In the first edition of 4Business, I wrote an article entitled “Business Planning – Are You Planning Not To Fail?” which sought to explain to you why you should seek to plan your business and develop a forecast for regular review and update.
This article seeks to help you critique how your business is performing currently in delivering your aspirations.
You will find it useful if you can extract information from recent accounts and detail them upon an Excel spreadsheet, seeking to identify recent trends in the business for you to work with.
An example spreadsheet follows (I normally look at 5 year trends). You will have more extensive headings within your detailed accounts – insert them, the more detail the better.
Consider what the summary is telling you about your business.
What is happening in your business, did you realise and what can you do about it?
Consider the example business
My “client” has told me that three years ago, he decided that the business was stagnating. So he decided to go about expanding the business, adopting an aggressive marketing policy.
Two years later he has enhanced turnover by nearly 14% on 2013 levels, but gross margins have dropped by 6%.
In terms of gross profit, the client has seen several issues arise within his growth plan that presumably he did not intend – his purchasing is now less profitable and his wage costings are inching up.
There appears to have been a need for capital investment to underpin the push for growth – depreciation has increased 33% on historic levels.
And, as with all growth, working capital needs have increased leading to higher finance costs of 50% with marketing costs having soared by over 200%.
Consequently, net margins have diminished by 11%.
Do you think he achieved his aspirations?
What can you learn?
If you do not regularly stand back and look at trends based upon historic accounts, then you risk missing changes that perhaps you had not seen and, more importantly, their impact on your profitability. Hopefully your accountant has already drawn your attention to any material issues that they have spotted over the years.
Think about your assumptions
This exercise should allow you to think about what strategies you might want to consider adopting in order to counteract negative trends, build upon positive trends and, above all else, seek to underpin underlying profitability of your business.
Any forecasting model needs to be based upon well thought out and considered assumptions.
Consider what happened in my example – the one assumption made was that enhanced marketing would grow and develop the business, the implications that growth had on other areas of the business were ignored!
Your assumptions need to be balanced and researched.
Finalising the business forecast and considering the finance implications.