Greetings!
Each month in this newsletter I strive to provide useful information to business owners and those who provide service to these business owners. This month my article is about Budgets and Business Plans, which is a challenge that most small and growing businesses face.However with todays lending practices combined with a tough economy, it is more important than in the past to fully understand your business. |
Budgets and Business Plans | |
The likelihood of a large companies and organizations not having an annual budget and business plan is fairly remote. To succeed they need to plan on a formal basis what the expectations of future periods will be, and how they will react to changes. Additionally during the period they will track their performance against this budget and analyze changes that occur.
On the other hand, many owners of small to mid-sized businesses do not routinely create a budget, let alone a business plan. If this is such an important tool for large organizations why is it ignored by small business?
Budgets and Business Plans
A budget projects for a period of time, normally one or more years, the estimated income and expenses for the business, the cash flow for that period, and other key financial information (balance sheet, capital expenditures, financing options, etc.). A company cannot prepare a budget without considering the results from the recent past, current operations, and its expectations for the future.
A business plan includes the budget, but is more comprehensive. It includes more information regarding the company, its products and services, the competition it faces, the markets it serves, its human resources, and the basis of its assumptions and projections. But, importantly, a business plan also includes how the company will be affected if its assumptions do not actually happen, and what will be done in such cases.
The Business Plan as a Management Tool
In most cases, a business plan is prepared when a company is seeking financing from a bank or other lender, or is seeking to issue debt or equity. Stakeholders want to understand the company's history and its expectations, and the thinking underlying those expectations. In fact, the assumptions and management's plans are as important as the actual financial projections, if not more so.
But, particularly in these uncertain economic times, most companies could significantly benefit by preparing a full business plan, and challenging itself to identify things that could go wrong and how the company would react to those events. It is the process itself that helps the company and its management focus its attention on opportunities and risks. The business plan is a dynamic living document that is used by the company's management to understand what is currently happening and make adjustments to future periods as deemed necessary.
Business plan formats are fairly standard, but to get the most out of the plan it is important that the management understands how certain factors such as interest rates, competition, slow down in customer spending, having the right people, and supplier performance will affect the company.
Understanding your Market
One key element is a description and analysis of the market that affects the company. This needs to be an honest, critical description and analysis. Describing the market in general terms will not provide good information to the users of the business plan. The market for a company must be very specific, and there needs to be evidence that the market does indeed need the product or service. Can the company clearly define the problem-the pain-that the product or service will solve? Why does the market need this? If the economy continues to be soft, will people defer buying the product or service, even if it does solve some of that pain?
Evidence is critical, and that is best obtained by interviewing customers, taking surveys, and testing the intended market. A company can hope for many things, but it is most important that intended customers provide feedback and information to validate the plans.
Does the company intend to sell its existing products into a new market? What has the company done to be sure that the products meet a need in that new market? People in different geographic areas have different habits, needs, and wants. So why should a company assume that other people in different areas or markets will actually want the product? Again, the company's assumptions need to be supported by some kind of third-party evidence.
Many times a company will have a great product or service, buts lacks the funds to properly market the new product. Many great ideas never succeeded because of a lack of resources. Does the company have the cash and human resources to properly market this?
Effect of Costs and Selling Prices
Another element relates to the cost to produce the product or service. Does the company have a good and realistic understanding of what this will cost? If they are using estimates, is there a method to compare the estimate to actual cost? Will these items provide an acceptable gross margin? What is the competition selling these for? How will a price reduction by the competition affect the profitability of the item?
How is Cash Flow Impacted
Cash flow is perhaps the most important part of a company's life, but many companies do not routinely make projections of its cash needs. What will happen if customers delay paying for the products? What if bad debts increase?
And what will happen if there are delays in the launch of the new product, or penetration into new markets? And what will happen to cash flow if the sales occur, but more slowly-or more rapidly-than planned? Does the company have cash resources to address those situations?
Why a Business needs a Business Plan?
You might look at the above and throw up your arms. "I can't think of everything," an owner might say. And the owner is right. But it is important to think of as many of the critical items ahead of time, and it is very important to include your management team in the process. I can't stress this point enough, that including your trusted managers in the process reinforces that you have a team and they all become stakeholders, by having some say in their future,
While it appears that I have mentioned many negative aspects, the plan in fact should also identify several items that will make a positive impact that will lead to the success of the existing products and new products, in the existing and new markets.
The point is to cause management to consider the impact of negative-and positive-occurrences, and then to consider how the company would react to those situations. And to determine how that would affect the company's operations, cash needs, and the impact on the company's stakeholders (bankers, lenders, equity holders, employees, customers and vendors).
In developing a business plan, management will identify issues and opportunities. Putting them in writing will help to crystallize the issues and the resolutions. And remember, this is a living document that is routinely updated for current conditions and new opportunities. Properly done and managed it becomes the recipe for success as it purpose is to to help the company plan how to manage its business. |
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Thank you for taking the time to read my newsletter and feel free to pass it along to your colleagues and clients.
Short Beach Business Services provides part time CFO services at an affordable cost to emerging and middle market companies.
Sincerely,
Edward Burke
Short Beach Business Services, LLC |
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