Planning Healthy Financials this Year — and Beyond


Is your business healthy? Or does it need a little more greens and a little less crud weighing it down? Here are a few financial and accounting reminders to ensure your business’ health in the coming year and beyond.

There are three key elements that business owners must look to in order to develop a winning strategy for the coming year and longer-term future: Look to the past to know where you are coming from, look to the present to know what you need to sustain and grow, and look to the future to know how you will grow and to understand your pathway.

Past: Where are you coming from?

Don’t spend too much time looking back, now is the time to review 2015’s results against your Plan and against the previous year. Make sure to do a thorough and honest assessment of what worked and what needs improvement, or eliminated altogether. Analyzing revenue streams will quickly tell you where the money came from and depict a clearer picture of what projects to offer or expand, and what projects, programs or services to let go. Here are some key considerations as you analyze where you came from:

  • Categorize Your Revenue Streams – Offerings, customers, territories, or any metric that is meaningful in your particular business model.
    • Evaluate top 10% and bottom 10%
    • Evaluate cost elements on each category
    • Evaluate capital requirements for each category
  • Evaluate Operating Costs in Relation to Your Revenue Model – Which costs are too high, or where could you maximize revenues by leveraging certain cost categories?
  • Check out other Options – Are there processes that could be outsourced?

Present: Sustain and Grow.

Looking to the present and beyond is arguably the most important view in mastering the ability to effectively manage finances. Certain key elements in planning are critical to taking advantage of opportunities or making fundamental changes to any business strategy as market conditions evolve:

  • Budgeting – A good budget tells you not only how much money you have to spend, but where you should spend it. Again, be honest and objective in modeling your revenue goals. Know what it will cost to achieve those goals. In order to build a meaningful budget, you will need to establish your revenue model, contribution margin, and understand your cost structure.
    • Revenue Model – A thorough analysis of your backlog, evaluation of market trends to project incoming orders, and updating of your pricing model are all essential tools in developing your revenue plan.
      • Revisit your pricing. Are you being paid for the value you are selling?
      • Do leading economic indicators support revenue growth assumptions?
    • Contribution Margin – Take some time to determine what contribution level is necessary from each revenue stream to cover operating expenses and produce the level of operating profit desired from your plan.
      • Know your cost of goods for each revenue stream
      • Understand your variable contribution margin—know what is left to cover fixed overhead
    • Cost Structure – Understand your cost structure. Split your costs into variable expenses and fixed expenses, and then scrutinize every dollar to see what impact reducing them or eliminating them will have on the execution of your Plan. This will help prioritize your cash flow.
  • Forecasting – Perhaps more important than the overall budget is the ability to accurately forecast line of sight for your business and make adjustments as necessary. Most business owners are focused on the everyday tasks that must happen to keep their business running. Developing a few key indicators will provide you the ability to accurately forecast your results, track your progress, and pivot or change directions quickly.
    • Backlog – Routinely assess the quality of your backlog, and bridge it to revenue conversion, or more importantly, cash conversion. Orders sitting in a backlog do not pay for operating expenses.
    • Incoming Order Trends – Understand your order receipt to cash timeline. The ability to forecast future revenues and cash flow based on incoming orders is critical in structuring your variable costs to meet customer expectations. This line of sight can often be easier and more revealing to your business’ health than following only your original budget.
    • Cash is King – We have all heard this, and there is likely no truer expression in maintaining the financial health of your business. Forecasting the timing of your cash inflows and outflows is critical. Undoubtedly, your business has performance cycles, and understanding your cash flow cycle is critical for the success of your business. The time lag between purchasing materials, paying employees, and collecting payment from your customer can sometimes be quite lengthy. Even companies with strong revenues and profits can simply run out of cash in the middle of the cash flow cycle. Forecasting your cash cycle can show where these gaps may exist to prevent running out of money.
  • Measurement – Utilize both your Budget and your rolling forecast to compare your actual results to budgeted and forecasted expectations. Certain key financial metrics should be analyzed on a periodic basis; daily for incoming and outgoing cash, weekly for incoming order trends or expense levels, monthly for overall profit or loss, and quarterly for changes in strategic direction. Set aside a few minutes to review actual results compared to expectations and prior periods so you have a clear understanding of how you are performing.

Future: Where are you going? The Strategic Plan.

A strategic plan is your overall roadmap to grow your business and create long-term value for your business. In an era when it seems some of the biggest businesses were started on the back of a napkin or in a dirty garage, a long-term strategic plan may seem as antiquated as the rotary dial phone. Contrary to what you may think, the rapid pace of business change and market changes is the very reason to develop a long-term strategic plan, or dust off the one you have, and update it. Here are a few key considerations in preparing or updating your strategic plan:

  • How far can I see – Many business owners try to develop a plan that looks too far into the future. While it is important to have a plan in place for five years and beyond, it is more critical to see your business in two, three, or five years. Often, we have a vision of our future state in five to ten years—do we want to expand our product or service line, double the business in size, dominate a market or region, or do you want to structure the business for sale or succession?   It can sometimes be easier to begin with that vision and work backwards, figuring out what actions you must take to reach your goals along the way. As you work backwards, the closer you get to today, the more detailed your plan should be.
  • What should be Included – There are numerous resources available to help determine what should be in a long-term strategic plan and an equal number of varying opinions on what to include. Include in your plan the elements that are critical to you in carrying out your vision of how you see your company’s future state. Some key elements include:
    • Company Mission
    • Strengths and Weaknesses
    • Industry and Competitive Analysis
    • Target Market and Marketing Plan
    • Operations Plan and Team
    • Financial Projections and Key Indicators
  • Other Key Elements – When preparing or updating your Long-Term Strategic Plan is the time to evaluate capital requirements to support growth, technology requirements to support the plan, talent requirements to execute the plan, and take an overall look into the sustainability of your business model. Some key considerations include:
    • Revisiting Your Pricing – Are you pricing your product/service based on the value of what you are selling?
    • New Product Offerings/Services – Are there gaps in the market where you can exploit a new product offering or service to meet a demand?
    • Technology Needs – Does your plan require investment in technology to help execution or measurement, or to streamline tasks and create efficiencies to reduce costs?
    • Talent Management – Do you have the right people in the right positions to carry out the plan?

The Plan should not be something you put together and file in a drawer. It needs to be constantly reviewed, evaluated, and updated as business conditions change, or your vision for your company changes.

Whatever stage of business, it will take planning, preparation and execution to get to the next level and build real long-term value. There are an estimated 29 million small businesses in the U.S., and approximately half of all new business startups fail within the first five years.

You have to prep your business for success and can’t just wait for it. Now is the time to build your Plan, or dust off and update your original Plan.

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