Business Planning: Lower Risk and Make Better Business Decisions

Better business planning is about identifying and managing the financial and non-financial risks your business faces, and doing what you can to reduce them.

Budgets and financial modelling are the best way of identifying and reducing financial risk, but managing non-financial risk is about asking the right questions, and then putting in place a plan to combat that risk.

Budget Better to Reduce Financial Risk

The secret to better business planning is budgeting. It’s the simplest way to map out the financial future you want for your business.

A good budget starts with a few simple goals, and those goals drive business behaviour. While past performance is no guarantee of future success, it’s a good starting point. But next year’s budget should also be considered in the context of the broader financial risks faced by your business.

Business Goal: Increase Sales 

Sales growth is probably the number one goal of most businesses. But deciding on your new sales target isn’t as simple as taking last year’s number and increasing it by say 5 percent.

Budgeting for increased sales means being confident you have a market for those sales. So before you lock in the target, review your customer base and ask yourself exactly who the business is going to make those extra sales to. 

If there is no scope to increase sales to existing customers the next step is to find new customers. To do that you might need to increase your marketing spending. So you need to ask yourself if your business can afford that.

Even if you’ve got a market for new sales you might not have the capacity. If you produce goods for sale your machinery might already be working flat out, or your team might not have the time to fulfil any more orders. Then you need to decide whether the business can afford to buy new machinery or hire and train more staff.

There are a huge number of potential business decisions behind the simple goal of increasing sales, but professional advice can help you assess all the variables and how they interact so you make the right decision for your business.

Business Goal: Cut Spending 

Most business expenses fall into two categories: fixed and variable. If you produce goods for sale your variable costs are those incurred making those goods, such as raw materials. So it makes sense that you need to budget to spend more if you plan to sell more.

Regularly reviewing your suppliers’ terms is good business practice but it could also mean an increase in sales doesn’t automatically increase variable costs. 

Trade on a long term relationship or the prospect of more purchases to negotiate better terms from your existing suppliers. Or look around for different suppliers who will give you a better deal. But make sure you are confident they will be able to consistently deliver, and meet your standards. 

If you plan to invest in equipment to meet increased output demands consider leasing instead of borrowing to buy outright. Depending on the type of lease you take on then maintenance costs could be included.

Use the prospect of annual renewals to shop around for a better deal on fixed costs such as insurance, and don’t automatically settle for an increase when it’s time for a rent review, always negotiate.

Make sure you understand the detail behind last year’s numbers well enough to identify quick wins for saving money in next year’s budget, however big or small the amount.

Business Goal: Improve Cash Flow 

For most businesses a bigger bank balance at the end of the month means security when unexpected bills arise or trade is slow. If your business doesn’t tend to carry a lot of spare cash then it’s a good idea to set a goal to increase that amount gradually over time.

Hold on to your business cash a little longer by reviewing supplier payment terms and make sure you don’t pay bills early. Check your customer payment terms against industry norms to make sure you are collecting cash on a timely basis, and make a habit of chasing up customers who don’t pay on time.

Where possible take advantage of the chance to make regular monthly payments for e.g. utilities to avoid paying big bills every quarter. 

Every business decision has consequences and being able to assess the impact on all the variables takes skill. An experienced financial adviser can help you understand those consequences.

Simple modelling tools will let you play with different scenarios so that you can see how your goal changes when you change some of the variables.

Download the Wilson Teis Breakeven Analysis tool here. It’s a simple spreadsheet that lets you work out what sales you need to make in any given timeframe to cover the expected fixed and variable costs for that period.

Ask the Right Questions to Reduce Non-Financial Risk

Better business planning also comes from understanding and managing non-financial risk. Identify potential risks by asking questions that touch on every aspect of your business such as: 

• Brand & Reputation: will a proposed increase in sales mean reduced customer service?
• Product: if I decide to branch out into new markets are additional sales sustainable?
• People: what would the loss of key staff mean for my business in the coming year?
• Finance: do I have the financial expertise to manage planned business growth to meet cash flow needs?
• Operations & Management: what is the impact on my business if I lose a key supplier?
• Sales & Marketing: have I got time to market my business to drive the planned sales growth?

The relevant questions for your business are driven by a variety of factors and are unique. Your answers to those questions will also help you identify which risks pose a more immediate threat and need to be addressed in your short term business planning goals.

Take the time to work through them with a trusted adviser who can work with you to identify and prioritise the key risks to your business.

At Wilson Teis we’ve developed a simple framework using a SWOT analysis that you can use to start asking the right questions about the risks faced by your business. Download the Wilson Teis Risk Assessment Worksheet here and start planning.

Whether it’s a simple one pager or something a bit more complex, Wilson Teis can help you build a better business plan for the coming financial year. Start as you mean to go on and call us today to find out how we can help.