Effective Business Planning Starts Here
Posted by: Brookside Admin
The success of your business relies partly on your ability to tell the future. It sounds crazy, but it's true.
You don't have to know exactly what will go wrong and when it will happen, only what could go wrong and how you'll cope with it.
That comes from strategic business planning. Doing so successfully creates a margin for error that allows your business to absorb changes and problems that no one could have seen coming. Except, you kind of did.
Here are some essential tips for how to plan for your business to create a fail-proof budget and lasting success.
Make some assumptions
Before you can create a plan, you need to know what you're planning for. This includes how you expect your business to grow, and what potential problems you might encounter. What product lines do you expect to take off over the next 12 months? How do you think the economy will affect your industry? How many additional employees might you need to hire, and what existing employees will need raises? By taking issues like these into account, you can create an accurate projection of what the next year will look like from a financial perspective for your business. This initial step will make the subsequent tips on this list much easier.
Bad year, good year, great year
Take that lenghty list of assumptions you put together and start categorizing them into lists that form what might happen in a bad year for your business, in a good year, and then in a great year. Making the bad year list might be scary, but doing so will ensure that if any of those bad possibilities happen, you'll be adequately prepared to overcome them. The more positive items on the good and great year lists will help you aspire to improve your company's outlook. For example, if you forsee some specific growth as a possibility, this exercise will help you make it a priority and ensure you reach that goal within the next year, rather than leaving it as an abstract hope.
Build your budget conservatively
You can use the three lists you just created to help build your budget. It's not a good idea to build using only the bad year or great year scenario, however. It's unlikely that your perfect, or perfect storm scenario, comes true. What's more likely is that outcomes from each of your lists create the actual scenario for your business. The most dangerous outcome is to plan financially for your best year, and instead live out your worst. That leaves you completely unprepared. However, planning for a bad year will limit your ability to grow and take necessary risks. The happy medium, conservative and realistic, but not risk-averse, will give you room to absorb problems while still being able to take advantage of new opportunities.
The 10 percent rule
Now you've got your budget created and ready for the next year, right? Actually, no. There's one more step that will help ensure you are ready for anything. Take 10 percent off your expected revenues, and add 10 percent to your expected costs. You may have thought you were planning accurately already, but this additional step helps to minimize any errors in judgement you have made. After following these steps for a few years, you'll be able to look back and see just how valuable this step and the 10 percent rule is.
Create your balance sheet
This includes both an income statement and a cash-flow statement. This is a vital step regardless of the size of your business. It will provide a snapshot of your financial health, cash flow, and assets that's available at any time. Having a balance sheet from previous years will help you go through this entire planning process next year, so it's a worthwhile exercise for a number of reasons.
Once you've finished this process, review the results with your accountant. If you need help, contact the CPAs at Brown Kinion and Company. We have offices in both Broken Arrow, and South Tulsa / Bixby and offer a number of valuable services to local business owners.