Sunday, November 8, 2009

Cash Rules Everything Around Me... Make plans for the upcoming year!

At present many of you are getting ready to close the books on what was a horrific year in business. If yours is like the majority of business out there your revenues were off by a double digit percentage, you cut back spending and may have even cut down your workforce, and you certainly lost money this year. If your business is in the minority of businesses, you had to cut back on spending including some work force expenses, your business was off but by single digits or not at all, and you broke even or managed to turn a profit. No matter which group you belong to though, you should congratulate yourself. You survived, you made it, you pass-go and get to keep playing the game. Now bring on the challenges of 2010.

How many of you feel that things are going to turn around in 2010? How many of you actually mean by turn around that you are hoping to see more manageable declines in revenues and a smaller loss than you took in 2009 without having to make any more cuts? With all due respects to the economists who forecast GDP growth and recovery in 2010 I think those of you who answered “I do” to the second question have got it right. But what does getting it right really mean? What can you do in 2010 as a small business owner to protect what you struggled so hard to keep in 2009? The answer is financial planning.

Financial planning on some level is what got you through 2009, I am sure of it. It is what made you cut back on spending, decrease marketing dollars or switch to a 4 day work week, but if you were like most businesses in 2009, you made or adjusted your financial plans in May or June. I know that is what we did in at least one of my organizations and that is fine. 2009 was the kind of year that reduced everyone’s expectations and couldn’t be predicted by anyone. However the results of this year allow you to be proactive as opposed to reactive in your financial planning for 2010.

Many of you typically sit down with your finance officer, accountant, or maybe just by yourself around this time of year and create pro-forma financial statements for the next year as a matter of practice. That is good practice for your organizations success so if you don’t do this, please start. In the past though I imagine for many of you this was a going through the motions exercise where predictions about expense growth and revenue growth were picked out of thin air or with sort of an ad-hoc guesstimation technique. I think as the results of 2009 bear out, this cannot be the case going into next year. Organization and detail should be the order of the day for any financial planning in 2010.

For me operating budgets are a great rudimentary planning tool. As a matter of fact an operating budget is what has consumed all my work time over the last few weeks and I am happy about that. It shows me that my employers care about the financial health of the company and it allows me to take control of any expenses I might have missed while putting out the bigger fires during the year. It allows me to strip out the accounting and technical elements of the things on our income statement and reorganize them based on related expense groupings. Payroll is more than just salaries, its salaries and insurance contributions, its car allowances, its federal taxes and processing fees for using an outside company. I don’t have to guess at what happens if we add back an employee or we bring back 5 day weeks, I could see all of the real costs increasing on the paper. All of our expenses being reorganized allowed me to see we spent almost $10,000 in computer and technology related expenses, and $5,000 in office supplies. I went back and pulled contracts and invoices to understand what we did to generate our costs. Were they necessary? Will the money need to be spent again next year? Will the costs be going up next year? I laid the operating expenses out monthly. I know that one of my organizations needs to make around $50,000 a month in net profit just to break even with its current spending habits.

Then once I was done with the operating budget, I sat down and went the extra mile as they say. I took a look at our work-in-process expectations to end 2009. I looked at the business we have pre-booked for 2010 and what we will have to pay our vendors based on what is pre-booked. I even went so far as to look at not only how much we will have to pay our vendors but when we will have to pay them. Based on that investigation I found out that we can expect to get paid by our customers in March at the earliest. I know now, halfway through November of 2009 that I need at least $450,000 in real cash to survive the first 2 months of 2010 and keep all of our payables under 30 days. I know today that due to rebate dollars at stake I can only afford to “float” about one-third of the $450,000 dollars. I know now what my contingencies are to obtain the cash my organization needs to survive and keep its reputation as a timely payment customer. I also know now that the repercussions of not paying on time will be delays in production, which in turn will postpone our jobs being done, which will postpone us receiving payment for satisfactory work, which will extend our cash shortage another 30 days… and so on and so on until we have no business left and all my problems are solved because we don’t have a business and so I have no cash to manage. I know that sounds like a silly scenario, but that is probably closer to a reality that we would all face if just one thing goes wrong with our cash flows and is a real example of what could happen if I did not do financial planning.

Now that the lesson is over so to speak I would like to point out that nowhere in the above description of financial planning did I do anything extraordinary that only a Finance MBA would have the skills to do. I simply took the time to organize the finances into understandable expense groups and utilize the information at my disposal to make our financial plans and predict our cash needs for the coming year. You don’t need advanced degrees to organize data and you certainly don’t need advanced degrees to form an opinion about the future.

In summary, if you haven’t done your 2010 planning yet, you should certainly start. If you don’t have this kind of information at your disposal, you should try to obtain it. If you don’t have the luxury of knowing you have pre-booked business for the coming year, simply do a best-worst-and base case scenario plan of your organizations financial needs based on your expectations. If you can’t do that because you don’t know how, ask someone, use the internet (I have an MBA and I use Google to clarify things for me all the time) or e-mail me your question and I can try and help.

In any event, as a result of my planning I know what I need to know about the future of my organization today, while I still have time do something about it. I understand that 2010 is not 2009 and the worst should be over but the best won’t soon be here. I also know that because I took the time to do proper financial planning my company should still be here when the good times do come back around. If you take the time, I am sure yours will be as well!

No comments:

Post a Comment