By: Arlene Meyers
Visionary Planning Can Reveal New Opportunities
Financial management of a business today can feel like a squeeze play, with owners caught between the lingering effects of the pandemic and a potential oncoming recession. Just when you think you’ve got a handle on one crisis, another one rears its head.
Focusing on the fundamentals — cash flow management, forecasting, budgeting and planning — is key to maintaining an even keel amid a volatile economy. But more broadly, asking the right questions and working through the options to find the best solutions can help an organization navigate to a more solid and profitable future.
Finding the right balance between everyday management of the company and the kind of visionary planning necessary to take it to the next level is what defines the most successful companies today.
The Fundamentals
- Cash flow management. The cash flow statement is one of the most overlooked documents a business owner has available. Reviewing the cash flow statement and understanding the ratios and key performance indicators is key to understanding the health of a business. It reveals the company’s cash flow, receivables, payables and loan balances. For example, is the remaining term of a loan longer than the life of the asset? Is the cash position strong enough to pay bills and payroll for at least six months?
The insights gained from the cash flow statement can help an owner make decisions about refinancing debt, dialing back owner draws, reining in discretionary spending and other strategies that can help ride out a possible recession. - Forecasting. Many people use the terms “budgeting” and “forecasting” interchangeably, but they are very different. Budgets are based on historical data and are static in nature. Forecasts are based on live current data and can be adjusted on a regular basis as market conditions change. Forecasting allows a business owner to react to the environment, particularly if they know something will affect the business within a short period, such as supply chain disruptions or a change in competition. A forecast is a moving target, which may seem unsettling. But a well-conceived forecast is the financial “boots on the ground” that enable an organization to prepare a more realistic budget for the next year.
An organization’s financial management team – including outsourced advisors – should work together to build a forecast, sharing information about industry trends and changes that are coming down the pipeline. The resulting forecast can enable more proactive business decision making, rather than reactive. - Budgeting. Your organization may be required to prepare an annual budget by a policy of the board of directors or as requested by investors. Even if there is no requirement, the value of a budget becomes apparent when you need a roadmap to guide the company’s spending priorities and decision making throughout the year. Since the budget is based on historical data and an understanding of the marketplace, it becomes the financial foundation that executes your annual business plan.
This doesn’t mean budgets are sacrosanct. Sudden downturns in the market, unforeseen supply chain disruptions or even natural disasters can require mid-year budget corrections. Moreover, the budget doesn’t reflect money in the bank. Your balance sheet and cash flow statement are the key tools indicating the health of your cash position. But when it comes to spending priorities and the execution of your strategic plan, the budget will serve as your financial GPS throughout the year.
Planning
What if? What if you want to raise your prices? How will it affect your customer base or your referral program? Is anyone complaining about your prices right now? If not, that may indicate an opportunity to adjust them. But how will that impact your revenues, budgeting, marketing and staffing?
Planning involves asking the right questions, running the what-if scenarios and making decisions based on reliable data. Ideally, a technology-based tool can help produce answers to the what-if questions to guide the decision making.
Key members of the finance and operations teams should be involved in the planning process, as well as the company’s trusted advisors.
The Covid-19 pandemic upended the planning process in many companies, and continuing supply chain delays are still an issue. But planning takes on even more importance in a volatile marketplace and can reveal opportunities as well as threats. Remember, that craft brewery that’s making your beer today was making hand sanitizer two years ago. That didn’t happen without forward-thinking planning and the ability to pivot quickly.
Contact your KRD advisor for a discussion about finding the right balance between everyday management and visionary planning for your company.
