Financeheads Blog

Tip 1: Plan Ahead

So many businesses fail to produce a plan (or budget) to enable them to assess whether they are on track, behind or even ahead of their objectives.

It’s like a Yachtsman sailing an ocean without a map or compass. Christopher Columbus set out not knowing where he was going. When he got there he didn’t know where he was. When he got back he didn’t know where he had been – and he did this three times in seven years!

If you don’t want your business to end in failure, you need to have a clear goal and then work out a plan that will help you achieve it.

Here are five reasons why good businesses make proper plans?

1. You need to understand which parts of your business are contributing what margin, which could influence your spend on marketing and resources.
2. You are looking for external funding and need a business plan.  The better the p
3. You want to compare your actual results with your expectations at the start of the year.
4. lan, the better your chance of obtaining the support you need.
5. You are looking for a third party investor who may wish to take a share in the business. Your plan will give the potential investor a good idea of whether your business is a suitable risk and provide an indication of when a return on investment is likely to be achieved.
6. You are looking to retire and sell the business within five years. A business plan will show the potential buyer that is a viable concern without you and that it is being purchased (and sold) at a fair price.

In the next tip, I’ll be looking at the different ways you can increase your turnover.

For a free analysis of cash movements in your business, please email me at gordon@welsbyassociates.co.ukand let me help you take the first step to understanding your accounts.

http://www.welsbyassociates.co.uk

I have had occasional mushrooms in my garden but this year I seem to have had more than ever and can offer a selection from very small and yellow through to large and creamy coloured. The sad thing is that I suspect none of them are edible and I am certainly not going to risk it.

Many clients have permanent finance staff working for them and it can be useful for the part time FD to get involved in any recruitment process. The challenge for MDs is that it can be hard to ask the right questions, let alone judge whether it is the right answer, when looking for staff in a discipline you aren’t sure about. In addition, many candidates are skilled at telling us what we want to hear so it’s often worth having a specific ‘test’ to make sure they can deliver and not just talk about it.

Finding the right staff can sometimes feel a bit like looking for the mushroom in amongst all the toadstools on offer but expert advice can help reduce the risk of getting it wrong.

I love this time of year when the trees change colour and sometimes the most unexpected plants provide the most vibrant show. I don’t even know the name of the main show off in my garden – I am sure an expert would, but an amateur would be as surprised by the display as I was the first year. I saw it’s role in my garden in a totally different light as a result.

There is seasonality in business that is predictable, and planning helps to ensure the business is ready to respond to those peaks and troughs. The great thing about management reporting (not just the numbers but other KPIs) is that it can help reflect, and then predict, some of those peaks and troughs. And a fresh pair of eyes can often help ensure that the correct reporting is in place and interpreted.

Landscape gardeners can help ensure all year round colour in the garden. Business owners need to achieve overall profits for the year. The challenge is that however skilled or open minded we are, our view is only one view and often we need to be shown the different perspective. Who can be your ‘other pair of eyes’?

Whether you are asking your bank manager for an overdraft or loan, or seeking outside investors into your business, you will need to be prepared and have a business plan and a Financial Plan.

Business Plan
Every business should have a business plan, whether or not they need funding, but when used for funding it will need to be in a more established format:

As well as basic company details, such a plan requires a 2/3 page Executive Summary that must capture the reader’s interest in your company by giving brief details of the business history and objectives; the management team; the market opportunity; its planned routes to market; the competition; any development plans; its IP protection; a financial forecast summary; the funds being sought and what it will be spent on. More detailed sections should then follow expanding on these headings, plus a possible appendix section to put CVs, broachers, copies of IP registration details etc.

Financial Plan
When seeking investment, a detailed three year financial plan will be required that, ideally, includes profit & loss account, cash forecast and balance sheet by month, although after the first year this can be reduced to quarterly figures. Recent historic actual results will also need to be displayed, as well as all basic assumptions used in the forecast, including sales mix, pricing, volumes etc that have been used to build your forecast. Build your model in a way that allows you to affect some level of sensitivity so that you can swiftly demonstrate what an x% drop in sales would mean to the business, a question often asked by would be funders.

Once you have achieved your cash injection, use this forecast as you next year’s budget, and have your future monthly management accounts compared to it with any significant variance being investigated against your forecast assumptions, and learn from why things are different.  Make sure that you intimately understand the Plan and Forecast, as you need to be able to confidently answer any question about it.

Whether you are asking your bank manager for an overdraft or loan, or seeking outside investors into your business, you will need to be prepared and anticipate all the information that you could be asked for and understand the implications:

Business Plan
Financial Plan
Due Diligence
Term Sheet
Dilution
Valuation
Legal Documentation

Taxation
Other than in respect of taking out an ordinary bank overdrafts or loans, it is always wise to consult your tax advisor at every stage along the way to try and ensure that the potential/eventual outcome has the most beneficial outcome for you and your fellow shareholders. There are also tax schemes that encourage investment (EIS) and these should be considered whenever possible, not only to secure that investment, but to make for happy investors.

Support
Whatever funding route you take it will involve a lot of preparation, detail, procedure, negotiation, legal jargon and most of all time to achieve a successful outcome. A FinanceHead can not only ease that burden by managing the transaction for you, but explain to you at every step along the way what it all means to you and the effect it may have on your business. Being seen as being in control of your business should enhance an investors’ view of value and give them comfort that their investment will be well managed.

Within business there are often jobs that we hate doing, can’t make the time to do or don’t have the skills for. When we finally get around to recognising that we need expert professional help to sort the chaos it does of course cost us more than if we had kept things under control along the way. And that’s without thinking about the business impact of not having the right information, working inefficiently and so on.

Once every 3 years I recognise that my garden hedges are so out of control that I need to get a professional in to sort them. They now look great and I wonder why I lived with the chaos for so long. This year I found a fabulous new, good value, supplier and have vowed to get him annually in future and keep things under control.  Do you need to make a similar vow in relation to your business’ finances?