The only way to remain in business in this climate is to plan, but the days of the three to five year plans are over. Instead focus on the next 18 to 24 months with lots of scenario planning and stress testing.
Create a forecast for the next 18 months to 2 years. Take your business plan and then impose a series of scenarios. A business-as-usual scenario, for example, might have flat growth. Another scenario might project a 10% drop in revenue and a 20% increase in input costs. These scenarios show you the effect on the business of outside forces, and allow you to develop contingency plans to mitigate their effect if you start to detect their impact through your monthly reports.
You might decide that if revenues decline for two or three consecutive months, then you will implement a stronger sales program. If that fails, then you might move to significant cost reduction activities. Look at what happens if the company loses customers and suppliers.
Include catastrophies like no sales for a year to see how long you have the cash reserves to keep paying staff.
You might need to draw up plans to create other ways of drawing revenue, like discounting, or going to other markets or changing production. Identifying a critical threshold means you can start thinking about how to mitigate it.
Develop your business plan
Critical to forecasting is your business plan; it should cover market analysis, organisation and management, strategic analysis, marketing and sales, products and services, the amount of funding needed to start or expand the business, and financials. The best business plans are updated every three months.
Do you find when it comes to a choice between serving a paying customer and writing a business plan, like most small businesses, you go for the money? Lack of time is a major reason many small companies don’t have plans. The answer for some businesses is to prepare the plan on the weekend. It might take an entire day, but it's a worthwhile exercise.
SMEs are at a disadvantage in this climate because, unlike the big corporations, they lack the resources and sophisticated tools that can make forecasts. But you can do certain things to plan ahead. Every business owner, even a small corner store operator, should be able to build a basic financial forecast model using Excel spreadsheets. It is really not that complicated. It's a very structured process where you look through the historical financial statements and the balance sheet history. If necessary, attend an Excel training course and spend some time with your accountant getting help to set it up initially.
Talk to customers and suppliers
Stay close to your customers and suppliers. They will often have good information in their own areas of expertise that can help you develop a sense of likely trends. For instance, retail supply companies probably know quite a bit about customer buying behaviour which can forewarn you about risks and opportunities in your own business.
Track targets and KPIs constantly
Going through the balance sheet every three months is simply not frequent enough in this climate. Prepare your monthly financials as close to possible to month end, and then run your stress tests constantly against the figures. Make sure that your key performance indicators, such as sales targets for each week, are in place. Analyse the month’s end financials comparing the actuals with your budget to see where you are performing well and where there are shortfalls.