted labour? I see this a lot and it’s prevalent in service industries. Or, do those large contracts and order spikes utilise additional material, undermining gross margins?
Don’t become a busy fool. Get a handle on product or service revenue peaks and troughs, and, most importantly, the gross margin and sales trends over the course of a full trading year. Looking forward, you should be promoting and selling those products or services with the higher margins, along with proactively managing those peaks and troughs.
3. Carry out a cost of sale analysis. For example, if you are using sub-contracted labour continuously, consider recruiting your own employees. Having your own staff will be more cost effective in the long term, giving you more control and the secure future capacity for growth. A client of mine doubled their gross margin on services they offered by bringing in an additional member of staff, rather than subbing out the work.
Likewise, if material purchases are high, could you reduce costs by negotiating better terms or going to a different supplier? Ensure there isn't a lot of wastage/surplus or write-off of materials in the delivery process too. If there is, where and how could this be improved?
4. Look at fixed costs. When was the last time you reviewed your fixed costs? Did you consider any/all of the following areas?
a) Wages: how much overtime? Could introducing shift patterns be a more effective method of covering the workload or do we have too many staff standing idle?
b) Rent, rates, heat, and power: consider moving utility suppliers or fit a smart meter, as there may be big savings. There are independent energy brokers that can do the legwork for you in sourcing a new supplier, but make sure you engage with a reputable broker.
c) Motor expenses: big savings can be made here. Look at fleet renewal programmes and consider maintenance contracts to fix costs. If you don't have the time to sort this out yourself, a good place to start is to consider a fleet-management service. Consider fuel purchases and also look closely at route planning; are there efficiencies to be gained?
d) Print and stationary: ink cartridges cost a fortune, so consider going to pay-per-page or leasing a photocopier/printer, as the new machines are much more efficient and often produce better quality. Another client of mine moved to a rented printer and not only saved an estimated £240 (K445,000) per year, but also increased the quality of their printing.
e) Postage: do you need to send everything by post? Could you send invoices and statements by PDFs via email? Most companies do nowadays and it has become generally accepted practice.
f) Bank and interest/charges: consider overdraft facility charges or discount invoicing charges compared to longer term loans. Now is a great time to consider refinancing your existing borrowings at a cheaper and more affordable rate.
g) General expenses: these shouldn’t be just a costing code to sweep things under the carpet. What costs end up in here? If they’re bad costs, why? What could you do differently going forward to reduce these expenses?
“If you always do what you’ve always done, you’ll always get what you’ve always got.” - Henry Ford
Before you plan and look ahead, consider all cost lines. Ask yourself, "could we manage our business and costs more efficiently?" Write down a list of actions and, before you plot the next few years’ growth plans, adapt what you can immediately, turning these items into quick wins.
Once you have analysed and reviewed the current state of your business finances, you are ready to start plotting the future business growth with the objective of improved profitability.