Essential Practices of Successful Businesses
Contents
Cashflow Forecasting & Management
Introduction
Have you ever wondered what makes a successful business? Over the years, Secantor has helped hundreds of businesses fulfil their potential and in this guide we present nine key practices followed by successful businesses.
To find out about Secantor and our range of business support services including how we could help you implement the success factors in this guide, please get in touch today
The Business Plan
**Every business needs a plan. In the current climate of uncertainty it has never been more vital. Why should I have one?**The Journey is as Valuable as the Destination
Arguably, the process of developing a business plan is as valuable as the result. It raises key strategic questions and debate that might not otherwise happen, helping you and your team to agree on vision and priorities. It requires you to take a step back and look at your business from the outside, examining your market, customers & competitors. The result is a statement of how the business will maximise opportunities and counter threats given the external factors.
Allignment, Cohesion and Action
Once completed the plan becomes a focal point for the business aligning the whole team around a clear vision and set of goals. It gels the team with a shared purpose and understanding. The outcome from the plan is a series of actions that are assigned to members of the team. In this way the plan becomes a reality.
How Do I Write a Business Plan?
There is no single ‘right’ way to develop a business plan** but there are a number of key elements it should include. The overarching aim is to analyse the external environment and develop your business’ response. This is then turned into actions. An independent expert can add great value to the process, providing an external impartial view which can be difficult to achieve when you are so immersed in your own business. It is essential that your business has the right plan. Keep it clear, simple and achievable. Make it action-based and follow it through.
Questions to Consider
- How relevant is my business plan?
- Does my plan need updating or improving?
- Am I on target to achieve my plan?
- Are my team’s goals and objectives aligned with my plan?
The Financial Forecast
Do you wish you had a financial crystal ball for your business? Sadly they don’t exist but the next best thing is a detailed financial forecast covering your medium to long-term plans to reflect the ideas in your business plan. Despite this, many small business don’t have one. What are they missing out on?
What is a Financial Forecast?
A financial forecast provides an essential roadmap of your key fiscal indicators (like profit, cash and balance sheet value). It reveals what your finances might look like in the future based on several potential scenarios that you determine. You predict what your monthly sales and costs might be over the next few years (usually 3-5) and from these an accurate model is developed to show an expected profit & loss, balance sheet and cashflow.
Why Does My Business Need a Financial Forecast?
Not having a financial forecast is like walking in the dark without a torch and can result in sleepless nights. By contrast, armed with a forecast you can clearly see the impact of various possible futures on your finances. This allows you to make better decisions and provides you with reassurance. And because a financial forecast includes a balance sheet and cashflow, you can see the changing value of your business and how future trading impacts on your cash requirement. This is essential in ensuring you don’t run out of money. And if the forecast shows you require extra funds for a period of time it is the perfect tool to share with your bank to persuade them to lend to you.
How Do I Create a Financial Forecast?
You start with your expected sales and costs. Then you’ll need an experienced management accountant to help you turn these into the full model. It should only take a few days’ work depending on how complex your business is. But the result will be worth the time spent. With the forecast in place, each month you can compare your management accounts against the model to track the progress of your business performance. You will find this very reassuring.
Questions to Consider
- Is my financial forecast up-to-date?
- How could a financial forecast improve the way I manage my business?
- Do I know what profit to expect this year?
Cashflow Forecasting & Management
Cash oils the wheels of your business. It’s the liquid that keeps everything moving. If it dries up, your business will come to a grinding halt. Nasty surprises are the last thing you need with your cash so a short-term weekly cashflow forecast is an essential tool for every business. So how do you forecast your cashflow?
Keep it Simple
A spreadsheet is an ideal tool for cashflow forecasting because it can easily be customised to suit your requirements. It provides visibility as each week progresses. It can be as simple or as sophisticated as your business requires. You need a section for receipts, one for payments and a balance showing available cash each week. It is helpful to have a summary supported by separate sheets containing the details for each part of the business. Weekly forecasting is suitable for most situations although monitoring cash on a daily basis may be more appropriate if cash is very tight. You should forecast at least 3 months into the future so that you always have your next VAT payment in view.
Managing Cashflow
Having built your cashflow forecast you’ll need to allocate time to keeping it up to date and regularly reviewing it. If you identify cash shortages in the future you should use the forecast to assess what action to take. Firstly, do everything you can to secure your cash collections on time. Secondly you can move payments dates in the forecast to model different options to improve the cash balance but you must ensure you have agreed this with your suppliers. You might choose to delegate the updating of the cashflow forecast to another member of your team but it is vital that you keep a close eye on it.
Take Action
If your business already has a cashflow forecast in place then it’s important it is up to date and used to plan ahead. If you don’t use a cashflow forecast then there has never been a better time to start. Create one for your business today.
Questions to Consider
- Is my cashflow forecast accurate and up-to-date?
- How often do I review my cashflow forecast?
- What options do I have if cash gets tight?
Leading People
You start a business because you have a great idea to bring to market. You don’t start one to have dozens, maybe hundreds of people working for you. But if things go well then at some point you are likely to find yourself with a team around you; perhaps you already have. So how do you get the best from your people?
Delegate Effectivly
The change starts with you. As a business leader your first priority is setting and delivering your vision. You need to make time for this which means delegating day-to-day activities to trusted members of your team. Successful delegation is not easy; it requires careful planning, capable staff, clear goals, and holding to account. It also requires you to step back and allow your team space to grow and take ownership & responsibility for themselves.
Clear Direction
To operate effectively your business will need a suitable structure and clearly defined roles. Use a job description to set out responsibilities and provide a framework for reviewing performance. This relatively simple document is an essential tool for ensuring expectations are aligned, yet surprisingly many SMEs don’t have up-to-date job descriptions in place. You should regularly check in with your staff to evaluate performance and realign goals & expectations. Implement and follow clearly defined HR policies that reflect current employment legislation. This is a specialist area so an expert and pragmatic outsourced HR firm is a vital partner for your business.
Identifying and Developing Talent
Developing people into the right roles is key to a strong team. This is achieved through a mix of training, mentoring, coaching and reviewing performance. Carefully selected external expertise can add significant value here. Recruiting talent from outside the business can also enhance the team. Use effective recruitment & selection techniques to ensure you hire the right staff.
Share Plans and Progress
Share your business plan with the team. Provide regular updates on progress and celebrate success together. Make the business plan personal by linking individual and department goals to the overall vision. This will galvanize your team creating committed players rather than spectators.
Questions to Consider
- What do I spend my time doing: a) working in my business or b) leading my business?
- How could I delegate tasks to free up my time?
- How clear are staff job descriptions and goals?
- Do I measure and communicate individual performance with my team effectively enough?
- What is my succession plan?
The Critical Business Friend
Anyone who runs their own business knows that it can be a lonely place to be. Who do you share your ideas and plans with? Who challenges you and highlights areas of improvement in your business? An independent expert can be the perfect critical friend for you and your business.
No-one Challenges Their Boss
You run your own business. It may be where you've spent the majority of your working life. As a result life can get rather claustrophobic making it hard to see things from an outside perspective. You have a team of staff around you but you can’t develop your vision, strategy and ideas for the business with them until it is a confirmed plan. And your staff rarely challenge you or follow up on your outstanding actions because you’re their boss. So who keeps the business sharp except you?
A Critical Business Friend
An independent expert in the form of a Non-Executive Director (NED) can be just what you need to cover these gaps. A NED can play several key roles in your business including:
- Act as a sounding board for your ideas
- Provide an independent and impartial view on your strategy
- Bring specialist and complementary skills to enhance the team
- Bring fresh ideas, methods, advice & experience to help you scale your business
- Help you evaluate your options and make the best decisions
- Ask tough questions and hold you to account in delivering your plans
- Act as a diplomat where there is tension or disagreement among directors
- Introduce you to a network of expert professionals
An Anchor in the Storm
When things are tough business owners have sleepless nights. A critical business friend can help you make sense of uncertainty and make a plan to ride out the storm. You will find reassurance that your plans are strong if you’ve tested them against expert advice. But you need to find the right fit – especially personal chemistry. Your critical friend does not necessarily need experience of your industry, products or services because you already know that. But they do need to have wide commercial experience of managing businesses, have sat in your seat before and understand your culture.
Questions to Consider
- Who can I share my ideas and concerns with?
- How do I ensure I get a wider perspective on my businesses?
- Who holds me to account to achieve the goals I’ve set myself?
Improving Profitability
We are all in business to make profit for re-investment in the future and to reward owners. Every business should examine & improve profitability routinely but in the current economic climate it is an essential activity to strengthen your finances.
Understanding Gross & Net Profit
First you must be clear about the difference between gross & net profit. Gross profit is the difference between your sales and cost of sales (materials, direct labour/services, sales fees etc.) Net profit is gross profit, minus overheads. Gross profit is improved by increasing price and/or reducing direct costs. Net profit is improved by increasing gross profit, reducing overheads and increasing sales relative to overheads.
Where Do You Make Gross Profit?
Surprisingly many businesses cannot answer this basic question. It is vital to understand where you make gross profit (and losses). You should analyse profit margin by customer, product/service, project, industry etc. This insight will enable you to decide where to focus sales efforts, highlight areas for profit improvement and reveal unprofitable areas to be culled. It is also vital that you check you are consistently achieving the profit you planned. Too many businesses over-service or don’t control costs closely enough which results in margin erosion.
Increasing Sales Prices
Ask yourself whether you are under-pricing or can justify an increased price. Consider how you can differentiate your offer to create extra value that customers are willing to pay for. Every product is topped with a service such as pre & post-sales support, delivery, warranty etc so don’t forget to incorporate this into your pricing.
Reducing Direct Costs
This can be achieved through a combination of methods including: improving efficiency (reducing time, materials and other resources required); reducing waste; negotiating with suppliers; and, taking cost out by redesigning products, production methods and service delivery.
Sales Maximisation
Maximising sales of profitable products & services will improve net profit because overheads won’t increase to the same extent. Review each customer to identify what more they could be buying from you. Consider up-selling and cross-selling. Rekindle relationships with lapsed customers. Target new customers and develop new products and services.
Questions to Consider
- Do I know which are the most and least profitable areas of my business?
- Am I making satisfactory margin across all sales?
- Do I actually achieve the margin I planned?
- Have I priced my product/service at the right point?
- What action could I take to reduce direct costs?
- Do I always maximise sales?
Cost Control
**Reducing [costs][1] is an important factor in improving [profitability][2] and preserving cash in your business. Every business should regularly review its costs to ensure money is not being wasted. However the current economic downturn makes this an essential task. How should you approach cost reduction in your business?**Direct vs Overhead Costs
Direct and overhead costs should be approached separately. Direct costs vary with output and are the ingredients for the services and products you sell. Overheads are the costs associated with keeping your business running and tend to remain relatively static despite changes in output.
Direct Costs
Direct costs can be reduced absolutely (e.g. by re-negotiating) or through more efficient use of resources e.g. by reducing waste or improving productivity or methods. This will improve your gross margin which is a key business performance indicator. We find that most businesses will have improvements that can be made in this area.
Overhead Costs
Overhead costs can be reduced by close examination and questioning. List all your outgoings and scrutinise in the cold light of day ask yourself, “is this essential?” Independent help can provide you with a more objective and effective outcome. We often find businesses are paying for things they don’t really need or no longer use.
People Costs
For many businesses people are their greatest asset but also the greatest cost. It’s therefore important to ensure everyone is fully productive and providing excellent value for money. This means ensuring processes are optimised and staff are well trained, supported and managed to achieve great results. If you find yourself in the unfortunate position where certain roles cannot be justified, take professional advice before making redundancies to ensure you act lawfully and treat your staff fairly.
Take Action
Cutting direct costs improves your gross margin and reducing overheads leaves you with more net profit. What’s stopping you from reducing costs today?
QQuestyions to Consider
- What wastage or inefficiency exists in my business?
- What unnecessary costs could I reduce or eliminate?
- How could I ensure costs do not escalate in future?
Business Performance Improvement
How do you monitor and improve the performance of your business? It is easy to get lost in day-to-day pressures but- to run an effective business you must regularly step back and consider your progress against mid to long-term plans. So you need an appropriate set of key performance indicators (KPIs) to track your business performance. You also need to assign responsibilities amongst your team and hold them and yourself to account to deliver.
Business Dashboard
Your business is like a car - very dangerous to drive without a dashboard. In your car you have a speedometer, fuel gauge, warning lights etc. These provide vital information so you can adjust your driving to keep you and your car safe from harm. You need a dashboard of KPIs for your business too. The exact KPIs you use will be specific to your business but they should provide overall coverage of core business functions like finance, sales, customer service, operations & quality. Don’t have too many KPIs though. Keep things simple; just stick to the most important ones otherwise their impact will diminish.
Setting Targets
Having defined your KPIs you need targets for each one. Ambitious businesses will have targets that get tougher over time to stretch and grow the business. Each KPI should have a defined owner who has overall responsibility to deliver. They in turn should cascade team and individual goals to their direct reports to align all staff to the business aims.
Track Performance
Use a simple dashboard to present actual performance against target. Graphs and charts often work better than tables and numbers. Review this regularly with your team (minimum monthly) and share a summary with all staff. Celebrate success where performance meets or exceeds target. Where performance does not meet target identify causes and actions to improve in future.
Questions to Consider
- What are my KPIs?
- Does my business consistently achieve the targets I set?
- What more could I do to involve my team in achieving business targets?
The Board Meeting
Whilst ‘board meetings’ and ‘governance’ might sound like bureaucracy reserved for PLCs, they are an essential element of every successful business irrespective of its size. Good governance helps you to provide structure and consistency for your business and reduces risk by checking you have all the right things in place. It also keeps you on track with your long-term goals and commercial success. A monthly board meeting is the ideal forum for effective governance. So what’s involved?
Helicopter View of your Business
A board meeting creates the opportunity to stand back from the daily activity of your business and review it strategically to ensure it stays on course. It is about getting a wide view from above your business rather than the narrow day-to-day perspective from within it. You should conduct an honest review of performance and be accountable with your fellow directors for achieving goals. An independent external expert can be a really helpful addition to your board meeting to provide fresh ideas, wider experience and challenge. Their involvement will also give you confidence that you haven’t missed anything.
Board Meeting Disciplines
You should meet as a board regularly, ideally once per month as this fits well with the rhythm of business e.g. sales targets, accounting cycle etc. You need to make sure all the right people attend including directors and department heads who should join as required to present their area’s performance. This makes it an ideal training ground for future directors or executives. Have a standard agenda so the same topics are covered every month. Make information available in advance of the meeting so attendees come prepared. Capture concise minutes with actions, timescales & responsibilities and follow these up at every meeting.
Good Governance
Being a Company Director carries with it various legal responsibilities so you must have strong mechanisms in place to ensure you comply. Comprehensive reporting with regular review, discussion, minutes and actions will help make sure nothing falls through the cracks.
Questions to Consider
- When was the last time I took stock of my business performance?
- How do I ensure I’ve covered all bases within my business?
- How am I developing the next generation of leaders in my business?
What Next?
Perhaps your business has already implemented these best practices. Well done, you're ahead of most SMEs. However, if this isn't the case then you are not alone. The majority of businesses have improvements to make. The key thing is that you take action but if you're unsure where to start, we can help.
Take Action
This guide is designed to help you compare your own business against best practice. You can do this yourself with your top team. However, if you’d like the opinion from an independent expert we can help you. The first step is to book a half-hour call with one of our team of business experts. We will:
- Listen to your business needs and make recommendations
- Give you free tips and advice regardless of the outcome of the call
- Give you an honest assessment of the challenges and opportunities you face
- Explain our services and how we work with our clients
- Describe how we have helped other SME businesses to improve & fulfil their potential
It will be the first step in a journey to fulfilling the potential in your business. Why not join a growing number of SMEs that are doing just that? Here is what some of our current clients have to say about us:
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To book a free business review with our team, please contact us today for your free consultation with our expert.
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