Getting Back to Business Basics
Getting Back to Business Basics
We have collectively experienced unprecedented times. As CEOs and CFOs, we seem to be writing the playbook as we go. Over the past eighteen months, survival mode has become the norm rather than the exception, as we navigate the turbulent waters of each day. Yet, we all realize we can’t survive in survival mode for extended periods of time. In doing so, we are only looking at our immediate requirements and needs to get by, not our long-term goals and needs to thrive.
When we operate only in the day-to-day, as survival mode requires, we tend to overlook the basics when it comes to our businesses, and specifically, our financials. But truly getting back to basics is the only way to support the long-term strategic growth of the business. And when it comes to basics, you can’t get much more fundamental than a business plan and an annual budget.
Basics #1: The Business Plan
You may be thinking this is Business 101 and you’re beyond it, but you’d probably be surprised (or maybe you wouldn’t be) at the number of businesses that do not have any business plan whatsoever. A business plan is much more than something that has to be checked off your never-ending to-do list. It not only helps you create an effective strategy for growth, but also helps you determine your future financial needs, including the need for investors and/or lenders.
According to the SBA, the importance is clear. “A good business plan guides you through each stage of starting and managing your business. You’ll use your business plan as a roadmap for how to structure, run, and grow your business. It’s a way to think through the key elements of your business.”
Additionally, if you plan on seeking funding, business plans play a crucial role. “Business plans can help you get funding or bring on new business partners. Investors want to feel confident they’ll see a return on their investment. Your business plan is the tool you’ll use to convince people that working with you — or investing in your company — is a smart choice.”
In thinking about the execution of a business plan, too many owners or leaders get stalled on the format itself. However, it’s important to remember there is no right or wrong way to develop a business plan. Regardless of how many pages or the font used, the most important takeaways are that it clearly lays out your product or service, identifies your target market, and details your strategy for reaching that market, including the financial needs and requirements on both a short- and long-term basis. While this past year has shown us that we cannot fathom every possible scenario that could impact our business, developing a robust plan is one way to prepare for as many contingencies as possible and help ensure the company’s success.
Basics #2: Annual Budget
While twelve months from now may feel like it may as well be twelve years from now, it is imperative to have a strong annual budget. The annual budget should also be able to be broken down into months for easier monitoring. At a minimum, your annual budget should include the following:
- Income Statement,
- Balance Sheet, and
- Cash Flow Statement.
Most businesses are familiar enough with income statements – they can clearly see the revenue coming in and the expenses going out. This is undoubtedly important, but it does not prepare you for your working capital needs. Essentially, you need to know how much you actually require to run your business. In order to truly understand those requirements, an accurate balance sheet and cash flow statement are needed. For example, if you have inventory on your balance sheet, you will need to project the use of cash to purchase that inventory. An income statement will not help you with that.
Nearly every decision you make today can impact your cash flow tomorrow. For example, I once worked with an organization that had double-digit growth each year and was very profitable. The company was getting ready to launch a second product and had offered extended payment terms to customers on their entire order if they added the new product to their order. This may have been an impactful customer service move; however, it was quite the opposite for generating the cash flow needed to pay the vendor. No one had projected the impact this decision would have to their balance sheet and cash flow, so they were unaware that the plan they had in place was going to essentially stop incoming cash. We had to react quickly and manage cash just to meet payroll and other immediate obligations. Simply, this stressful time could have been avoided entirely if the company planned appropriately with a balance sheet and cash flow statement.
While the responsibilities and priorities of a CEO or CFO may vary depending on the company, the need to get out of survival mode and back to business basics is the same for everyone. The common denominator of these basics is that they require you to look ahead and make forecasts on the future of your business – the very opposite of survival mode. Barker Associates has extensive experience in developing business plans and annual budgets that are appropriate for the specific business involved. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.