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Financial Components of Your Business Plan – Necessary Financial Statements
If you are running a business, one of the most important questions you need to ask yourself is “what is the best way to grow your business?” How do you take what you have, expand it, but keep your costs as low as possible?
Fortunately, history has given us many good examples of how NOT to do this. Perhaps the best of these happened in 2001 – when thousands of companies went under the dot com bubble.
But how did SO many get SO WRONG?
Back then, startups (with little or no income) and existing businesses (dreaming of expanding their business online) rented the biggest and best offices. They signed huge print advertising contracts, paid ridiculous amounts for banner ads and took huge salaries.
When sales were lower than expected and they ran out of cash to cover all of these expenses, these companies couldn’t simply reduce their monthly expenses – because they were mostly FIXED, not variable. Their only option was to declare bankruptcy and go out of business.
Contrast this with Amazon.com, which started in a suburban garage with old doors on desks. By keeping fixed costs low, they were able to operate long enough to turn a profit. Now they are a huge company (with real offices) making huge profits.
So how does all this apply to your business?
Regardless of the size of your current business, the goal is to grow your business while keeping fixed costs as low as possible as a percentage of sales. And there are many practical ways to do this.
Start by creating a simple Excel spreadsheet of your current income and expenses each month. Make sure that you have correctly separated the fixed and variable costs of the business. Roughly speaking, the breakdown should look something like this:
– selling expenses (includes merchandise costs and variable wages for subcontractors or part-time employees)
= Gross profit
– Fixed costs (includes rent, salary, marketing, telephone, utilities, accounting fees, etc.)
= Net profit
Next, based on your current financial performance, set your monthly revenue goals for the next 12 months and estimate your cost of goods sold. For example, if you are currently making $20,000 a month in sales with a 60% gross profit margin, maybe you want to grow your sales by 15%? Therefore, you would use a projected sales goal of $23,000 each month and a cost of goods sold of about $9,200 as a starting point. That would leave you with a gross profit of $13,800 every month. If your sales fluctuate each month due to seasonal differences, manually adjust your forecast to reflect these ups and downs.
Here is where most business owners go wrong…
Most people mistakenly think that fixed costs are fixed. This means that the owner begins to put available amounts for rent, marketing, wages, telephone, etc. into the financial projections. Fixed costs are called fixed costs because they are fixed at a certain point in time. However, this does not mean that they are fixed forever and cannot be changed. In fact, you should consider almost every aspect of your business as “up for discussion and re-adjustment” when creating your business plan and future financial projections.
That’s why we create business plans – we use them to reassess and plan for the future so we can improve and grow. Without a specific plan, we will most likely continue to achieve exactly the same results as before.
You will get the most out of this exercise if you go back to each expense (fixed or variable) to identify opportunities to “make the most of what you already have”! Cost cutting may be possible and recommended in some areas of your business. However, cost cutting [in isolation] is not usually an effective strategy for growing a business. To grow and improve your bottom line, you need to ask yourself, “How can I grow my business without increasing my costs”?
Can you think of ways to partner with others to expand your reach and sales without actually opening another location or hiring more full-time employees? You may already have underutilized capacity to increase sales.
Can you introduce products or services that complement what you currently have and contribute more to your company’s bottom line? Can you renegotiate terms or prices with suppliers to increase your gross profit margin?
Do you have a website and a fully functional payment gateway? Do you make it easy for customers to buy from you? Selling online is a very cost-effective way to increase your reach without increasing fixed costs.
If you manufacture goods, you could find ways to increase production simply by tidying up, rearranging the layout of machines and planning smarter (to reduce work-in-progress and downtime). Oftentimes, mistakes and rework can be costly to your business, and surprisingly, they can be prevented by taking the time to find solutions in your business planning.
Better use of time is another fantastic way to increase production with minimal impact on fixed costs.
Surprisingly, 95% of business owners never take the time to create a business plan and forecast revenue and expenses. Of those that do, only a small percentage refer to a plan and measure their progress against goals and KPIs. This is why so many companies go under every year.
A business plan does not have to be 50 pages long and take 100 hours to complete. It just has to be realistic and useful. It should take 48 hours of your time to follow the basic chart of projected income and expenses above to get it right. 48 hours of your time in exchange for better results and peace of mind is a small price to pay…
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