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Attaining Financial Success | Estimating Revenue and Expenses | Projecting Your Financial Future
Ensuring Your Plan Makes Cents
Now that you have completed your goals and action, it is time to assess the financial viability of your strategic plan. While your action items and goals are top of mind, you need to estimate the costs associated with the implementation of each item. All best laid strategic plans are all subject to time and money. In this section, we not only look at the estimated expenses, but also at the potential revenue. This will help you make decisions about when to implement certain action items and if your cash outlay will generate the required revenue to meet your financial goals. As with every business, budgets are never big enough to do everything you want to do. As a reminder, a business can be considered a financial success when it:
- Stays in the black and turns a profit.
- Has a healthy balance sheet.
- Generates good cash flow.
- Produces a good return on investment for its shareholders.
Attaining financial success, starts with a financial assessment that is based on historical record and future projections. By looking at the past to help plan and predict the future, you can gain much better control over your company’s financial performance. A good financial plan gives you a detailed picture of the financial health of your business and the viability of your strategic plan. It also helps you know if you are getting off track during implementation so you can take action before any thing serious occurs, like running out of cash. To conduct a financial assessment of your strategic plan, take the following steps:
- Estimate revenue and expenses
- Conduct a contribution analysis to determine if your strategies positively contribute to the bottom line.
- Combine all of your numbers in a one-year and three-year financial projection.
Expense and revenue estimating is an imperfect science. However, it is meant to give you a idea of the additional cash outlay required to implement each area of your plan, and the revenue you can expect to generate. In the previous exercises, you identified potential expenses for action items as well as potential revenue for each target market group. Here you combine that information with your current operations to get a complete financial picture. It is important to identify large expenses that might prohibit implementation. Ideally, your market research will give you a rough idea of how much you can anticipate generating.
Use the following formula to determine estimated revenue. Number of customers x average sale per customer x number of sales per customer per year = Estimated Revenue this Year Expenses: Listing expenses associated with any goal or action in the plan that are not part of your normal operating expenses. Additionally, estimate your current operating expenses by forecasting each item based on how it will need to increase to accommodate for the expected growth. Contributing to the bottom line Just because a market looks attractive, does not always mean you can serve it profitably. Before your creative folks start churning out cool ads, do a quick contribution analysis. A contribution analysis determines whether a particular target customer group contributes to the overall financial well-being of the company. In other words, is this customer group profitable? This analysis provides you with a projection of whether your strategy will generate revenues in excess of expenses. If the contribution analysis determines that the dollar investment in the strategy required to reach this target customer group cannot be justified, you must rethink and adjust customer goals and financial goals. Eliminate the groups that do not positively contribute to the bottom line. Those that do are used in your financial projections in the next step.
By putting all of your revenue and expense numbers together and projecting them out over three years, you can see in black and white how successful your business will be. It also allows you to grow the business without running out of cash. Growth in sales always incurs additional cash requirements to generate and support the additional revenues. When used properly, financial projections help you determine what additional assets will be needed to support your increased sales and what impact that will have on your balance sheet. In other words, the plan indicates how much additional debt or equity you will need to stay afloat.
All commonly-used financial and accounting system packages come with functions to create financial projections. Use these tools to create your financial projections by plugging in assumptions based on your strategic plan. If your system does not allow for projections, create an Excel document. Your financial projections include forecasting out all three of your financial statements. Produce projections by month for year one and then by year for the next two years.
Project the income statement. Use the estimated revenue for each target market group that you determined in the section Estimating your Revenue and Expenses. Plug in the expenses and operating expenses as well, and use all three figures to determine your net profit (or loss). Project the balance sheet. As sales go up, so do other areas of the business — variable assets (accounts receivable, inventory and equipment), variable liabilities (accounts payable and accrued expenses) and (hopefully) net income. If your net income plus the increase in variable liabilities equals or exceeds the increase in variable assets, the company will have the resources to finance itself. If not, you must bring in additional debt or equity. Use your current balance sheet to determine the various asset and liability accounts in your business. Project cash flows. Using the information in steps one and two, project how these numbers will impact your cash flow, paying special attention to how much new debt or equity you will need to inject into the business and when. Like much of the work you have done up until now, creating financial projections is not an easy task. But don’t skip this exercise or you’ll be missing an important part of developing a sound strategy. Undoubtedly one of your financial goals is to increase your sales and/or profitability. Once you have completely your projections, even if they are very rough, double check to make sure your goals match up with your numbers. Figures don’t lie, but liars figure. The financials will tell you what goals to keep and what to cut. Keep the goals with a positive story. Revised the ones with a negative ending. Show me the money! The cold reality is you’re in business to make money. If you’re not making a return on your investment, at some point, you don’t have a business, you have an expensive hobby. Ouch! That hurts, I know, but it’s the truth. If you don’t believe this, then you can skip this section. But if you do, your financial assessment concludes with an analysis on your ROI (return on investment). After all, there’s no sense in implementing a plan if it won’t yield the desired return. As an owner, you’re either investing in or drawing out of your business. If you’re investing for growth, you ought to have a clearly defined payback period and strategic plan to get you through it as fast as possible. Your payback period should match up with your owner’s vision. Business owners often plan for growth without considering how long it will take to get a payback or developing the action plans to get there. By looking at how quickly you will get paid back for your investment, it forces you to answer the question if you are comfortable with the time period. If it is too long, too big of an investment, then don’t invest. Revise your strategic plan by removing some goals and action items until you develop a plan you can live with. Remember, the plan works for you, you don’t work for the plan.
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Topics in this post: financial goals, Leadership |