Those of you old enough may remember Hannibal from The A-Team. He was the cigar-smoking, black-gloved leader who thrived on adventure and planning. With Murdock, Faceman and Mr T, they got into and out of many life-threatening adventures. And when the plan came together the cigars came out.
Last week we looked at a pension’s journey for a company director. In case you missed it click here
We are going to look at planning for 2021. Not as exciting as The A-Team but there are similarities. We are in interesting times. This year has been very challenging for many businesses. The shock of the restrictions and first lockdown hit many businesses hard. After that many businesses flourished in the Summer months with strong domestic spending. The current lockdown is very difficult for those businesses that had to close again. Especially after doing everything right to reopen. Signs are positive for next year with many vaccines on the horizon. It is time to look to the future and plan.
How do I do this?
The first thing to do is to understand where you are now. What are your numbers like up to the end of October? Do you know what your sales/turnover figure is for this year? What is your wage cost as a percentage of sales? How are your margins holding up? What is your profit like? Is it lower or higher than expected and what are the reasons for the difference?
It is not vital that you know exactly every number in your business. Don't beat yourself up if you don't. But you must understand the main numbers in your business. There will be four of five key numbers that you need to know. Among these would be
- Wage costs as a percentage of sales
- Gross Profit Margin
- Net Profit percentage
- Debtors days [date of invoice to date of payment]
I put the last point in because all the other figures could be fantastic, but you may not have cashflow to pay costs. Your money is sitting in your customer’s accounts and you are being used as their bank!
Get your numbers up to date to the end of quarter 3 for this year. Examine and understand what your key numbers are and see how the business is performing. Plan out the last quarter. You should have a good idea of sales. Many of your costs will be certain so you will be able to predict those to see where your profit is likely to land.
Prepare a budget for 2021
"A budget is telling your money where to go instead of wondering where it went" Dave Ramsey
We can increase profits in one of two ways
- Increase sales
- Reduce costs
Current and past business performance will be a strong guide to future performance. You can look at your sales for 2021 with a 10% or 20% increase from this year. Whatever increase you have in there needs to be realistic and achievable. You know what your costs are. Will your main costs like wages, rent and rates, insurance and IT costs increase? Are there costs in there that have no benefit? In our business we don't have advertising costs. We don't get any return from it. In a different business, like recruitment, advertising would be vital for the business. If you hire another employee how will that add to the bottom line?
Happy Harry Ltd is a well-run recruitment company with sales of €1 million in 2020. Their wage cost is €400,000 and which is 40% of turnover and they want that percentage to stay the same for 2021. They are looking to hire a new employee to help them grow the engineering side of the business. The cost of the new employee in 2021 will be €60,000. As total wage costs will be €460,000 turnover will have to increase to €1,150,000 next year to maintain the 40% rate.
€460,000/40 x 100 = €1,150,000
Harry knows that his new employee must bring in €150,000 of income for next year and can set-out a plan to achieve that.
Once you have your budget in place you need to use it and share it with your team. You use it by setting aside time to check it with your management team. Are you on target? Why are some costs higher than those in the budget? Will that cost help to increase sales and reduce other costs by adding to the bottom line? You can challenge the numbers and it will give you good information. You can find out you are losing money on certain products or servicing certain customers. You will see what your high margin products or services are and that can be an area of growth.
You may not feel comfortable sharing all your numbers with the team, but you should share the key numbers. They will get a better understanding of the business. They will know what sales number they need to achieve, and it will help get their buy in to give their all. You are trusting them to share your numbers and in turn, you are asking for their trust to improve the business. You are both trying to achieve growth and increase profits so they can earn more in the future.
What will the above do for you?
It will give you confidence. You will know what your key numbers are and what you are looking to achieve in 2021 and beyond. When I say beyond, this will tie in with a vision for the business and a strategic plan. We will talk more about that in future blogs. Confidence is important in business. When you are confident you are looking ahead. You are positive and looking to improve. It gives you energy and that energy can be infectious and rubs off on your team. With confidence you look forward with hope and energy. Without confidence you are looking behind and worried.
It will give your customers, staff, and other stakeholders confidence in you. You will be trying to help your customers as much as possible. You will be enthusiastic about selling to them and new customers. Your staff will be more confident in you as they understand the numbers in the business. They know it's a good business that is looking to grow and that they have a future in it. Other stakeholders could be your bank. They want to see a business owner that is confident, enthusiastic, and knows his/her numbers. After all, they are trusting their money with you and before they give it to you, they want to be sure you will pay it back. If you are looking for money you won't inspire confidence in them if you haven't up to date numbers. This could be the difference in getting a business loan at 4% rather than at 8%. It also makes the whole finance piece much easier. There is less time wasted on applications. You may have to get the numbers from your stressed-out accountant who is fire-fighting. There can be delays and if there are delays then you can lose out on more attractive interest rates.
Why do this?
"Someone's sitting in the shade today because someone planted a tree a long time ago." Warren Buffett
Why are you in business in the first place? What do you want to achieve? Once you know what your "why" is then the above will make sense. Your why will be in line with a strategic plan for the business which should tie in with a personal plan for you.
A useful exercise here could be to write down what you want to achieve in your business. Where do you want to get to and what will do for you?
In our business we are planning for 2021. We have accounts up to date for 2020 and can see where we should finish this year. We know what our sales and costs will be to the end of the year. These figures will be the basis of our budget for 2021 and we will put one of our team in charge of that budget. We will meet with our team in early January (hopefully not on Zoom) to review the business. We will share our 2020 numbers and look ahead to what we want to achieve in 2021.
If you think we would be a good fit for your business call Deirdre on 051 396703. She will point you in the right direction. Or contact us and we will be back to you