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 management of costs to attaining higher profit margins. From optimum utilisation of assets and a streamlined use of every resource of a business, organisations 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 a proper guidance for business planning, is not only required for first time entrepreneurs, but also for seasoned businessmen who have for generations, sustained a business. They need some guidance on how to plan for growth and expansion.
Amidst the various conundrums of business planning, CFO Bridge founding partner, Srinivasan V explains in almost a layman’s tongue, what these roadblocks are and how focussing on financial planning can help tackle them.
He starts off with talking about one of the most powerful tools a business has it its disposal, Microsoft Excel. A simple use of functions and formulas could extrapolate data and provide useful insights at the time of preparing budgets, plans, etc.
Moving onto the deeper-rooted problems these businesses face, he highlights the presence of a trap that most businessmen and entrepreneurs fall into. The trap of setting optimistic incomes and pessimistic expenditures and outflows whilst 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 very basic module in costing, Zero-based budgeting, which talks about questioning the very existence of an expenditure for the business. Every expenditure in its truest sense, is variable in nature. Fixed costs are merely a myth and a notion that businessmen have succumbed to believe in.
He then moves onto explaining another trap and a fallacy that most businessmen commit to, which is the use of a base and a standard expenditure and adding the effect of inflation and price rise, when preparing a budget. Businessmen and entrepreneurs should never commit to an expenditure. They should dig deeper into understanding the need and timeliness of any spend as explained by the principles of zero-based budgeting.
He then ventures out into explaining 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 the process of financial planning. Sales (-) all direct costs paints a true picture of the business. All other overheads should also then be planned for, by setting a standard and then analysing the performance of the business. For example, the effect of foreign exchange fluctuations should be standardised whilst analysing weekly, monthly and quarterly business performance to understand how the core business is functioning. At the end of the year, both these internal and external elements should be isolated and analysed. 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. In case, 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 organisation, 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 and business heads, captors but it helps us in understanding the relation between the needs of an employee 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 and the incorrect use of averages to assess performance and draw budgets. Averages often, represent a skewed picture and actually camouflage the key impact areas of any business. Mean and standard deviation are the variables which are to be used as a substitute to Averages as they do not ignore the extremities of actual performance.
He also talks about the importance of Behavioural economics to understand the how the behaviour 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 which change with need of the circumstances 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 major 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 important to factor the effect of inflation on your potential income and expenses. A multiple of the projected incomes suggest a positive shift and fraction signifies for a negative impact. Also, increase in sales should not just mean increase in the quantity but also increase the rate and value. In a growing company, it is not essential that it show in numbers. It can be increase in volume that could mean the brighter picture of the company. Even in situations where the rate increase is not possible, the company if utilising its capacity well can be profitable.
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 evaluate and compare the actual performance with the expected performance periodically to see how well close the company is to achieving its goals. If certain departments arent meeting their goals, management must correct the problem during the period, so the company can meet their numbers by the end of the period.