Previously on the blog I’ve talked a lot about new businesses. Today I’m going to focus on taking a fresh look at an existing business – and what this means in terms of planning.
So, your business is up and running. Maybe it’s been trundling along for years, or maybe you’ve been furiously climbing the slippery slope to financial stability as a startup. You might not know it but you’ve reached a point where it’s time to take a new look at your business.
Why financial data is important
On the operational side, this means considering changes in the way you run the business, in what you sell, the way you sell it, or who your suppliers are and how you deal with them. But when I talk about taking a fresh look at the business I’m talking about the financial side.
After all, the data you will be using as a basis for change will often be financial data. What sold well and what didn’t, are we overpaying our suppliers, which current project has the best, fastest, or lowest risk return on investment. In a lot of cases, it’s the data you get from your financials that will shape the way you plan what to do next.
What is a fresh approach, and why take one?
So if that’s the case for the importance of financial data, what about changing the way you look at it? Clearly, there are going to be advantages to tracking the same types of data in the same structure over time in the way ways – you can pick up trends and changes easily. For example, you could track the growth of sales of a particular product line, or more generally the profitability of the business. But what you’ll often find when looking at these benchmarks, is that there is information about your business that is being lost, because you keep on viewing it in the same way.
The fact is – businesses change over time. Their internal structures change, their sources of funding change, and the way that they think about their income and expenditure changes too. When you come to take a fresh look at your business plan, these are the changes you’ll need to consider when remodelling your business.
What is important about what I am selling?
Are you getting the data that you need from the Cash Received line in your Cash Flow? It may be that there are trends in your cash received that are hard to spot because the data isn’t broken down in the best ways to reveal what you need to know.
Here’s a simple example: every year I make £20,000 selling fruit. Included in ‘fruit’ are apples, pears, bananas, oranges etc. If my fruit sales have been decreasing, I need to understand which of these types of fruit is responsible. Or if the price of bananas has increased, I need to understand that it is this fruit, rather than any other, that is driving up my direct costs of sale.
Another example: a freelance graphic designer works on several projects for several clients. Some might have high associated costs, while others are simply more time consuming, require face to face meetings or revisions. Other work might be on a contract basis, regular for a time but with a finite end point. Identifying these different streams of revenue and how they behave will enable the designer to forecast them with much greater accuracy in the future.
Can I get a better understanding of my business costs by re-categorising them?
When taking a fresh look at your businesses finances, one of the first places you’ll look is your expenditure. Identifying and cutting unnecessary costs, or paying them more efficiently is a no-brainer for any business. But the ways these costs are categorised can lead you to think about planning them in different ways.
For example, a business which operates on several different sites might pay all of its bills for all sites from the same account. But when planning for the future, splitting the costs associated with different sites into different sections for the purposes of planning will help track identify higher or lower costs sites. This is turn will help planners make informed decisions about expenditure and profitability per site.
But businesses with multiple sites are not the only ones who might consider re-organising how they think about their costs. Changing the granularity in which a businesses expenditure is planned can be a good way of getting the right information out of the businesses financial plans. For example, splitting out the direct costs associated with different products, or the hourly rates contractors charge for different tasks can give a clearer picture of how much is being spent that having more top-level figures.
Do I need a better way of looking at future scenarios?
When planning the future of a business testing different scenarios is key. Envisioning one static future may provide an indicator to one potential series of future events but businesses need to consider more than one potential way forward. This could be as wide-ranging as considering changes in the wider economic reality the business operates in – changes in tax laws, rates of inflations, the cost of buying materials etc. Or they could be more internal possibilities, such as restructuring the business, starting a new project or product line, changing the way the business is funded (seeking outside investment, for example).
If your current financial plan was made some time ago, perhaps when you had different data or made different assumptions about the business, then now might be a good time to revisit it. Ask yourself what answers your financial plan needs to provide, and if it can provide them in the way it is currently structured. Often you may find that questions you ask of your plan as part of scenario testing (what happens if we push this project back 6 months? Or, what happens if I change the rate of taking on new employees?) do not easily fit into the current structure of your financial plan.
If this is the case, taking a fresh look at the way you think about your financial plan could save you time in the long run. Planning for a purpose is always going to be better than planning in the same old way ‘because that’s how we’ve always done it’. Plan to answer questions pertinent to your business, not the way your business used to be.