By David Edmunds, Financial Analyst
To help make the 2020 financial year the best one for your business, we’re sharing some insights from our own planning process. Our process at SiDCOR is similar to the one set out by Amar Bhide in his article “The questions every entrepreneur must answer”.
The first question asked is, ‘Where do I want to go?’ It’s a big question that can’t easily be addressed in a single post, touching on vision, goals, legacy and so on, but we’ll try.
We want to focus on two areas relevant to any business owner’s planning while addressing key elements of the direction of the business and ensure these plans fit within the context of their personal life.
Elements of a Clear Business Direction
We’ll stay clear of operational matters, but, without clarity, there will be gaps in your plan, leading to unexpected consequences or a failure to achieve your desired outcomes.
1. What kind of business are you trying to build? A legacy business, a platform to spread a message, a family cash generator, a creative outlet? There are many reasons to start a business. Before getting into any planning detail, you must be clear on what you ultimately want this business to achieve at its highest level.
2. Know your “status quo cash flow”. Without an understanding of your “status quo” business cash flow, any kind of planning will be difficult. If you’re uncertain how to do this, a quick-fire approach is to start with your last years’ earnings before depreciation, adjust for any abnormal items and deduct any debt repayments, company income tax payments, and if you think you’ll need any more cash to cover stock, debtors and minor capital items.
3. Growth rate. To double your revenue in five years, your revenue will need to grow at 15% per annum. To grow fivefold in five years, it will need to be 38% per annum. Compounded. Without interruption. If you aspire to grow your business significantly, understand the short to medium-term growth rate required and consider how the business will need to periodically evolve. In our next post, we’ll cover resourcing growth plans.
4. Your role. Unless your role is clearly defined, there’s every chance you’ll be doing a lot more administration and operational problem solving than you’d like. When designing a staffing structure to get the most out of your team, determine whether your own role is adding maximum value or filling gaps.
5. Exit. If you have any short to medium plans to sell your business, addressing factors that impact your business’s value in the eye of third parties is important to incorporate (diversify client base, lead generation strategy independent of the owner, reducing working capital requirements, etc).
The Business’s Impact on your Personal Life
Your business plan needs to be able to co-exist with your non-business life. They’re too interrelated to look at without considering how they interact.
Make sure your business plan considers:
1. Time. Creating business improvement time with a heavy operational role is hard enough. Be sure there’s enough time to do ALL that matters in your life, including keeping your sanity.
2. Personal Cash Flow. Investing in increasing capacity, lead generation structures and other growth initiatives will drain cash flow that you could use for personal and wealth building. This includes existing cash reserves and future cash flow generated from operations. If you want to invest in your business to grow, you need to be clear on how much cash is available to commit to that. Do not forget your debtor and inventory growth.
3. Risk of (and security over) personal assets. It’s a rare situation where finance companies will provide substantial business expansion funding without taking some security over personal assets. How comfortable would your spouse be with your personal home being included as collateral on further business lending?
4. Competing opportunities. Wealth building outside of your business may need to be put on hold if you are targeting a high growth rate for your business. The cash and time demands may be too high for you to commit significantly to other wealth-building opportunities, let alone another startup opportunity or a property project. Work to understand what will generate the best risk-adjusted long term rate or return.
If you haven’t already, take a look at our previous article, an end of financial year exit interview for your business.