No business owner plans to fail, but plenty fail to plan. It is an old adage, but never truer than today. We are coming out of the global financial crisis and retail confidence has been rocky and won’t really show signs of recovery for six months. The remainder of the economy, however, is starting to look brighter.
Business Development Company Director, John Downes, believes that with the turbulence, and a spot of blue sky, we need to be carefully planning our way through the next 24 months to ensure we don’t go too hard too early and miss the next wave of growth.
“There is much uncertainty as to what’s going to happen with the Australian dollar, unemployment, consumer demand, interest rates and venture capital,” says Downes – who runs BDC’s small to medium enterprise strategy business.
‘It’s also very difficult to understand what’s happening with consumer confidence and business confidence, which is driving buying decisions and which, in some cases, is quiete delayed.
Still, the only way to remain in business in this climate is to plan. Scenario planning and stress testing become more important than ever before.
Building the plan
Downes recommends his clients and all franchisees develop a three-way forecast of monthly profit & loss, cash flow and an annual balance sheet. Business owners should run a series of forecasts for the next two years. A business-as-usual scenario, for example, might have flat growth. He then advises clients to impose other possible scenarios on their business plan, like:
- a 10 per cent drop in revenue
- a 20 per cent increase in input costs as a result of a stronger Australian dollar
- a tightening of credit terms by suppliers and a lengthening of debtor days by customers
‘This allows the business decision maker to look at his business under a range of scenarios, none of which can be guaranteed to happen.’ Downes say. ‘But through testing these different scenarios, we can actually identify the trigger points in the monthly reporting as we go through the year.’
Downes says this allows the franchise business to develop and implement an ‘agility plan’ to mitigate those forces.
If the forecase is for a 10 per cent reduction, we may have in place a set of decisions already modelled; so if we have two or three consecutive months of declining revenue, we have to drive for a harder sales program. However, if we feel that’s not delivering, we may have to look at some significant cost reduction activiities.
Monitor your cash flow
Cash flow is the critical indicator to watch here. It determines your ability to pay for staff, stock and rent. Only some of these are variable costs and each has its different level of tolerance for delays in payment. Even if the business is growing, we need to know what the cash flow implications of growth are so we do not grow our way into bankruptcy.
‘I had a franchisee last year who, despite fabulous sales growth, was being caught out by having his debtor and creditor trading terms being totally mismatched, so for every dollar of new sales, he was closer and closer to financial collapse. A simple realignment of the terms made a huge difference, but it was only by looking at the cash flow budgets and the business plan that we would foresee this and avert a crisis,’ said Downes.
This might mean developing contingency plans to consolidate sites, or reducing marginal growth services or those that are likely to suffer more when demand crashes. If the worst happens, the company is not caught off-guard and is quick to act.
‘The reality is we can’t guarantee what’s going to happen over the next 12 to 24 months. It’s about being forewarned and forearmed. It’s prudent to model some of the scenarios that you can reasonably expect might happen and establish some plans should they occur.’
Keep track of customers and suppliers
According to Downes, scenario plans also need to look at what happens if the company loses customers and suppliers. It is more than likely that some will not be there two years from now.
Having these scenarios modelled and action plans written down will give you the ability to make decisions in an informed and considered manner and avoid getting the fax on the Monday morning from the receiver saying, ‘We have been appointed to one of your key clients and you are likely to get X cents on the dollar in two year’ time,’ or ‘We are not going to continue looking to you as a supplier.’ That’s when you get kenee-jerk reactions.
Downes says the simple way to avoid these surprises is by tracking your customers and suppliers.
‘As a business owner you need to be speaking to your customers and suppliers and having the heart-to-heart conversation with them about what’s actually happening in their business and how their busienss is going.’
‘If you have two or three key suppliers, or two or three key customers, then you need to be having those conversations, just as you should be having those conversations with your bankers,’ he said.
The business plan covering such areas as market analysis, company description, organisation and management, strategic analysis, marketing and sales management, service or product line and the amount of funding needed to start or expand the business and financials, is critical. The best business plans are updated every three months.
Downes says one reason why many small companies and franchisees do not have plans is lack of time. Faced with the choice of serving a paying customer or writing a plan, any small business would go for the money. This canbe a convenient or necessary excuse.. Unfortunately, the answer for some businesses is to prepare the plan on the weekend or a slow trading Tuesday.
‘It might take an entire Sunday, but those that do it say it’s a worthwhile exercise,’ says Downes
John Downes is Director Advisory and Strategy for the Business Development Company. John is one of Australia’s leading business growth experts with over 25 years international experience providing strategy and operational advice.
BDC provides a full range of managed services from one company to strategically develop clients’ businesses from concept to completion, with one solution.
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