Eighty percent of small businesses fail within the first 18 months (according to SBA.gov). That statistic should raise red flags to entrepreneurs. How can businesses avoid getting relegated to the “4 out of 5” bucket? Careful planning aided by detailed forecasting will increase the odds for success.
…I don’t have the time!
Professionals making the leap from salesperson to business owner say this often. Revenue drives the business, but revenue inflows are rarely steady for small businesses. Some businesses are fortunate to get off to a strong financial start. However, this often builds a false sense of confidence. Management might overlook cash burn analyses and “what if” scenarios, overcommitting capital or rushing to hire an army of personnel in a quest to continue accelerating growth. Since most start-up or small businesses rely on a small concentration of clients for the bulk of their revenue, there should always be a contingency plan for if/when one or more major clients take their business elsewhere.
- Nothing kills morale like hiring a wave of workers…and promptly terminating the new hires. Consider hiring contractors for added financial flexibility.
- Management teams without seasoned executives should consider bringing aboard a part-time or contract CFO or Controller with a proven track record to help make sense of the numbers. Even if the part-time or contract CFO or Controller is utilized for as little as an hour per week, access to that seasoned executive can help to minimize reckless financial decision making.
- Management should align staffing needs with revenue milestones and anticipate staffing hours ahead of each project. What’s the point of acquiring new business if the right personnel hasn’t been hired or appropriately trained? That absence of leadership can compromise client contracts and relationships.
Bottom line – without planning for the future, there probably isn’t much of a future for the business.
…what’s the point of all the assumptions in the projections and forecasting? My business might look entirely different in twelve months!
True, in a small business, much can change and will change quickly. However, there’s more to forecasting than cash and liquidity planning. It’s about building a discipline and understanding financial responsibility. In my opinion, forecasting is about planning for the unknown – discussing possibilities and probabilities. Questions the management should ask on a regular basis:
- What if we lose a client? How will we replace the decline in revenue?
- What if our best performing employee leaves? How long will it take to hire another employee of a similar caliber? Will we lose any clients as a result?
- What if a significant client defaults on a receivables balance? How will we decide whether to negotiate a deal, recommend a payment plan, or cut off all services and go to court?
Discussing various scenarios in advance increases the odds of moving quickly and effectively in the face of surprises or adversity.
Written by Ray Petrino, founder of Hemera Financial Solutions, LLC, provider of part-time, interim, and contract CFOs, Controllers, and Directors.