Forward Planning for Small Business

An essential function for any business entity, forward thought and planning will help a business to:

focus on business goals
plan resources
help control activities
motivate themselves and their staff

Businesses involving just an owner, often referred to as ‘lifestyle businesses’, generally do not need to consider this topic formally and/or in detail; an informal assessment should suffice (preferably in collaboration with a professional advisor). Having said that, it is very unlikely that any business benefits from its owners not giving the matter of forward planning any thought at all; such businesses will inevitably be at a disadvantage to those that have, and so less likely to succeed.

Note also that inexperienced business owners are at particular risk of making the mistake of not taking the time to consider, take advice on, and understand this important topic.

The steps outlined below are therefore pertinent for all businesses, but aimed primarily at businesses with growth plans, and have or will have staff-members other than the owners. For these businesses, the steps below are vital, and will help ensure that any realistic and achievable goals are realised.

Strategic Planning
The first step is to prepare a medium term (3-5 year) strategic plan, which can form part of a general business plan. The strategic plan should focus on the specific key performance indicators (KPI’s) of the business, setting broader targets that need to be achieved in order for the business to get to where the owners want it to be at the end of the term. KPI’s are always business-specific and must be identified and understood by the business owners at the outset.

Once set, it is not a good idea to alter the strategic plan and/or its objectives too often, although by the same token, not adjusting it while things are materially not going to plan can also be counter-productive. It will depend on the particular circumstances and is a skill that the business owners must develop or bring-in as part of their management team.

Annual Budget
These are generally as essential as the strategic plan in our opinion, although very straightforward and highly profitable small businesses may choose not to have one in place. Budgets can be extracted or derived from the strategic plan, or built from scratch along the same principles.

Each budget should be prepared before the start of the financial period to which it relates, and will show line-by-line detail of the financial and KPI targets for that period. Depending on the skill of the business owners (and their advisors), the budget can be used to serve a range of purposes. For example, in periods of strong growth the budget can be set with aggressively high sales and/or new customer targets; for businesses experiencing difficult trading conditions the budget can be set to help ensure that cash does not run out. Also avoid altering the budget once set; in our view, it is a very important part of the overall process to compare the business actuals (what actually happened) with the budget at the end of each financial period – this exercise is devalued the more the budget is adjusted.

In all cases, the business owners need to ascertain and understand the various factors that drive the business (such as repeat business, new products or services, average prices, and so on), often referred to as the ‘business drivers’.

Forecasting
Business owners will often be able to predict what will happen in the coming three to six months with great accuracy. If this information is made available in a management report, and is updated at the end of each month or quarter, the business will be better-placed to react quickly to changing conditions, unforeseen circumstances or new opportunities as and when they arise.

Unlike the budget, which is necessarily based on the business’s strategic plan and can be considered an ‘active’ planning tool, the forecast does not take account of anything other than what is actually going to happen (good or bad); it is a ‘passive’ tool, although no less essential for it.

Overall, we advise all clients to spend as much time and effort on forward planning as they possibly can (experienced owners generally do not need reminding), and we are of course ready to help in this important subject.

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