Thinking about your business in different ways affects how you plan for the future, opening up some new avenues, but making others potentially harder.
By being aware of how you view your business you’ll also invent new ways of thinking about it, which will give you a more balanced and flexible approach to financial planning. Robin Booth of Brixx.com explains how to think differently about your business, and the benefits of doing so;
What does your business mean to you?
How do you think about your business? What comes first to mind? Your product, your staff, or your customers? Or maybe it’s the ‘bricks and mortar’ of the business, your IP, or your brand?
The way you think about your business is important, not only because it gives you an insight into what’s important for you, but also what might be blindspots in your understanding of it.
Think about your business as if you are explaining it to someone new. How would you draw your business on a piece of paper, and what are its core components?
Thinking about this ‘picture of the business’ is a great way to start understanding not just how a business operates but how best to model it financially. Time for an example…
Jane’s Bakery is a small high-street business. What different ways can Jane picture this business?
Key Question: “How many people know about the business?”
The focus of the businesses planning is on generating a loyal customer base and attracting new customers.
New projects are evaluated on their ability to bring in more customers based on brand/marketing spend.
Staff may get training and external expertise to help them support and maintain their brand, while many avenues of local advertising are explored and evaluated.
In terms of planning depth and detail are put into calculations around converting different numbers of customers from different marketing strategies, and considering several scenarios for the potential payoff of different marketing exercises.
Key Question: “How many loaves are produced per hour?”
The focus of the business planning is on maximising efficiency of production and storage. New ideas and projects might include better storage options, delivery to other retailers in cases of overproduction, repair and maintenance of equipment and hiring staff of different skills levels and providing training to new staff members.
The financial plan of the business will include different assumptions for products produced per hour or per employee, while the scenarios being planning might look at the impact of hiring more staff or improving production by investing in technology.
Key Question: “How can I best serve and retain my customers?”
The business is heavily focussed around customer numbers and quality of customer. Planning with this focus in mind uses the number of customers per week as a driver for income generated, direct costs associated with this income, and maybe even overheads such as staff.
Different grades of customer are established, with the aim of converting passers-by to customers and customers to regulars customers. Ensuring that customers’ needs are catered for by the line of products the business sells will fuel the creation of new products, or new pricing of existing products.
Key Question: “How low can I keep my running costs?”
The business is focussed on keeping its running costs as efficient as possible in order to maximise profits.
Plans include scenarios for switching suppliers, renegotiating contracts and cost benefit analysis of investing in new technology or processes to save money in the long run.
The plan is structured to provide clarity around which costs are necessities, which are variable based on sales, and how much profit marketing expenditure can be expected to generate.
Key Question: “How many of each product am I selling?”
The business puts its products first – both in terms of how many of each type of product are sold and their profit margin, and in terms of the quality of products.
Ingredients, storage and display costs are carefully tracked, broken down by product group.
Products themselves might be divided according to frequency of sale, profit margin, or simply by name.
Analysis will focus on which products are selling the most units, which have the highest profit margins and the creation of new products to fulfil customers’ needs.
What approach should I take?
The glib answer is all of them – the above approaches all contain things that Jane’s Bakery should be considering.
But the way you think about your business is likely to lead you towards one or more of these as a starting point. It’s where you will find you invest most detail in your planning. And there’s nothing wrong with this – a plan does not have to be detailed in every respect – just the ones that are important to the way the business is run.
Financial models do need to produce complex outputs – KPIs, balanced balance sheets etc, but they should also be comprehensible to the people actually running the business.
In addition to be easy to ‘get’, a financial model based on the real-world structure of a business can be built to revolve around the business’ ‘care-abouts’ from the ground up.
About the author
This article has been written exclusively for ByteStart by Robin Booth of Brixx.com the financial forecasting app that turns your ideas into numbers. Robin is a regular ByteStart contributor, and other articles he’s written to help business owners to get to grips with forecasting include;