HOW A LITTLE PLANNING CAN GO A LONG WAY
As small business owners, we all know that we’re supposed to do regular budgeting and planning. But we often don’t. Why is that?
The excuse is usually that we’re just too busy. Who has the time to sit down and try to predict twelve months into the future, much less three to five years? And even if we did, how accurate would it be, anyway?
Budgeting and planning is often difficult and time-consuming, but it doesn’t have to be. Doing it the right way can be game changing for your business.
Here, in simple terms, is what budgeting and planning is, what it can do for your business, and how you can plan for the future in a meaningful way that doesn’t take a lot of time.
1. The first step: Setting goals
The common phrase is “budgeting and planning,” but that’s backwards. We have to plan before we budget. Otherwise what are we budgeting for?
So let’s talk about planning.
We start with a simple question: What are your goals for next year?
Think about it. Where do you want to be at the end of the year in terms of:
- Numbers of customers
- Dollars of revenue
- Cash on hand
- Minions reporting to you
OK, that last one might be a bit over the top. But you get the idea.
2. How we get there: Identifying drivers
Once we’ve listed out your goals (the numbers we want to achieve), we need to understand how we get there. We get there by identifying the key drivers of your business.
Think of the business as a machine. If the business is a machine, then drivers are the “levers” we can pull that make the machine work faster, pushing us closer to your goals.
So how do we identify drivers? A good place to start is by thinking about revenue. We don’t just create revenue out of thin air. Revenue comes from somewhere — often a variety of places.
For some businesses, revenue comes from advertising that pulls customers into the store, resulting in sales. For other businesses, it means hiring sales people who phone up prospects and convert a percentage of those prospects into customers. And some businesses might still be building the product that they’ll be selling, so even R&D costs can be a driver of future revenues.
Here’s a list of questions you can ask yourself to identify drivers in your business:
- What people and products in my business generate revenue?
- Who are the people I need to hire to fulfill orders and support my customers?
- What are my operating expenses to support all of this?
Once we’ve listed out your key drivers, it’s time to relate them to each other and build a financial model of the business.
3. A recipe for success: Building the financial model
All of your business drivers are connected in some way. Expenses drive revenue and revenue drives expenses, and either can drive changes in cash flows.
Consider a business with a direct sales model. For each salesperson hired, assume that individual generates, on average, five new customers per month
If each person on your customer support team can handle 25 customers, we know that we need to hire one support person for every 1 salesperson x 5 months (after they’re fully ramped up). You also likely have customer churn — this would also need to be taken into account in your hiring plan for the support team.
The output of your salespeople — customers — is the driver of your hiring plan for the support team. And the number of people on your team as a whole determines your office rent expense and other overhead.
Defining the relationships between your business drivers in this way is the essence of building a financial model and can provide powerful insights about your business.
4. The bottom line: Getting to insight
Let’s get back to your goals — that’s the whole reason we’re going through this exercise, right?
Perhaps your big goal is to increase net profit from 5% to 20% in the next five years.
A financial model can help you figure out how to get there. It can tell you what “levers” to pull in the machine of your business to grow revenue at a faster pace than expenses, and maintain proper cash flow so you don’t run yourself out of business in the process (especially important if you’ll need to take on outside capital to finance the growth)
In the example above, perhaps that could mean using automation to increase the number of customers each person on your support team can handle from 25 to 30, or maybe a better strategy is to invest in an inbound sales strategy. Or maybe you’d be better off selling a different mix of products and services.
Perhaps it’s pulling a bunch of small levers a small amount, or maybe it’s pushing one big lever as far as it can go — the only way to know for sure is to build the model. And once you’ve got a financial model you like, the outputs of this model or scenario you’ve designed becomes your budget and cash plan.
A better way: Getting to connected insight
Usually it takes an Excel “wizard” hours, days, or even weeks to build up a sophisticated financial model using dozens of spreadsheets and complex formulas. And then it’s difficult and expensive to update. So most businesses don’t.
But that means they’re missing out — one of the most important parts of budgeting and planning is “rolling forward” the plan every month to account for the difference between your budget and what really happened (your actuals). Not only is it important to look at your budget versus actuals every month — you also need to reforecast your projections given the new set of actuals you’ve experienced.
Doing this manually in spreadsheets used to take so much time and effort most businesses didn't have the means to achieve it until now. That's why we've partnered with Jirav, a cloud-based financial planning and analysis solution that allows you to build a model, connect it to your accounting system, and automatically take care of the hard parts of importing actuals and reforecasting every month. This enables us to help provide your company with clear r line of sight for next year and beyond.
Interested in getting better insight into how you can achieve your goals in 2020?
Let’s jump on a call and we’ll start making a plan together.