With a clear map for the journey ahead, you’re ready to get on the road.
According to Bloomberg (2013), 80% of small businesses fail within the first 18 months of operation, and the evidence suggests that poor financial practices are to blame. As an entrepreneur, this statistic can be seriously demotivating. But, if you know the cause, there are steps you can take to ensure you don’t become just another statistic. Key to ensuring that you can achieve growth and sustainability in your business is the drawing up of a clear roadmap for financial success. This should outline the step-by-step process needed to reach your financial goals.
The advantages of drawing up a plan are clear. It will:
- Set the scene for sustainability. In order for your business to grow, you need a clear roadmap outlining how you are going to attain your financial goals.
- Improve your focus: During challenging times, a clear roadmap can help you to keep your eyes firmly focused on what you’ve set out to achieve.
- Provide direction and guide operations: This process helps you filter what activities are important, and ensures that all business activities are aligned with the goals you want to achieve.
- Help with decision-making and problem-solving: When difficult financial decisions have to be made, it’s useful to have a plan you can refer to in order to make sure that your decisions are still in line with what you want to achieve.
- Keep you motivated: In a volatile economy, it can be difficult to remain positive. However, when your roadmap is clear, it allows you to remain steady and clear on what you want to achieve.
A question small business owners often ask when it comes to creating a financial plan is: Where do I start? The answer is to approach your roadmap in much the same way as you would if you were putting together a plan for your next holiday. So, start by deciding on a destination. After all, once you know where you are going, you can start thinking about how you will get there, what you need, how much you need, how long it will take, etc. Creating a roadmap to financial success shares the same principles.
Here are the five key steps to follow:
- Start with the end in mind. For your plan to be meaningful and to result in the growth and success of your business, you need to set out and fully understand your vision. This should go beyond a mere statement to describe the impact you would like to have and define what you want to achieve in the future. This is an important starting point as you can use it to guide the types of goals, decisions and activities you will embark on. This is the “anchor” of the business, holding everything together to ensure that all activities lead you in the right direction. It also provides a solid foundation from where you can start setting your financial goals.
- Know exactly what you want to achieve. Once you have a firm understanding of your vision, ask yourself Where am I heading? and What do I want to achieve? Be clear about what you want to achieve in business. Financial success involves setting clear goals for the short, medium and long term. You should ideally set goals for a minimum of five years and go right up to 10 years or more. These long-term goals will help when developing an accurate growth strategy, and will help you keep an eye on what you want to achieve.
When entrepreneurs speak about financial goals, they often focus solely on sales targets. And, while this is an integral part of financial goal-setting, it is important to look beyond these to include other components.
Key components to consider include:
- Operational expenses. For the business to grow its profit, operational expenses need to be accurately measured and managed carefully to ensure that they don’t spiral out of control. You should set an expense limit to help you stay on target.
- Cost of sales. Cost of sales refers to the direct costs involved in generating your net revenue. It is the costs associated with producing your products or services. The cost of sales will impact the sales price you set for your product or service. The amount of profit you want to make on the sale is the other variable to take into account when setting a price.
- Fixed expenses vs. variable expenses. While variable costs change depending on things like sales volumes, fixed costs tend to stay the same regardless of how much or how little business you do. Ideally, you should keep your fixed expenses to a minimum. When setting your goals, outline a target for fixed expenses, so that you know exactly how much the business needs to make to fulfil these obligations. In addition to keeping an eye on your fixed expenses, you will need to constantly review those costs that vary according to how much you produce or sell i.e. your variable costs.
- Financial goals should be clear and easy to track. For example: The business will aim to achieve a turnover of R500 000 by December 15, 2017. Starting from August 15, 2017, the average turnover per month will be R125 000. Operating expenses will be capped at R93 750 per month as the business would like to achieve a net profit before tax of 25%.
- Determine how financial goals will be achieved. Once you have identified your financial goals, you are ready to move on to actually formulating a plan. This is the “how” of what you want to achieve. Here you will outline your approach and the specific tasks to be undertaken to fulfil your goals. It also assists with determining what activities are needed to reach the goals and to create the resources required to achieve those goals.
This process touches on almost all of the important functions of a business. If we look back at our earlier example: the turnover goal speaks to sales, products or services offered, the market, the type of service offered to customers etc.; the operational expenses goals impact on the management of finances, the processes undertaken to produce and sell products or services, the overall operations of the business, which would include location, staff and more. Your plan needs to cover all these areas comprehensively.
- Set your plan in motion. To implement your plan, outline everything you need to execute effectively. Every business is different and will require different inputs to set them on the road to success. Here are just some of the questions you should ask to ensure you are on your way to achieving your goals:
- What key resources are required to achieve my financial goals?
- What equipment will be needed to fulfil targeted sales numbers?
- What facilities are necessary and what is the cost?
You might experience some financial challenges that mostsmall businesses experience at the very beginning of the business operations due to the lack of resources required to achieve financial goals. When resources are not available, it makes it challenging to implement the plan effectively.
- Monitor your financial performance. This is a crucial part of your roadmap as you require constant feedback to assess whether you are doing the right things in your business and that they are all going according to plan. Reviewing your financial history allows you to see how close you are to reaching your financial goals, helps to keep you on top of your business performance, to identify any problem areas, assess the receptiveness of your market, determine the effectiveness of your plan, evaluate whether you are putting your efforts towards the right activities, determine whether you are managing your finances well and if your plan is relevant or requires changes. Your actual performance should always be measured against the goals set. Sound systems are crucial when monitoring your performance. The most basic of accounting systems should be able to give you essentials such as an income statement, balance sheet and cash flow statement. But you can go far beyond this with more comprehensive packages. Once you have implemented good financial practices, it becomes easier to monitor performance and determine if you are achieving your financial goals.
With every journey, you should be prepared for a detour or two, and there is no doubt you will experience one on your financial journey – so be ready to adjust your plan and take a different route. Staying in tune with your business finances means monitoring your financial goals on a monthly, weekly, and even daily basis. This is all part of determining how close you are to achieving your financial goals, and if you are indeed on the right track.