If you were traveling to an unfamiliar destination across unknown territory you would certainly want a SATNAV – real time navigation to keep you on the best route to your target. The SATNAV is a simple metaphor for the planning and financial reporting elements of a well-run company.
When you are clear on your destination, the SATNAV gives you the optimal route to get there, gives you an ETA and even estimates how much it will cost. The device then guides you constantly along the way to make sure you are still on track – the only time the SatNav goes quiet is on 500Km of straight road where there are no decisions to be made.
It tells you exactly where you are at any time and more importantly where you are in relation to reaching your target and your ETA.
Target setting is critical
To use a SATNAV you must have a clear target in the first place.
The destination is the equivalent setting of clear overall targets for your business – both financial and non-financial.
This is a critical conversation in your business – for example if you are setting up a high growth start up intending to exit within 5 years your targets will be to achieve ambitious revenue growth to maximise the value of the company at exit without burning too much cash in the process as otherwise you will dilute your equity ownership too much.
In contrast if you are running a multi-generational family business, you may have more moderate growth ambitious as stability and sustainability may take precedence. Your targets might be to generate an agreed level of profit without burdening the company with debt or taking on new external equity.
These 2 targets would demand very different financial plans.
It is critical to agree the targets with all stakeholders – banks, shareholders, management and employees. In a family business for example it is very important to have family agreement on the growth strategy and risk appetite and the implications for dividends that can be paid out.
The single most important task for financial management is to agree clear targets for the business over about a 5 year horizon, and to then agree a clear financial plan that shows how you will deliver on those targets. How much investment will you need to get there? How long will it take to build revenues to deliver on your targets?
Running a company without targets is like driving without a destination – you will go round in circles.
The targets and the plan to reach them must be clear to all managers and decision makers. Everyone should be clear on the target for each of the next 5 years and the strategy beyond that, and on a practical level what exactly has to be done to deliver on those targets.
What’s in a Financial Plan?
The plan shows you the cashflow implications of your proposed strategy, showing the full investment required to reach your goals, and the working capital implications – the amount of money you will need to tie up in inventory and customer credit.
It also shows the expected profit and loss – how much revenue do you expect to generate and what costs will you incur to get there. And finally it includes a balance sheet which shows how you propose to fund the assets you will need to support delivery of you plan.
For example if you need to expand your facilities to generate higher turnover, are you expecting to be able to self fund from profits generated? Borrow from the bank? Or seek new equity investment.
The Financial Plan is essential to raising capital
The plan shows you how much external capital you will need to raise AND puts you in a much stronger position to get it. The bank want to see a credible well researched cashflow forecast to see whether they can be repaid. Investors want to see a forecast showing a clear path to exit or value creation.
Don’t wait for the bank to force targets on you, set your own agenda and targets in line with your own risk appetite, lifestyle aspirations and value system.
Creating the plan
You have to estimate what volume of products you can/ plan to sell at what rice and product cost, and then plan the level of overhead spend you will need to support that volume of sales. What management resources, sales and production team will you need? How much marketing will you need to do? How much will administration and premises cost you?
Current Location vs. ETA – Monitoring delivery of the plan: Management Reporting Systems
Just like the SatNav tells you where you are in relation to your target and ETA, You need to set up reporting systems to monitor progress and delivery of the forecast. Like any other goal and plan, without monitoring it will bite the dust.
Financial systems should give accurate timely information updates on progress vs. plan in your management reporting systems. Your monthly weekly or quarterly reporting systems answers 3 questions:
- Are we on plan?
- If not why not?
- What can we do to get back on plan?
The Finance leader should seek to guide the company back on track whenever we deviate off i.e. off budget. Just like the SatNav, whenever there are decisions to be made the financial manager should be guiding these to keep the company on track.
It is important to develop a culture in the business whereby the financial forecast is really important. If you miss the months target you pull together as a management team to take corrective action to get back on track quickly.
Good management reporting systems give you strong credibility with your bank by keeping them updated on progress. It also allows you to easily explain to the bank if you are off track, and discuss the action you propose to take to address this.
Good Management reporting systems means timely, accurate and adequately detailed to be able to identify accurately why the company is off track on delivery of the plan.
Scanning for traffic jams and speed cameras – scanning ahead for all risks to delivery of your forecast
Just like the SatNav gives real time information on any new hazards that have appeared while you are on the road, the management team must keep financial planning well informed to any risks to delivery of the plan, and where possible you should seek to mitigate. For example if Brexit poses a risk to your business, the financial forecast allows you to get a real sense of how badly your business might be impacted – what if the £ goes to parity and 6% tariffs are applied to our UK exports. If the answer is future huge losses you need to start replanning now to put a Brexit proof plan in place – diversify markets, develop new products for Euro markets etc.
Financial Planning is dynamic, not set in stone
The SatNav is updating all the time reflecting what’s going on outside your car – and rerouting accordingly. Likewise your plan should be a dynamic document – plan ahead 5 years but you should be revising and updating that plan regularly as the outside world changes with new competitors, technology, regulations, consumer trends, political risks etc. There is no point following a SatNav on an out of date route.
This article is written and reproduced with the kind permission by Moira Creedon of Artemis Consulting