Why Forecasts Matter
There was a time that I didn't track our cash flow right either, back in my creative agency days. We had money coming in so I spent my time focusing on the more 'important things.' But once the recession finally hit us in early 2008, I realized that cash flow can become THE issue overnight. I started tracking our cash flow and sales pipeline like a hawk.
That's when I realized that I wasn't just watching for a shortfall, but those numbers told me all kinds of things about my business and how to turn that data into decisions and actions that avoided crisis and made us money. By 2011 we'd nearly doubled our revenue even with the long, painful affects of the recession still weighing heavy on our business.
Here are my top 11 areas where businesses are leaking money.
Things that could be plugged with some basic systems in place and a few minutes a week to know where you stand. I doubt you're plagued by all of these issues, but even a single issue on it's own can be disastrous.
1. You're not Forecasting Your Cash Flow
• You have only a cursory understanding of where you're headed financially
• You're dramatically increasing risk of a crisis and, at worst, business closure
• Your business is losing money through the cracks in your processes
You're pulled in a thousand different directions and forecasting your cash flow is just not a high-priority.
But forecasting can give you the biggest ROI on your time. From flagging an issues ahead of time so that it's dealt with before it becomes a costly and time-consuming crisis through to literally saving your business, a quick update and look at your forecast at minimum once per week WILL pay off.
2. You Have a Single Line of Sight
• Your lack of scenario planning and 'what ifs' leads to tunnel vision
• You're not stress testing decisions
• Your direction and decisions are uninformed and come back to bite you
Entrepreneurs 'go with their gut' on decisions from small to large, low-impact through to business-changing, far too often. Their informal score-card tells them that they got a great track-record of trusting their gut.
But even if a decision turns out to be a success, was it the best decision? Did you leave money on the table? Did you stifle your growth?
Even worse, poor decisions are often just filed away as the 'cost of doing business,' but too often these decisions would be completely different if you had the data at hand and compared your options before you make that critical decision.
3. You Don't Know Your Break-Even Point
• You run at high risk without a baseline understanding of your costs
• You're unable to set goals related to operational realities
• You have difficulty growing
Although costs are likely to change month in and month out due to varying costs in materials, inventory, contractors, etc. it's important to know exactly what your baseline, break-even point is every month.
It's really up to you to decide what you include in your baseline versus what you track as your variable expenses but having a figure that you use as a guideline will help you wrap your head around the ongoing costs in your operation.
4. You Aren't Creating Revenue Goals
• You don't plan for growth but just hope it happens
• You lack a sales process that targets your needs
• You only plan for the very near-term
Just getting through today, this week, this month, is often the focus of an entrepreneur. That's completely understandable and you're not alone. Not by a long shot.
But failing to put more than a passing thought or ballpark to your goals has a negative impact on your decisions throughout the year. It stifles growth and leads to a sense of lacking control.Logically established goals and frequent bench-marking can make a fundamental difference to your business.
It informs the hundreds of small decisions and some really big ones throughout the year. When the decisions all pile up, they can dramatically change your direction and the outcome.
5. You Aren't Tracking Your Profit Margin
• You focus on the total value or revenue of a sale but are unclear on the profit margin
• Your sales lacks clarity in what products or services are the most profitable
• Your sales team estimates to low or offers discounts that could put a deal in the red
We talk with businesses every day and are often shocked at the lack of attention to profit. Too often business owners just assume the profit is there.
They may have ample profit in their markup on materials but don't adequately account for the labour costs. Or they have profit built into a common service they offer but don't track their time carefully enough to know that they're constantly over their budgeted time.
I was guilty of the same thing. If something 'seems right' then it must be right. Right?
Taking the time to decode all of the costs in your offerings will help you patch the profit holes at the bottom and those profits will work their way up to the business overall.
6. You Lack Revenue/Sales Forecasts
• You lack the step between goals and the reality or exceeding them
• You don't have a sales process that will help you reach your goals
• You lack long-term planning and a pragmatic approach to growth
When I talk with entrepreneurs that don't have dedicated sales team or at least a dedicated sales process, the business is truly at the mercy of the 'sales gods.'.
It's a bit of luck, a bit of magic, a bit of voodoo... but, for the most part, an area that feels out of control.
Even businesses with a solid sales process and team in place often show cracks when the process is put under bright lights. There's often a disconnect between ownership, operations and sales that leads to lost profit, missed goals and miscommunication that drains morale.
7. You Experience Severe Highs and Lows in Your Sales
• You experience bumpy, unpredictable cash flow
• You find it difficult to plan and manage growth
• It's tough to identify trends and smooth out the growing pains
Too often, a sales forecast is nothing more than a list of potential deals with a rough idea of which ones will close. The core issue is lies in the timing of the deals. If you need 2 million to meet your goal this year and the money rolls in over 14 months, you're in trouble.
If those deals are completed and paid out in 11 months, you're poised to grow.
A much more detailed forecast of your deals, the likelihood they'll close and, most importantly, when the deals will turn into cash in your account, can fundamentally change your profitability.
The tricky part is that the problem is actually one big step further. When the deals close at different times over the year for vastly different amounts, you experience major highs and lows in your sales which leads to highs and lows in your cash flow.
Knowing what you're in for ahead of time, helps you prepare to ride out the waves.
8. You Suffer from Capacity Issues
• Leading to capacity issues and increased Cost
• Loss of Billable Time
A bumpy sales pipeline can lead to capacity issues that can make life even more difficult. Especially in the case of project-based businesses where the internal team is responsible for generating billable hours and income, a highly variable sales pipeline means that you'll suffer from capacity issues on a regular basis.
When the team sits idle, billable hours just leak out the bottom and you're unlikely to catch up. Highly busy times can be just as damaging as you pay out overtime and contractors to deliver but profit is eaten up by the extra expenses.
Knowing ahead of time what your sales pipeline is likely to deliver gives you time can give you options. Quick turn around sales to backfill slow periods, negotiating staggered start and delivery dates to manage the busy times, turning down jobs that aren't highly profitable jobs during busy times.
When the data is at hand, potential problems will float to the top but options are more likely to appear.
9. You Fail to Identify a Crisis Before it Hits
• You fail to see a cash flow crunch ahead of time
• You're unable to prepare for the unexpected and costs pile up
• Crisis appears as a nasty surprise with a lack of time or capital to react
Business owners like to tell themselves all sorts stories. "Bad luck... again. It's the cost of doing business. Why me?"
But how many times could the nasty surprise be avoided or at least minimized from a crisis to an annoyance, if only you saw it ahead of time and made the moves to deal with the problem ahead of time?
If the crisis is big enough that you financing or other stakeholders to step up and help, time means everything. Your chances of a loan go way down when you say "I can't make payroll this Friday" versus "We're predicting a shortfall in six weeks but here's what our cash flow and sales pipeline look like so we expect it to be a tiny bump in the road."
10. You Don't to Act on the Data
• You don't do collections for late payments
• Your not keeping bank/stakeholders up to speed
• You miss out on opportunities because you don't have capital on hand
Having access to information is only one half of the equation. Having time to evaluate, plan and make proactive moves can be the difference between limping along and high growth.
So even if you have a rock-solid system in place that has all of the data you require to make decisions, the data is worthless if you're not keeping on top of it.
I've been there. When times are good, it's so easy to get complacent but the risk versus reward of taking a few minutes a week to stay on top of your forecasts can take away the regret when you get lax and let something slip by.
11. You Don't Keep Your Data Up-to-Date
• Consistency is key
• Very little effort if it's up-to-date
• Have your plan at your finger tips
Of course, this data is only useful if it's up-to-date. With today's cloud tools and connected systems, keeping on top of everything can be a breeze.
Don't believe me? Give Dryrun a try, free and we'll prove it to you.
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