Business Planning – A Cornerstone Of Success
To be a successful company that remains strong throughout ever-changing markets, you must have solid business planning skills. Very rarely is a company accidentally successful. Although a company can gain immediate success, go viral or create a marketing or word-of-mouth frenzy. However, you must quickly asses how to manage this or chances are that the company will not make it. Having a plan for your small or large business operation is what will keep you on track. Jay and the Numerico team are qualified business consultants. Let them help you with the following business planning tasks.
Create Yearly Financial Income and Expense Projections
Estimate revenue weekly or monthly depending on your size. This will be the basis of the projections for your income. You can use previous year’s sales numbers, number of employees, amount of inventory you have purchased or any special events that you know may occur. Then track each month to see how your projections are comparing to actual sales and make adjustment to your plan. Do the same thing for your expenses and billing. The accountants and business advisers at Numerico can help you create benchmarks for each area of expense. This includes fixed costs and cost of goods. This will give you an idea how your business compares to others in your area and industry.
Business Planning – Execution
Now it’s time to pull everything together. Keep track of your income and expense projections. Depending on your business model, you may also want to do a cash-flow projection. Find a system that works for you whether it is daily, weekly, or bi-weekly. Take time to compare your actual sales and expenses to projections. Remember that the longer you wait to check-in and see how you are measuring up, the less time you have to adjust your income or expenses. Do the same with your marketing plan. Always stay on top of what is supposed to get done and make this a top priority and part of your routine.
Review Your Business Planning Often and Re-adjust as Necessary
Take notes on how things are working out. Measure your success and always be thinking of creative opportunities. Keep these detailed notes all in one place. Did you start too late for your back to school sale? Was one of your coupons missing a disclaimer that would have protected you from misuse? What can you avoid next year to increase your profit? What is missing? One of the most important things to record is what you did right. What will be important to repeat next year. As time goes on you will become more intuitive to your business planning and projections. Each time you plan and project should become more natural to you than the last time. It is okay if you don’t get it right. You are setting yourself apart as a financially fit business leader just by logging your progress.
Business Planning – Create Your Business’ Valuation
Business valuation can be tricky. No one agrees on the best way to do it for every company or industry. The value of the business is based on many variables. Some of these variables are demand for your product, service or space, the market, assets, debt, and employee skills and talent. There are many additional factors as well. How close the owners are involved in the business and what type of involvement they have is key. How the landscape of the business will change once they are removed weighs heavily. Jay and his business consulting team can help you with determining your value. If a sale is looming, they can advise you on carrying it out from beginning to end. They will analyze your business closely, study your operations and sort through your past financial statements. It is important to look at the business value in a multi-dimensional way.
Market and Net Income
Pricing is important and it is imperative not to price your business too high or too low. Either way, it is easy to scare off potential buyers. Your price is a reflection of your motive for selling and the state of your business. Obviously, net income is one of the first and last places a buyer is going to look. A buyer will want a long range insight to the company’s income. They will want hard evidence to back up the net worth of the business. This will include tax returns and bank statements.
Adjusted Net Income
Adjusted net income is the amount of money a new owner will be able to “make” from the business once they own and operate it in their own way. These items are added back to the net income of the business to become the adjusted net income:
– Owner’s Salary
– On time expenses such as equipment, trucks, etc.
– Rent, amortization, interest
– Possible human resource changes
– Owners personal expenses such as auto expenses, entertainment, travel, pension, insurance etc.
– Tax write offs that would not be there if the business had new ownership
Adjusted Net Profit X Profit Multiplier= Value
In the above equation the “Profit Multiplier” will be different for any business. It depends on the business’ assets and profit center. If you have a piece of real estate that is worth something now or in the future or if you are selling your business with many talented or skilled workers – those may be your “Profit Multiplier.”
From a buyer’s point of view if they pay $250,000 for a business and they plan to get a 20% return on their investment – that would be $50,000 per year. This would be a decent return and the new owner would get their investment back in 5 years. This type of arrangement figured out prior to the sale may make the business worth more. A different example is a business that sells for $800,000.00 and plan to get a 12% return on investment – that would be $96,000 per year. It would take 12 years to get a return on the investment.
Another important factor is the terms and what they mean. Will the seller receive all the money in one lump sum? With this kind of transaction, they may expect to get between 60%-80% of the sale price. But if they take a down payment and finance the balance it would drastically change the financial picture as well as the forecast for the new owner. For a business to be attractive, the cash flow needs to be able support the price. Don’t make mistakes that could cost you a lot of money in the end. Let Jay and the team at Numerico advise you on the sale so you can maximize your wealth and better your future finances!