A great business strategy and plan should be supported by a detailed budget that can test different business scenarios. Having a simple budget summarising your sales and costs is a good starting point, but you really need to expand this further to help support business decisions. This does not have to be a super complicated spreadsheet model, but it should allow you to be able to test different business scenarios and the effects on profit and cash. A great budget model should allow you to see the effects on profit and cash flow when a business experiences changes in:
- Sales increases or decreases.
- Gross profit margin improvements.
- Staff costs, be it additional employees and or wage increases.
- Operating expense movements.
- Asset requirements such as vehicles, machinery, and so on.
Small business owners know their businesses better than anyone else but being able to model out these ideas to see the financial implications of how certain decisions will affect profit and cash is not always that simple. This is where I spend most of my time with the small business owners that I work with regularly. We not only look at how the business has performed historically, but also future performance based on the business’ strategy. Having a great working budget model allows us to not only plan appropriately but check how well the business has performed to the original plan set 12 months ago. This provides business owners with actual data on whether their original strategy was achieved, realistic, roadblocks that might have impeded their strategy, and any improvements that could be made to the updated business strategy.
A perfect example of how well this works is a real-life situation I was faced with a client where they were considering ceasing their wholesale business with their only focus being on their vertical business; this is their online and retail store operations. This was a significant business decision and it needed to be thoroughly tested through different scenarios to determine the impacts on the business’ overall profit and cash flow. In this example, the business has decent business systems for managing their inventory, sales, and financials. This allowed us to easily extract the sales, cost of sales, and overheads specific to this arm of their business. I was then able to model out what the business would look like if they ceased their wholesale operations. With the business owner, I was then able to show them their financial position if these operations ceased and everything else remained the same. I was also able to show them how their business might look 12, 24 and 36 months later if different sales growth targets could be met as well as margin and other improvements. After 6 months of modelling and strategizing, the business decided on going ahead with their strategy of ceasing this part of their business which was an extremely difficult and bold decision dropping 45% of sales. Over 12 months later, this business exceeded their sales growth targets, achieved their margin targets, and kept their overheads in line with budget. Through the first year of changes, we constantly monitored actual performance to budget monthly to ensure the strategy was on track. They are now a slightly smaller business from a sales point of view but far more profitable with less moving parts to manage. Being able to model this big business decision and show the business owner how these changes would affect profitability and cash flow played a big role in making their decision easier. Furthermore, by modelling the planned changes we were able to set clear targets and goals for the next 3 years to successfully deliver on the business’ strategy.
The above real-life business example highlights how important it is to have a budget model that allows you to test different business scenarios when formulating your business’ strategy. It does not matter how big or small your business’ is, you need a good budget model along side your business’ strategy to see the profit and cash flow impacts. This ensures you can plan for any shortfalls and how you might fund them.
If you would like more information on how I can assist your business with creating a budgeting model to test your business decisions feel free to send me an email.