Most SME entrepreneurs, start-ups, and family-run businesses face several problems and hiccups in running and sustaining the business. The problems may vary from managing costs to attaining higher profit margins. From optimum utilization of assets and streamlined use of every resource of a business, organizations in almost every industry and sector face a multitude of problems, and all this boils down to simply one solution, which is Business Planning.
Assistance and proper guidance for business planning are required for first-time entrepreneurs and seasoned business people who have sustained a business for generations. They need some guidance on how to plan for growth and expansion.
Amidst the various conundrums of business planning, CFO Bridge’s founding partner, V. Srinivasan explains in almost a layman’s tongue, what these roadblocks are and how focussing on financial planning can help tackle them.
He talks about one of the most powerful tools a business has at its disposal, Microsoft Excel. Simple use of functions and formulas could extrapolate data and provide useful insights when preparing budgets, plans, etc.
Moving onto the deeper-rooted problems these businesses face, he highlights the presence of a trap that most business people and entrepreneurs fall into – the trap of setting optimistic incomes and pessimistic expenditures and outflows while budgeting. We should reverse this psychology and move towards pragmatism and realism, and what could help a businessman do this is adequate financial planning. He brings up the importance of a fundamental module in costing – Zero-based budgeting, which talks about questioning the very existence of expenditure for the business. Every expenditure in its truest sense is variable in nature. Fixed costs are merely a myth and a notion that business people have succumbed to believe in.
He then explains another trap and a fallacy that most business people commit to using a base and a standard expenditure and adding the effect of inflation and price rise when preparing a budget. Business people and entrepreneurs should never commit to an expenditure. They should dig deeper into understanding the need and timeliness of any spend as explained by zero-based budgeting principles.
He then explains the importance of Return on Equity (RoE) and Return on Investment (RoI). Planning of these two variables is of utmost importance for any businessman. Whilst focussing on RoE and RoI, a businessman should focus on gross margins and steadily move onto the other overheads and EBITDA during financial planning. Sales (-) all direct costs paints an accurate picture of the business. All other overheads should also then be planned for by setting a standard and then analyzing the performance of the business. For example, the effect of foreign exchange fluctuations should be standardized while analyzing weekly, monthly, and quarterly business performance to understand how the core business is functioning. At the end of the year, these internal and external elements should be isolated and analyzed. This way, the businessman and the finance function could assess and control the sheer functioning of the business by correctly understanding Actual Vs. Anticipation/Budget. If the business is making too much out of these various external volatilities, it could signal that one is in the wrong business.
Talking about employee cost and the impact of human resources in an organization, he explains metaphorically the famous Stockholm syndrome. This syndrome implies that in the case of a kidnapping, there is a sense of mutual affection between a captor and the victim after almost 36 hours, thereby reducing the probability of the captor killing the victim. In no way are the employees, victims, business heads, captors, but it helps us understand the relationship between an employee’s needs to his/her output and performance. Most businesses are in a predicament in terms of over-paying and over-compensating and this in the future will have a financial burden on the business once we consider the impact of compounding salary cost and CAGR.
He then explains the criticality of Statistics in business, understanding various statistical variables such as mean, median, mode, standard deviation, variance, etc. The incorrect use of averages to assess performance and draw budgets. Averages often represent a skewed picture and camouflage the key impact areas of any business. Mean, and standard deviation are the variables that are to be used as substitutes for Averages as they do not ignore the extremities of actual performance.
He also talks about the importance of behavioral economics to understand how the behavior of a customer or an employee could have a lasting impact on the business.
He believes that a long-term plan usually faces the test of time and change and is not as fruitful as originally thought of. A rolling plan to suffice the short-term goals that change with the circumstances’ need works best in any situation. Departmental plans are best suited as they address the direct need of the target work area, and people responsible know about their accountability. Involving the people executing the plan in framing it makes the exercise more worthy. Communication is the key to its smooth implementation. Attaching responsibility is another major criterion. Also, divide the larger plan into smaller fragments for easy understanding and successful implementation. Another primary drive for achieving the targets is linking it to financial incentives. Rewarding with performance provides the motivation element.
When it comes to deciding the ratio of expenses to incomes, he feels that it is essential to factor the effect of inflation on your potential income and expenses. A multiple of the projected incomes suggests a positive shift, and a fraction signifies a negative impact. Also, an increase in sales should mean an increase in the quantity and an increase in the rate and value. In a growing company, it doesn’t have to show in numbers. It can be an increase in volume that could mean a brighter picture of the company. Even in situations where the rate increase is not possible, the company can be profitable if utilizing its capacity well.
Quoting an interesting statement, if all the business plans presented to the board were met, the global economy would be high by 60 times. Management must periodically evaluate and compare the actual performance with the expected performance to see how close the company is to achieve its goals. If specific departments are not meeting their goals, management must correct the problem during the period so that the company can meet its numbers by the end of the period.