Simple Planning for the Year Ahead
The quote “Planning without action is futile, action without planning is fatal” (Unknown) is a bit like the debate about the chicken and the egg, but one thing’s for sure, without any goals or targets you sure can’t fail. So with a new financial year upon us, what should we be doing to get ahead and learn from the year just ended?
Don’t wait for your accountant to prepare your accounts, carry out an initial analysis yourself of the year’s results and see how the year went, even if you have to estimate some of your overheads and gross profit margin. Was it better or worse than you expected in comparison with last year or in comparison with your budgets and targets? How much cash do you have tied up in inventory or work-in-progress? Have you overspent on your overheads or staff or under spent on areas which are key e.g. marketing?
Set Goals and Budgets
If you didn’t have any goals or targets to compare against, sit down with a decent accountant and work some out. If you don’t know where to start, note down your overheads first and how much you’re going to spend on these – they should be easy to predict. Then add on your drawings and tax to arrive at your total outgoings which tells you what you need to generate from your sales after your direct costs (those which vary depending on sales achieved) by grossing up using your gross profit margin. For example, if your overheads, drawings and tax are $150,000 and your gross profit margin is 60% then you would need sales of $250,000 excluding GST (150 x 100/60). This tells you your break-even sales which is a good starting point to tell whether you’re going to be sweet or in deep trouble.
Prepare a Cash Flow Forecast
The next step is to prepare a simple cash flow forecast as the budget will only tell you what profit you are going to make which is not the same as cash flow. Go through the budget line-by-line and move the expenditure to the month when it’s going to be received or paid. Add GST to all sales and expenses and adjust for inventory purchases as well. Lastly remove all non-cash items e.g. depreciation and add in capital expenditure and GST. What does this tell you about your monthly cash flow – is it enough? Do you need a bigger overdraft?
If you really can’t see how the year went because you’ve no records or decent books you need to upgrade your systems. And don’t tell me you can’t afford any – you can get decent accounting software for $500 + GST which will also hold your database, let you invoice your customers or send out customer statements, or keep timesheets as well as keep a record of your inventory. You will get your investment back very quickly
You probably know the areas where you’re not doing well. Don’t ignore these or dodge them, now is the best time to work out what to do to improve things. If you can’t face then, get some objective advice from someone who’s been there before. Get a business mentor from Business Mentors NZ which still only costs $100 + GST, see www.businessmentors.org.nz
If you need help with your planning for the new financial year contact Nick on 0800 ASK NICK or email firstname.lastname@example.org.