Crafting a Credible Business Plan: Paving the way to ambition

You already have cash in the bank

Great, so we have ticked a vital box in financial management. Not having enough cash in the bank to pay suppliers, employees, HMRC is the number one reason many companies go under.

However, have you considered the next step and looked a little further over the horizon? Can you bridge the gap between paying for that large material order in January, which you won’t receive income for until October? Gives you food for thought, doesn’t it?

Your business is already making profit

This is fantastic news! All your hard work is paying off and you can see those positive numbers at the bottom line.

But do you understand what’s driving this profit? Which customers/product line etc? What if your activity profile changed over the next 12 months, such as selling more of product B and less of product A? What would the financial impact of that change be on the business? 

The plan is never correct anyway

This is true – as soon as you’ve written your plan, it will be out of date. You might have carefully included the accurate monthly utility costs, and maybe even considered some inflationary calculation, and phased the costs based on increased usage during the winter (go you!). Suddenly though, you find yourself in a cost-of-living crisis and your electricity bill has tripled overnight, making your plan completely inaccurate. Was it therefore a waste of time? Or does the plan allow you to identify overspends in a timely manner and encourage cost-saving activities?

Not having a business plan is like going on a journey without a satnav or a map; it might well be a wonderful adventure, but are you likely to end up exactly where you’d hoped to go? Or are you going to run out of petrol on the motorway long before you get a chance to enjoy the scenery? Or will you simply get lost?

Of course, the lack of a credible business plan could have far greater implications than getting lost on a day trip; for example, the business could run out of cash before the finance manager can make appropriate arrangements.

So, how do I create a credible business plan?

I am so glad you asked. Planning well ahead of time informs, empowers, and motivates colleagues at every level throughout the business, which helps to drive financial performance.

1. Clear Strategy

Firstly, you need a clear agreed strategy in financial terms. What is the business aiming to achieve and by when does this need to be achieved by? For example, identifying key metrics such as X revenue/Y gross margin etc in 3-5 years’ time.

This will allow you to draft a strategic plan – this is usually top level for the business as a whole and looking at full financial years, ignoring monthly phasing.

2. Detailed budget

A detailed and phased plan for the next 12 months; tying in with the figures from the agreed strategy. Ideally, this means we create departmental/cost centre mini-budgets that all feed into one overall budget. Input from departmental managers at this stage is highly recommended in order to improve accuracy and accountability further down the line.

3. Start at the top

Spend time to ensure the revenue figures/mix/phasing stack up and are sensible based on seasonality and information available at the time; the associated costs linked to the revenue can be dropped into place accordingly.

Here’s a top tip: consider capacity constraints when verifying revenue phasing. You will thank me one day.

4. Inflation and one-off costs

When you have your draft file ready, consider the impact of inflation on different income and cost lines. It is likely thar different rates need to be considered for utilities/hourly labour cost; do you need to consider any cost saving activities to maintain current profit margins, or can increased cost be absorbed by increased sales prices.

5. Level of accuracy

Accept your budget will never be fully accurate, and in fact it does not need to be. The idea of the budget is to draft a detailed financial map on how the business intends to achieve its strategy, and this will help identify potential risks and opportunities.

6. Excel vs ERP system

I have created many budgets/forecast/plans during my career, and as a result, I’ve come across a variety of tools. In my humble opinion, the best tool to use is still Microsoft Excel – obtain or create a budget template which allows for easy data manipulation.

Once finalised, upload and lock down the final agreed version into your IT system of choice to allow for easy variance analysis in the future.

7. Risk analysis

With a critical eye, consider potential risks to the plan which could cause disruption. Does 30% of revenue depend on a prototype being signed off? Do you depend on one overseas supplier to deliver essential materials?

Planning for different scenarios will aid you in your preparation.

8. Assign responsibility

The budget is not intended to be the responsibility of the finance team. Of course, the finance team plays a key role in coordination, challenging and verifying data; however, the managers of individual departments should be encouraged and supported to take ownership of their areas of the business of which they are the expert.

9. Periodic review and commumnication

This where the magic happens. Performing regular review of results versus plan; understanding where things are going well and where there is room for improvement. Then, make informed decisions based on the findings and collectively work towards the common goal of achieving the overall plan.

Practice makes progress

The budget, forecast, and outlook created will never be perfect. However, with practice, the process of planning will help us better understand the business and how and where to drive changes.

Following these steps ensures a credible business plan which will help you establish a clear strategy aligned with financial objectives, provide a detailed and phased budget, and prioritise accuracy and accountability from top-level revenue projections to departmental budgets.

Through this structured approach, your business will gain insights, identify potential risks and opportunities, and foster a collaborative environment conducive to achieving your strategic goals.