The average small business owner is caught in a bind.
You have customers to please, employees to manage, inventory to procure, vendors to negotiate, and seemingly never enough hours in the day. As a result, your company’s finance function often falls by the wayside. Best case scenario, you’re overseeing the financials by reviewing the company’s point-of-sale (POS) system output and keeping an eye on your bank account balance. Worst case, you’re only learning about cashflow issues when it’s too late – right before a payroll run, estimated taxes, or a vendor payment.
So what should you be doing then? The answer is simple: Reporting and Planning. These two elements are often what separate average businesses from elite ones.
Reporting – Understand the Past
Reporting looks at what has happened in the past. Benchmarking past performance versus your company’s historical performance and overall industry performance. This may include assessing quarter-over-quarter revenue growth or decline, expense trends, inventory fluctuations. Is your company improving over time or getting worse? Are you performing ahead of the competition or behind?
Most business owners have a “gut feel” for these types of things, but business is fluid and the economy is dynamic. One day something is and the next it isn’t. If you as a business owner are not dialed in to the company’s past performance, and how it fares versus historical trends and competition, your business can be hitting a rough patch and you may not know it until it’s too late.
Understanding the past is the best way to understand and plan for the future. To do this, businesses need squeaky clean books, ideally prepared on a monthly basis, and for them or their advisor to perform detailed analysis over the numbers on some regular cadence such as monthly or quarterly.
Planning – Looking to the Future
Planning is forward looking. Preparing a budget for the upcoming year, revenue projections for next quarter, and financial sensitivity analysis are just a few examples. Looking ahead, do you expect the business to be on par with last year or last quarter?
Why or why not? Is growth forecasted? If so, what are the drivers? What are the different scenarios for sales depending on your marketing spend and other investments?
The majority of business owners assume next year will be just like last year. And this may be fine if everything is stagnant – but, of course, in business it never is. Macro and micro changes cause companies to need to be nimble, and change is almost guaranteed in order to stay in business and grow. A good business owner aims for something. Some target – be it revenue, customer satisfaction, etc. Without goals, you end up just running around with no direction or purpose. Financial planning establishes these targets and ensures you have a clear goal and aim.
To effectively prepare a budget, projections, or a sensitivity analysis, the business owner or advisor needs a deep understanding of the business and how future changes may impact it. This exercise should be at least completed once a year – and then looked back on and evaluated and updated at regular intervals.