26 Jun 2011 | Small Business
Last week I answered a question from a reader that had set up an online business and wanted help in preparing a business plan. In my opinion there are two types of business plans for small businesses. The first can cost a lot of money and in the end produces very little in the way of results. The second is a lot simpler and is based around the cash flow of the business.
The first step in this planning process is to reduce the business to its smallest component parts. That does not mean taking last year’s results and increasing all of the income and expenses by a fixed percentage to reflect the effect of inflation. It does mean breaking down revenue into the different major income sources then breaking these down further to each product or service.
For example it does not make sense for a service station owner to increase his or her annual sales by 3 per cent a year. It makes a lot more sense to break the sales down into Fuel, groceries, snacks and take away. Then break each of those lines down into each major product such as unleaded, premium and diesel.
The same goes for expenses. The first step in this process is to identify costs that have a direct relationship with income. These include costs of goods sold in retail or hours worked by a trade or service provider. Each of these expenses needs to be analysed to work out how much these costs increase if income increases.
The next in the process is to identify those costs that a business pays no matter how much income is earned. These are the overheads of the business and include rent, loan repayments, insurance and administration costs such as bookkeeping and accounting fees.
Each overhead expense needs to be broken down as much is practically possible. At the end of this process the business owner should have a statement that details all of the historical income and expenses and what components of the business are the most profitable. One of the most important results of this process will be what income must be produced for the business to break even.
Items of expenditure that have blown out or are not strictly necessary, such as a luxury car lease or excessive entertaining, and business lines that are not covering costs will become apparent. It is from this point that the business planning process can start.
At the heart of every good business plan is an analytical process where the business is assessed and ways found of improving it. A tried and tested way of analysing a business is to prepare a SWOT analysis of the business. This involves looking at what the Strengths and Weaknesses of the business are and what Opportunities it has to grow and what Threats it faces.
Business planning action are formulated to maximise the strengths of the business and ways found to reduce the cost and business impact of weaknesses. This could mean increasing the price of a good or service that is not profitable or dropping it altogether. It could also mean a loss leader of the business is identified that results in more profitable items being sold.
The big advantage of using the cash flow budget as the centre piece for this planning process is that the financial impact of each planning action can be modelled. This means the business owner can establish what planning options have the greatest impact and have a basis for benchmarking whether the actions taken are working.