The three most important tools that a business can have in its toolbox are Business Plan, Cashflow Forecast and Management Accounts. No I hear you scream, marketing and sales are what keeps a company alive! That is true but without the first three you can’t have the last two.
How can that be?? Well without a business plan you don’t know who to target your marketing to for sales, without a cash flow forecast you don’t know what budget for that marketing you have and when it’s available and management accounts will tell you how and which channel/market is performing best or not at all. We are going to use a few car metaphors so the first one, the Business Plan tells you where you want to go and when you want to arrive, the cash flow tells you how you’re going to pay for the journey and the management accounts tell you how the trip is going.
Have we got your attention? Then read on…..
A business plan is a roadmap for a business, you plan where you want the business to be in say 5 years and how you are going to get there. Sometimes you will be asked to supply a business plan when applying for a loan so the lender can see that you have a plan and whether, in their opinion, that plan is sound.
The important part of your business plan for this discussion is the review of who your target market is, sometimes called your customer avatar. What is your product/service and who is most likely to buy that product/service – i.e. what problem do you solve for them. Most mentors like you to boil down your customer avatar into sex/age/marital status/dependants/location. For example your best customer may be a man, 40’s, married with 2 children, based in a city in New Zealand (i.e. not rural/small town), earning around $80k+ who loves cars. To decide on this you must research, research, research competitors, consumer data, Statistics Dept etc.
You may say but everyone buys my product/service, yes that may be the case but who buys it the most? You need to target your marketing to get the best bang for your buck. Concentrate on the return not the spend.
Now you must decide where this person hangs out, both physically and virtually, and you must have a presence there – advert, sponsorship, web banner, google ads, FB ads etc.
Cash flow forecast. So what is a cash flow forecast, simply put it shows what income a business can expect, what bills and expenses it needs to pay over a set period of time using historical information in your accounts, research and based upon certain assumptions of what the future is expected to hold.
Take the car analogy again, you operate a courier business (sole trader) you know you spend say $100pw on petrol, every 6 months you need a warrant, every 4 months you need a service and every two years you need tyres and every year you pay insurance. This is mapped out over say a 12 month period and you might see often insurance & warrant occurs in the same month therefore that month your cash flow is down because your expenses are higher so you may need to pull back advertising spend in that month or cause cash flow pain in the following month. You may plan to delay some spend the month before so you can cover the following months higher expenses.
Another example, a shop may know that Easter is a good month for sales, they buy stock in March to be ready then have a great Easter sale so lots of cash in April comes in. Your cash flow forecast warns you that May is very slow after the Christmas/ Easter sales so you need to manage the money in the account as you have usual expenses like rent etc. to cover for that month but with reduced income.
Basically you project your cash flow over a set period so you can plan discretionary spending to occur when you have the most cash to support it and still cover bills.
Management accounts are reports that are run over your accounts to see business results, issues and risk, they are critical tools for controlling and directing a business. For example, you may spend $xxx on Google Adwords or Facebook adverts, how much business has either brought in to your business compared to the cost. If one has a greater return than the other then wouldn’t you want to know and shouldn’t you switch spending to the one that is performing. Also you may sell more of product A but it costs more to produce that product B which therefore makes more profit per sale. Why is this and shouldn’t you know why and shouldn’t you look at pushing product B more or investigating costs on product A?
To use a car analogy again it’s like owning a car, yes you can put petrol in and drive for quite a while but unless you service the car eventually you are going to have problems. Management accounts are like a service for your business. “Shouldn’t my accountant already be able to see this stuff” I hear you say? Yes to a degree, they can look at your accounts, Balance Sheet and Profit & Loss and see areas of concern and highlight these but without running management reports they can’t drill down and pinpoint the problem. Again like the car, you can drive it to a mechanic who can listen to your car and say this and this is a worry but without doing a service can’t pinpoint the actual problem and attend to it.
So I pay to get my tax return done, why do I pay extra for Management Reports? Firstly tax returns and financial reports are required by IRD (Banks, Financial Institutions etc) who specify the minimum information to be disclosed in those reports. They are for external review and are a snapshot of the financial state of the business at that point in time, IRD only want to see what income you’ve made and did you pay enough tax. It’s like a warrant for your car, they only want to see that it is being safely run, a warrant does check whether the engine has a problem and going to explode on the next drive.
Management reports are for the business owners’ eyes only and give more detailed information about the businesses performance or lack of. They are produced using more focused data and require time to review and interpret to come to more detailed analytical conclusions to make business decisions upon which will require a meeting between the accountant and business owner to discuss and plan.
One size does not fit all, the Management Reports need to be tailored to your business and your business goals and aspirations. A motor mechanics accounts are different to a café operation, an online retailor or a builder etc. However, all businesses have one thing in common, they can all use Management Reports as a tool to plan, design strategy, set goals, measure goals and to keep a close eye on business health and trends.
Conclusion – so with the 3 tools you have in your business toolbox you can safely and confidently take your business on its journey;
The Business plan will tell you where you want your business to go and when you want it to arrive, it is your roadmap. Your cash flow forecast will tell you how much budget you have for the journey and when it can be spent and whether you have any money for that flash hotel on the way. Your Management Accounts will tell you whether you are on schedule to arrive on time and at the desired destination and whether you are on budget or some areas of the trip are causing problems.
Posted: Tuesday 5 May 2020