Basic Financial Planning

Financial planning is about knowing - not just guessing or hoping - where you are, and where you're going, financially.

It boils down to four things:

how much you've got coming in,
how much you've got going out,
what you can do to cut costs and increase profits,
what you might need in reserve to either see you though a tight spot or to invest in improving your business.

Income

Working out what you've got coming in is pretty simple if you're already in business. You need to make time to sit down and go through your income records - the takings from your business - for the past couple of years. It isn't necessary to go through every single order or booking. If you use desti.ne, Sage, Quickbooks or a similar program, or you employ an accountant or a book-keeper then you should have the figures to hand. If not, then you'll need to summarise your bank statements, order books and receipts.

If you've got the time, there is a lot of detailed information to be gained from analysing your income - which products sell best, which generate the most profit, which customer types buy the most, where your repeat business comes from and so on. However, for a broader approach you are really looking for the following information:

how much did you take each year for the last two to three years? Break this down into months for the past year and quarters for the periods before that.
are your takings going up, going down or staying the same?
is your income seasonal, and if so when are your good months and when are your poor months?

If you aren't already in business, or your financial planning is for an expansion project, estimating income is much harder, and involves a lot more guesswork. But unless you make it educated guesswork, there isn't a lot of point to the exercise. This is where research really comes into its own. For example, most accommodation businesses average about 65% occupancy per year, which helps to give start-up accommodation providers a realistic idea of income ... once they've been up and running for a while.

Outgoings

Again, this is simple if you are already in business. Review your outgoings for the past few years and look for the following:

how much you've got going out each year, preferably broken down into months for the last 12 months and quarters beyond that.
where any major expenses are - large lump sums going out or significant recurring costs.
which elements of your business - stock, interest on loans, wages, utilities, premises, vehicles, advertising etc - account for the most costs?

If you've not yet started your business, or you're planning for an expansion, you must be very methodical and disciplined when estimating costs.

Write everything down. Think first about your capital items - the expenses you'll have in getting going:

deposits on a premises, decorating, maintenance or improvements
equipment
utility connection fees
professional fees (eg legal advice, accountants, architects etc),
advertising, marketing and signage
recruitment
clothing etc

Then, separately, put down all your revenue items - the things you have to spend money on all the time to stay in business:

rent
rates
water
insurance
utilities, phone and mobiles
advertising and marketing
food and stock
wages/staff costs
web costs
admin costs, postage, stationary
maintenance
wear and tear on equipment etc

Then try to estimate these over at least a two year period, month by month for the first year, quarters after that.

Shortfalls and the unexpected

Once your income and outgoings are mapped over the previous twelve months and the quarters before that, you can start to compare them and see where the shortfalls or tight spots might be.

Are there some months when you've got costs that outweigh income, either because you aren't very busy or because you have major expenses? Or some months where you are only just meeting your outgoings? How can you iron these out? Is there anything you can do to spread the cost of bigger items - pay for insurances by monthly direct debit, for example? Can you negotiate payment terms with your suppliers - if you're a prompt payer in other months, they may be willing to extend your credit terms in your tighter months.

If you can't spread the costs then plan for them. Try creating specific 'savings funds' drawing a little money from each month's cashflow that you can then pay back into your current account when the major expense draws near.

Planning for the costs you know about is one thing, but what would happen to you if an unexpected cost arose - damage or unexpected maintenance, for example? Even if, eventually, insurance would cover the cost, the likelihood is that you'd have to find the money first, then claim it back later. Could you meet the cost or would your cash flow grind to a halt? What about creeping costs? What if your utility bills rose by 15%, or your staffing costs? What would this mean for your business?

Although it isn't a pleasant process, thinking through different, difficult scenarios is a very important part of financial planning. Given that more businesses fail due to lack of cash than anything else, it is extremely worthwhile making sure you've done everything you can to keep your cash flow healthy, and that you've protected yourself against the unknown.

Cutting costs and raising income

While you are paying attention to your finances - and certainly before you start to think about how much additional money you might need to manage, start or grow - look at what you can do to cut costs and raise income.

Look at where you are spending money. Is there anything you can do to cut down, say, your utility bills or water bills? Can you switch suppliers or put energy saving devices into place? Can you change your routines to take advantage of cheaper rates? Can you encourage customers and staff to be more energy efficient?

What about your staffing? Have you got it fined tuned to keep your wages bill as low as possible? Can you change the way you do things to take advantage of quiet times, when staff are under capacity? Could you improve your staff's skills or productivity so that they do things faster or better? Could you alter your routines to spread the workload and reduce the number of staff required?

What about stock? Have you sourced from the best suppliers, who are offering you the most advantageous terms? Can you safely cut down the amount of stock you have to hold, to free up some cash flow? Is there the possibility of changing your ordering patterns, either to avoid making additional purchases in months where you already have major outgoings, or to smooth out your VAT returns?

What about payment terms? Is there anything you can do to adjust when you pay your suppliers, so that it more closely matches when you get paid by your customers? Can you speed up the time it takes to get paid, or get payments in advance?

Raising income

What about raising income? One way to raise income is to cut costs - because you get more income from each sale you are already making. Another is to look at your pricing - is it right, or do you need to put it up or down to generate more sales or more profit?

But what can you do to get more business? How can you raise the profile of your business so that you sell more? Better, smarter advertising is one way, but what about responding faster and more appropriately to customer enquiries, so that you convert more of your existing responses to sales? Look at making improvements to your website to buying easier, or to improve your rating with the search engines.

What about offers or deals? Consider an email or direct mail exercise to your previous customers (perhaps combined with an offer).

What about catering to niche markets? Consider your business carefully and think how you could cater to more specialist markets, for example business people, older customers, walkers, cyclists, overseas customers, customers with disabilities, green customers etc.

Ironing out seasonality

For many tourism businesses, seasonality is a big issue. If a big chunk of your revenue comes in over just a few months of the year, how do you keep going over the quiet period?

Firstly you have to make sure you've got your costs as fine-tuned as possible over the quiet period. Keep an eye especially on staff, stock and utilities. Consider also how you can use the quiet periods to schedule essential tasks - maintenance, marketing, training, planning etc - so that your time is freed up during the busier periods to concentrate on servicing your customers.

Then look at what you can do to boost sales over the quieter months. Try special offers and seasonal promotions - especially to local in-region customers and those customers less affected by the weather or less concerned with school holidays. These are overseas visitors (especially from Scandinavia) visitors without children, professional couples looking for shopping, culture or pampering breaks, business people, school groups and customers with disabilities and their carers. Try to plan events or features that will boost your marketing and PR.

Also look at how you can 'diversify' a little. You'll need to think creatively and it depends very much what kind of business you have. For example, if you're a café, can you offer outside catering for the autumn and winter months - for all those Christmas parties? If you're an activity centre can you offer team building days, or educational activities? If you're a hotel can you provide meeting and function rooms for businesses, perhaps with catering and maybe even overnight accommodation as part of the package.

Keeping money in reserve and planning for growth

When you're sure you understand the pattern of your income and outgoings, and you've begun to consider what you can do to cut costs and boost income, you need to look at making sure you've got money in reserve to cover cash flow and emergencies, and to fund growth.

Working out what you need

The very first step is to estimate what money you need. Every business needs to have working capital (ie the actual hard cash you need to smooth out the gaps between payments and income) and a cushion against unexpected costs. What do you need? There's no magic formula. The working capital you need is shown up by the month by month comparison of costs versus income. You can see the shortfalls so you know what cash reserves you need to draw on during these times.

The cushion - to cover the unexpected - is harder to define. The exercise of factoring in different unexpected scenarios helps to work this out. Some businesses choose to set a percentage of their turnover aside, others choose a lump sum. Creating the right cushion is a tricky line to walk - on the one hand you don't want unnecessary piles of idle cash sitting in interest accounts, but on the other you've got to protect against the future. Too little and you might get caught out, too much and you aren't maximising your assets.

It helps to remember that whilst you certainly need cash for working capital, you may not actually need cash for your emergency reserve fund - a pre-arranged loan, for example, would suffice, provided you can draw down the funds within a matter of days. Talk to your business adviser or bank manager.

Money for growth

Covering the unexpected is not the only reason you need extra money. Expanding a business can require a lot of cash. Expansion means different things for different businesses: an additional bedroom and bathroom for a B&B, a refit/extension of the eating area for a restaurant, a new feature at an attraction, more staff for a tour guide or activity company. As with start ups, estimating the costs and returns accurately is crucial. In some ways, expansions have more to lose: if you incorrectly gauge your financial need for the expansion and run into trouble, it can suck money and attention from your existing turnover and possibly bring your whole business down.

Make sure you've done your research, estimated every last cost (as described above for new businesses) and been conservative about both how much extra business the expansion will bring and - critically - how soon the extra receipts will come. Most expansions - like start ups - require that you outlay a considerable amount of money first, long before you begin to win your additional customers and before their money actually gets into your business account.

Once you're confident you've identified your financial needs, you need to look at raising money.