We are lucky enough to live in an age where technology can provide incredible insight into your business, and tools exist that make forecasting and modelling easier than ever before. However, the impact of such technological improvements has resulted in a shift in focus to the skills required to use such tools.
Take Excel for example, one of the most useful and powerful tools available to any business owner. Those tasked with creating financial models seem obsessed with showing off their fancy shortcuts and advanced functions, so much so that there are numerous competitions to find the next great Excel genius. The problem with this focus is that it ignores the fact that no matter how skilful the user is, if you put garbage in, you will get garbage out of your shiny excel model. So, our advice is to forget the Excel terminology and focus on understanding and breaking down the key inputs and outputs that make your business tick.
Take a coffee shop, for example. Before building your financial model, you should start at the beginning. How much foot traffic does the shop get? How many customer orders per day, or the average order value? What’s the product mix (coffee vs food), food costs, labour costs to make a coffee or an eggs benedict?
Once you have a financial forecast broken down and driven by key underlying assumptions, you have a roadmap to a plan and can make educated decisions. For example, should you cut the staff numbers (impact on quality of service, speed of service and potentially lost sales in peak times), increase your pricing (risk losing customers) or cut back on supplier costs and impact the quality of your food?
There are no obvious answers in making business decisions as there will always be pros and cons to your decision making. However, as Benjamin Franklin once said “if you fail to plan you plan to fail”, and in business, you are always better off having a plan and adjusting it as better information is gathered, than to not have a thought-out plan at all.
After determining your key inputs, you should then complete a sense check. A good starting point to do this is to compare your key costs and metrics against industry averages. Internally at TR Consulting, we have the advantage of working with multiple industry participants, however, we also draw on research compiled by leaders such as IBIS World and publicly available benchmarks made available by the ATO (that’s correct, even the tax office can be helpful sometimes!)
Based on these benchmarks, if your projected profit margin is twice that of the average or your labour to sales ratio is half that of the average, you know you are being overly aggressive or conservative in your assumptions. You can then re-work your key assumptions to understand where you may have made a miscalculation.
The key advantage of a good financial forecast is that it underpins your pricing, product mix, labour model, leasing options and financing needs. Furthermore, it provides the ultimate point of reference to compare your actual results and work them back to which key assumptions were off the mark, for example, if your average order value is down by 30% then maybe more staff training is needed?
If your business forecasting practices are not providing this information and allowing for informed decision making, then make an initial consultation with our team today. We can walk you through our approach and how we can build you a business forecast that will be both a roadmap and a source of truth to assess your businesses performance.