FINANCIAL PLANNING AT WORK!

Let me give you an example: take the instrument panel of a car, the dashboard. It has gauges that indicate the condition of the engine's critical elements by the relative movement of a needle on each gauge. These are extremely effective as, watching them, you can be warned and alerted to take action before any damage or unsafe condition occurs.

Imagine now what would happen if those gauges were substituted by fancy flashing lights. Those would flash to get the attention of the driver only when there IS an actual problem.

Can you see the difference? If we use the same example in the case of your business, wouldn't you prefer to have gauges that provide you with an early warning system and not with a flashing light? You can monitor the needles on those gauges as they move.  Flashing lights would tell you nothing until it was too late.

Gauges for monitoring businesses are called ACCOUNTS. The systematic analysis (e.g. on a monthly basis) of the information in them in understandable -away from accounting jargon (e.g. as trends) and the timely monitoring of that information will give you early warnings that there might be a problem ahead if you don't take immediate action or that a problem has showed its ugly face. But, as it is still small, it will be easier and less costly to deal with.

The same analogy applies to favourable opportunities.

I am sure you are aware by now of the biggest problem of all in business:

If you don't manage and plan ahead and make decisions using your ACCOUNTS, you are driving the car with flashing indicators and, therefore, you don't know you have a problem until there is one. Can you afford to do that?

But, all that is at least practical theory! Perhaps you can appreciate more what I am talking about if we look at some examples that demonstrate how financial planning works in practice:

STOCK

Objective: You don't want to stock more than what you can sell because the less stock is sitting around, the more cash you can have in the bank or investing for expansion. Also, it costs money to store it and if it goes lost or damaged, you will automatically suffer financial loss.

Flashing light: you won't know that you have a problem with stock until you notice loads of stock lying around. 

Gauge: You need to have a system in place, which will give you a warning when your stock levels have reached the point where you have to stop purchases or production. Your accounts show you that in month 1 stock levels begin to creep up or that gross profit margins have slightly increased.

Action: That information will make you investigate the reasons for the excessive stock and accordingly take necessary action to eliminate the discrepancy before it becomes a real problem. Is it because some fast- so far- stock is becoming slow? If that's the reason, you will be alerted not to buy more of that stuff. Don't let that line spend the night in your warehouse ever again. Or is it because the customers are there but the sales outlets are not properly fed? If that's the answer, you will make sure that proper re-stocking is restored.

PAYROLL

Flashing light: You realise you are spending too much on people. By the time you realised that, you hired two more staff and given yourself a large bonus.

Gauge: accounts will give you a WARNING that your business payroll to sales ratio is higher than the average for the industry in which you operate, adjusted for the location and any special market conditions.

Action: make sure productivity is increased or you get rid of excess personnel. Cut the dead wood, pamper the producers. Use your brain trust to help you find the efficiencies and opportunities. Listen to them, encourage creativity, invest in training, help them become successful. Encourage entrepreneurial thinking within your company. Share your plan and let them help you accomplish it.

CASH FLOW

Flashing light: you don't have the cash to buy stock to meet demand or pay for the staff wages. But, how could that be? The business accounts show a profit and sales are up.

Gauge: accounts WARN you that debtors are creeping up.

Action: investigate reason. Is it because some debts are aging and becoming doubtful? The longer you take to collect debts the higher the risk of never being paid. Therefore, speed up collection.

Or is the reason for the cash deficiency because of the working capital ratios? For example you could be tying up too much cash in stock.

GROWTH (EXCESSIVE TRADING)

Flashing light: it will come on when you have grown out of business.

Gauge: the accounts show that your sales have grown beyond the level, which your current ratio of equity, debt and retained earnings can support/ maintain. For example, signing up lots of sales contracts with long payment deadlines may seem worthwhile in the longer term but leaves the business unable to pay creditors in the short term.

Can you see the pattern? Problem or Opportunity, Gauge, reason, decision making and action to solve the problem or take advantage of the opportunity.

Of course, that's only a few general examples how you can use financial planning to help your business grow, increase profits and keep out of trouble. But, I 'm sure you get the idea.

Financial Planning provides your business with that early warning system which is so necessary not to hit problems and to take advantage of favourable opportunities.

Have you ever wondered why the gas indicators still show incremental changes and not flashing lights? Couldn't they just tell you when you are about to run out of gas, like the other lights do? Because you need to know the progress of your fuel consumption based on the trip you are taking and availability of resources.

It's the same with your business. In business, your gauges are the numbers found on your financial statements and their interpretation.

Nevertheless, to be of any use as gauges, you need to make sure that the technical language of the accounts is converted into plain, understandable information given to you in good time and not too late.

Like the gauges on the car dashboard, when produced accurately and regularly, these numbers will typically move in small increments, which show you trends.

And astute operators not only notice the movement of their operating gauges but they also understand the cause-and-effect each one has on the others.

Conclusion: make sure you operate your business with gauges, not flashing lights. It's the only way to tell if your decisions are producing positive or negative results.

Make sure you are getting your financial statements before the end of the following month. Spend more time with the numbers below the top line (sales) on your profit & loss statement.

Please feel free to use all the information that you will find on the web site.

If you have questions, please feel free to contact me personally at any time. You can call, e-mail, fax or write to me and I will be happy to answer any and all of your questions.

Good luck in your business ventures!

Demetris Savva BA FCCA
Constantine Savva Accountants Ltd
Chartered Certified Accountants
155A West Green Road
London N15 5EA
Telephone: 020 88094468
Fax: 0845 0500905

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