Creating a strategy for growth
Tip #1 – Create a solid foundation for growth by understanding financial performance
“If you always do what you’ve always done, you’ll always get what you’ve always got” - Henry Ford
In business looking backwards is easy but looking forwards with confidence is far more difficult. The first place to start is to understand what your recent performance was. What was the sales figure? What was your profit margin? What were your overheads? Did you make or lose money? Which products or services were most profitable?
That information should be available from your annual accounts, however ideally you want to be seeing that information on a monthly basis in the form of management accounts so that you really have your finger on the pulse of the business. Once that happens we are ready to step back and think about how we are going the business forwards, and that will require us to be ambitious and open-minded in equal measure.
Tip #2 – Develop a clear plan for the future
“If you don't know where you're going, any road will get you there” – Lewis Carroll
Once we fully understand past performance then we can start to look at future performance, but in order to do that we first need to know what we are trying to achieve. Why are you in business? Are you thinking long term or short term? Are you focused on profit or are other things more important? Are you planning to sell the business or pass it on to family? In other words you need a plan that answers all of these questions.
Most business plans use a 3-5 year horizon and set stretchy but realistic targets for business performance. What does success look like? What do you want turnover to reach in 5 years? How much will profit be? What will your role in the business be? Experience shows that if you set out clear targets you are far more likely to achieve them. Once you have your long term targets in place then you can work back to see what you might need to achieve in the coming year.
Tip #3 – Develop an annual budget
“A budget is telling your money where to go instead of where it went” – Dave Ramsay
A budget is as much a process as it is a document because when done properly it requires you to review and analyse all aspects of sales, costs, margins and profitability. Micro businesses can often get away without having a detailed budget but even simple businesses find that they need a budget as they grow and add complexity in the form of more sales, staff, premises, stock, and vehicles etc.
When preparing a budget try to avoid the temptation of going for your typical growth rate; rather try to identify what sales and profit figures you want to achieve and then work out what activity and resources you need to achieve those targets. What extra sales people do we need? What do we want them to sell? What will they cost? Do we have the finances available to afford them? A properly prepared budget involves a whole series of questions like this, with robust discussions about priorities as departments fight for scarce resources. The end result represents the agreed way forward for the business for the next 12 month period and so it is worthwhile investing the time and effort to do it properly.
Tip #4 – Maintain a realistic cash flow forecast
“Turnover is vanity, profit is sanity but cash is reality” – Anonymous
All the plans in the world will not help us if we don’t have the finance in place to support our growth plans, and there is nothing worse than having customers with orders ready to place and not enough cash in hand to meet their requirements. Once we have agreed an annual budget, a cash flow forecast will help us identify pinch points in our next trading year. In addition to normal operating expenses, other financial commitments such as VAT, corporation tax, dividends and bonuses all need to be built in so that the forecast is as accurate as possible.
Common problems to consider might include selling goods on 30 days credit terms and being paid on 60 days by a large customer or imports from China requiring payment of a 30% deposit months before goods even arrive in the UK. The purpose of the cash flow forecast is to identify issues like this well in advance so that appropriate bank facilities etc. can be put in place.
These are the types of issues and conversations that come up regularly for an experienced business adviser such as Simon Monaghan of Clear Target Management & Business Solutions. With 30 years of management experience under his belt Simon is able to identify and resolve a broad range of issues experienced by growing companies and he is available for a free initial consultation upon request.
Simon Monaghan, Tel. 07768 611986, Email: email@example.com