Business Planning - an updated view
Updated: Jun 10
Whether developing an existing business, considering an acquisition or starting a new business, the process of business planning is invaluable. It helps you map the journey from where the business is now to where you’d like it to be. And it’s an opportunity to bring together your aspirations and dreams and turn them into a tangible reality.
The starting point is clarity on the plan’s purpose. A budget is different to a target which is different to a funding application or a shareholder update. Are you clear which one you’re building?
Once you’ve got that clarity, you’ll need to amass the strategic information required to build a financial model which you’ll do by considering the following;
What does the currently business do? How did it get here? Where does it want to go?
How will the business drive revenue and get paid?
What will future products and services look like? What will their development costs be?
What is the route to market and the cost of customer acquisition?
What are the milestones and KPIs in the journey?
How will we know what success looks like?
The outcome should be a strategic story that is robust, credible and achievable, and will engage its intended audience, both internal and external (managers, employees, investors, or grant makers).
In addition, by considering these questions, it starts to become clear what is and isn’t important to the businesses’ future success.
The outcomes of this process will be used to build a financial model that will then be used to assess the feasibility of the proposed plans. The financial model is the only place where all the business elements (strategy, sales, product, staffing and investment requirements) come together and the relative importance and risks of each become clear. It will quickly become apparent if the outcomes in the model are irrational, if the plans don’t match the strategic story or if key benchmarks can’t be achieved.
When the model doesn’t work the assumptions are then challenged, challenged, and challenged again, until the amended assumptions do work. And when the model does work, the next step is to challenge the logic and assumptions to improve cashflow, limit risk, better use capacity, smooth sales challenges or address a skills shortage. It will also become clear when (or even if) external investment is required, and how much. The assumptions will be challenged again, to ensure the investment stages are rational from an investor’s point of view (for example if the plan shows unattainable funding needs). Once all the above has been resolved it is possible for managers and founders to be confident that the plan they have produced can withstand vigorous interrogation from the most cautious of stakeholders.
The outcome is not a model or plan but an insight into the machinery of your business – and the freedom to focus on the key issues that really do matter.
We applied the above methodology with one of our clients who had been struggling to grow their turnover much beyond £2m for a number of years, with rising costs and losses. We were able to demonstrate that contrary to their long-held assumptions, there were only three KPIs that were essential to their success; sales volumes, the efficiency of charge-out hours and getting paid on time. They used to worry excessively about expenses, but expenses weren’t the key issue for their business, it was revenue growth and profitability. Furthermore, by undertaking a benchmarking exercise, we were able to prove that their desired profit target could be achievable at a much lower revenue level than they had previously thought.
When working closely with our clients at Practical CFO we use the financial model to test all the things we believe to be true, and then improve them. This approach allows us to pinpoint the key performance indicators and then stress test them. Once we have completed the modelling process, our clients can talk with confidence to interested parties and impress them with their in-depth knowledge of the mechanics of their business. And rather than produce the weighty business planning tomes of the past, we encourage our clients to follow the modern trend of drafting a one page “teaser” (the investment memorandum) to garner interest, and then to prepare a longer presentation for face to face meetings with potential investors.
The biggest mistakes which we routinely see in business planning and modelling are:
Not starting the model early enough in the process; for example, the model starts with the first month’s revenue and ignores the pre-revenue marketing and sales activities, and the time (and other costs) required to get a deal over the line
There’s too much detail; the model should concentrate on the important categories
Stopping at profit. Profit is rarely a good proxy for cash, and cash is essential for business survival. You need to model future cashflow as well as the income statement. Additionally, your ability to secure borrowing against assets requires you to understand the scope and value of those assets – which means you need to forecast a balance sheet.
Forgetting that you run more than one business! Treating different business units as one often means you can’t see the weaknesses in each. Having separation allows you to appropriately manage the challenge each business unit presents.
Odd periods. Sometimes we see quarterly or annual models, but these often hide important information; a monthly model is best. In fact, if we’re working with a client under cash pressures then we’ll model daily cashflows to manage planning and cash control.
We believe that the principal purpose of a good financial plan (or budget/forecast which follow the same process) is to take a holistic approach and work out whether the business is winning or not. You might think that you’re winning now, but if you’re missing a better result, you’re actually losing.
FYI, with our help the client mentioned above increased its revenues to £4.5m, improved profit by £1m from a £0.5m loss and made a strategic acquisition to improve its offering in the marketplace. A great result for a company that spent 3 years struggling to increase its turnover...