Every business needs an accurate business plan which balances the optimism of a sales team with the prudence of the finance department and needs of a production team. An inaccurate business plan can have major consequences for a business: strains on cash flow, unhappy funders when the actual results bear no resemblance to the plan, incorrect stock pricing and purchasing, an inappropriate staffing model, and ultimately an underperforming business.
So how do you achieve a business plan that is balanced and credible?
The key is to make sure all departments have input in what should be a fully integrated business plan, with a profit and loss account, balance sheet and cash flow. Too often we see business plans which are centred on overly optimistic turnover estimates, underestimated costs, and certainly not integrated with the cash flow. Taking the time to get it right, based on well considered assumptions will pay dividends both in the medium and long term.
Particularly important in the manufacturing sector is to have accurate gross margin calculations. If the stock price is wrong or the stock levels incorrect then this is a major element of the business which is unlikely to recover elsewhere.
Points to consider when compiling the plan:
• Review your historical sales trends and forecasts going forward, consider seasonal trends, shut down periods, significant changes in the order book, new contracts, terminated contracts, discounts given, question the sales team about sensitivities;
• Review the actual cost of producing each stock item, does this vary per customer, what are the stock lead times and impact if stock is received late on production schedules, potential exchange rate differences, import duties;
• Review staff levels, will additional staff be needed at certain times in order to meet production levels, can shift patterns be altered or will agency staff be needed
• Include all the fixed costs such as rent, rates, insurance and also variable costs such as repairs, motor, finance costs;
• Consider industry trends and sector market data, competitor activity;
• Get your credit terms built into the cash flow both for your customers and suppliers, make the cash flow an accurate reflection of the cash inflows and outflows;
• Build in key performance indictors;
• If you need additional finance from the bank involve them from an early stage;
Hopefully what the above demonstrates is that there is so much to consider and that involving all the key personnel means you get a more accurate business plan. Then once you have it, it’s important to monitor it, update it for your actual results from your management accounts and react to the results accordingly, review your key performance indicators and do something about those which fall outside the parameters set.
Use the business plan to control, monitor and review the business performance. If used correctly it can potentially be the most valuable business tool.
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