How to develop a ‘financial picture’ for your business

Business Plans are like maps for tourists – you need a plan for where you intend to go, what you want to look at, where you are going to stay and, if you deviate off track, you need to be able to identify where you’re at and then navigate to get back onto your original path. Planning a business activity is very similar.

The business planning process helps!

The Business Plan should incorporate commentary from the people involved in the business – directors, owners, shareholders, leadership team and other team members, together with a summary of the strategies that have been developed, the tactics for the implementation of those strategies and the allocation of responsibilities for monitoring the supply of funding for the business.

A new year has just commenced.  This is a great time to be planning what you’re going to do in your business in 2022.  With the continuation of COVID-19 causing problems all over Australia, there will be ongoing problems, particularly for businesses, until the immunisation rates are at the level required for “herd immunity”.  In the meantime, preparing a “realistic but flexible” Business Plan can give you a map for the conduct of your business until something approaching “normal business conditions” emerges.

Predictive accounting identifies the ‘financial picture’

A good Business Plan contains a commentary on the strategies to be implemented over a range of activities as well as the business’ vision.

“Predictive Accounting” creates a “financial picture” of the visions and strategies by preparing four key documents:

1. Key Drivers – the key compilation data relative to the predictive reports:

  • Sales estimates
  • Raw materials required
  • Raw materials inventory
  • Labour team required
  • Labour cost estimates including productivity percentages
  • Labour on cost estimates
  • Electricity, gas, oil estimates
  • Overhead budget
  • The markup on external purchases for clients
  • The estimated outlay for client purchases that have to be funded through the cash flow forecast
  • Sales’ budget
  • Inventory of completed products
  • Work in progress
  • Research and development
  • Debtors’ budget
  • Creditors’ budget
  • Operational budgets for each business activity
  • Loan accounts
  • Taxation payments
  • Capital expenditure
  • Shareholder accounts
  • Cashflow forecast
  • Projected balance sheet

2. Budgets – prepared for each business activity.

3. Cashflow Forecast – reflects the financial figures shown in the budgets and from subaccounts within the key drivers – debtors, creditors, inventory etc.

4. Projected Balance Sheet – highlights the impact of the various financial decisions.

Virtual Chief Financial Officer (Virtual CFO) services help SMEs

Virtual Chief Financial Officer (Virtual CFO) services are provided by accountants who have wide commercial experience in a range of business activities to assist growing SMEs.

A key aspect of the role is to be able to “dig down” into the business’ records other than just to extract key financial data.

Virtual CFOs perform this function for small or growing businesses that haven’t yet reached the scale to justify the investment in a full-time CFO.

The engagement of a virtual CFO fills a void in SMEs’ commercial, financial management capability by providing high value, essential strategic financial management advice and enabling business owners to focus on commercial matters within their business and in dealing with their own clients.

Any business that is contemplating “scaling up”, possibly by approaching external investors, will benefit by indicating to those investors that a virtual CFO engagement with their accounting firm is assisting the leadership team in developing the key financial policies for the business.

‘Scale up’ to implement your vision

“Scaling up” is a process that normally follows after the Business Plan has been finalised, incorporating the business’s vision.

“Scaling up” requires the following key items to be attended to:

  • The business needs to assemble a “leadership team” committed to ongoing training and professional development and prepared to ensure that they conduct quality communications with the team members.
  • Businesses attempting to scale up need enthusiastic “team members” who are well trained and committed to the culture of ongoing skills development. To achieve this, the business needs to have an ongoing commitment to the concept of succession planning in every segment of the business’ operations.

The leadership team needs to have developed “workable strategies” for every aspect of the business.

We then come to the challenging part of a scaling-up process: the “implementation of the strategies”.  This is a major commitment to ensuring that the business will operate in accordance with the vision.  Unless there is a commitment to implement the vision, it probably will not happen!

Businesses need “money” to implement their strategies.  The leadership team needs to have a complete understanding of the financial position and to have developed strategies to raise additional funds, loans or capital from the public, if need be, to ensure that sufficient funding is available.

The article is provided for general information purposes only and is not intended as professional advice. Readers should not act on the information contained therein without professional advice from a suitably qualified accountant. 

If you are interested in exploring the concept of utilising a virtual CFO Service and developing a ‘financial picture’ for your business,  contact our KMT accountants today!