Does your business have a sat nav?

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Regular journeys and driving around locally don’t generally require much planning, but if we’re venturing further afield or going somewhere new, most of us would reach for the sat nav. And it’s no different for your business. You can probably get away with limited planning if your business is trundling along – although it’s important to look out for changes in the market and competitor behaviour that could blow you off course. But if you are ambitious to drive your business forward then careful planning is essential. Here are a few tips to help with the process:

Firstly, it’s important to set a clear strategy so that you and your team are fully aware of what you want to achieve, why you want to achieve it and how you plan to achieve it. If you’d like my thoughts on this, please check out my blog ‘Small businesses with big attitude’ – ‘Small businesses with big attitude!’

Having established your goals, the next step is to draw up some long term financial plans. With the rapid pace of change and economic uncertainty, it’s pretty difficult to predict too far into the future, so I’d suggest that your plans should cover two or three years. If you want to go beyond this, you could extrapolate from year three. You can either adopt a ‘bottom up’ approach (i.e. start with detail and build up the bigger picture) or a ‘top down’ approach (working in the opposite direction). Either way, your aim is to come up with a plan of your turnover, direct costs, overheads (including contingency for unknown costs), profit and tax for each of the years. And for year one, it’s good to break this down further to give a monthly profile. Depending on your personality, you may veer towards optimistic or pessimistic plans so try to sense check them wherever possible. This may be via market research, desk research or discussing with colleagues. You may also want to draw up a few different scenarios (e.g. how would the plans look if turnover was 10% lower, 25% lower or 20% higher?).

As well as drawing up plans for profitability, you should consider whether you need to invest in capital items (e.g. buying machinery, premises, computer hardware and systems). Again, try to come up with realistic costs for these and include any depreciation charges in your profit plans.

You now have all the ingredients to draw up cash flow projections. Starting with your monthly profit plans for year one, apply assumptions about the time that customers will take to pay you, the credit terms that suppliers will offer you, the frequency of your payroll and the timings of your tax payments. Then consider the timings of the cash outlay for capital items. These cash flow projections will help identify whether you are likely to need additional funding and whether it’s just for short periods or long term. Whatever the requirement, you’ll have good plans to take to the bank or to show potential investors. If you do need funding, remember to add interest costs to your profit plans.

This planning exercise may seem complex and time consuming, but it really is worth the effort. You’ll be able to track your progress compared to the plans and you’ll soon see if you are straying off course. From time to time you may need to alter your approach, but hopefully you’ll avoid that irritating sat nav voice saying ‘turnaround where possible’!