Running on Empty
Managing a business without a financial plan is like driving a car while running on empty. Running out of gas can be unfortunate, but running out of cash is a painful way for a business to fail.
The best financial plan is a financial forecast. Forecasts are popular in Fortune 500 companies, but also easy for a business owner to accomplish.
Financial plans are also referred to as a budget. We prefer the term forecast because budgets can be perceived as a limitation on spending. However, forecasts project what we think will happen. If it does not, then we will pivot and make mid-course corrections.
Some businesses are seasonal, which means they may have higher volume sales during certain months (holidays, summers, etc.). Why is planning important in these scenarios? Cash is the gas that keeps a business’ engine running.
Case Study: At one consulting engagement, I was asked to turn around an energy company that provided gas heat to commercial and residential customers. Due to seasonal variables, this business generated all its profit in just three months. Stated another way, we made money three months of the year, and lost money the other nine. Talk about an interesting lesson in financial management!
Because I was a planner, we made it through our first and second year, but then things changed. Our section of the country experienced the warmest winter in recorded history. Wow, what a set-back.
Fortunately, we had improved our planning, accounting, cash reserves, and had secured a line of credit in advance. We also improved our technology infrastructure.
But we needed two things to survive: to reduce expenses and to have sufficient reserves to hold the company over till the next winter. Due to the solid financial forecasting, we made it through relatively unscathed, and even managed to squeak out a profit.
Needless to say, a financial plan is critical for any business. In addition, your financial plans should include best and worst-case scenarios so that you’re prepared for multiple outcomes.
Excerpt from The Extraordinary Business by Mike Hill
Write to Mike at Mike.Hill@TeamTrenton.com