Let me tell you about a recent encounter I had with a business owner (to save his blushes, we’ll call him Pete) whom I met at a networking event last week.
Over a beer, Pete was explaining to me about his business (a “B2C” software-as-a-service startup that had been trading for four years). Pete was proud how the gross profit margins were high and increasing, customer satisfaction was tremendous and staff were great.
The issue that Pete was facing however, was that he needed more cash to invest in marketing and research & development. He said he needed the cash now, as competitor products were appearing and he wanted to stay one step ahead.
As the conversation progressed, I asked him a few questions about his business strategy and financing needs:
- What were your target sales for this period?
- What was your projected cash requirement in order to make these sales?
- Have you been tracking actual performance against your planned performance?
That’s when it became clear how this (avoidable) problem arose – a lack of business planning. “It’s more fag packet calculations than detailed figures” he admitted.
It’s not easy to conjure up cash at very short notice, regardless of how profitable your business. Investors – both debt and equity – will want to complete due diligence before providing finance, while building up a cash pile from sales takes time.
The key is to have a business plan that sets out what, how and when you agree to do certain things. There should then be a financial budget which sets out numerically what will be the outcome of that plan if it turns out as expected.
If prepared properly, this should identify when you will need cash. Once you’re armed with this information, you can start talking to investors or looking at alternative ways of pulling together the necessary cash funds.
I would guesstimate that roughly 50% of SMEs prepare a budget. However, that’s just the starting point.
During the year, as some aspects of the business go better than expected (and others worse), it’s important to prepare a revised forecast, which updates the budgeted figures for the months that have since passed for actual figures. This will keep you up to date and on track.
I’m pleased to say that Pete is now putting a budget and forecast in place which will, hopefully, make it easier for him to face the competition with more confidence. Make sure you learn from Pete’s mistakes.
As part of my role I attend companies’ management and board meetings. I listen as the directors set out their plans for the business and explain why some aspects are going well and others, less well.