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2 January 2008

Businesses that fail to plan – plan to fail

To run a successful business in the 21st century, it simply isn't enough to be great at what you do.

The key to continued prosperity for businesses is the ability to make effective financial decisions and to plan properly.

Tim Harrington, Westpac's General Manager Commercial and Regional Banking, said businesses who failed to plan, should plan to fail.

"Planning gives the business clarity about where they are heading and the New Year is a great time to make some resolutions that will help better manage the business," he said.

"We think there are seven resolutions for 2008."

1. Plan properly
To make it easier, break planning into five areas: product, people, place, price and performance. Write down the top three short term plans under these areas that will impact on the business. For example under "people" ask if you have the right people; what actions can you take to ensure you do? Are you in the right location – what actions can you take to improve? How are you tracking against planned sales?

2. Manage cash flow properly
Most businesses cite managing their cash flow as one of the biggest challenges they face. Businesses need cash to pay their staff, trade, and take advantage of opportunities. Make a resolution to improve stock management and speed up debtor collections – improve your payments and debtor collection.

3. Monitor financial position
The strength that most owners bring to a business is the ability to either make a product well and/or sell a product well. Understanding the strength of the business, however, depends upon their ability to understand the financial numbers that underlie the business. Resolve to work out the strength of the business using the financial statements. Make a resolution to develop a scorecard to track performance in your business. This should cover sales, employee costs, margins.

4. Understand the relationship between price, volume and cost.
No two businesses have the same cost structure and yet most businesses will price based on how much their competitors are charging. Make a resolution to calculate the business breakeven point and use that as an effective planning tool.

5. Borrow properly
The most important rule in purchasing is to match the life of the loan to the life of the asset. If you are buying stock, use cash. If buying cars, equipment, property or landholdings – they will last a long time and should be funded accordingly – with long term debt. Resolve to review own recent purchases and determine if there is a better way to fund them and is the mix of short term and long term debt right.

6. Manage Growth
Managing growth while balancing the cheque book is a fine art.
Managing cash is so critical to managing a business. Resolve to review the working capital situation and look at how you currently fund sales growth? Is there a better way that you could be doing this?

7. Plan for Transition
Business owners should resolve to know the ultimate goal they have for themselves and the business. They should look at the measures they currently use to ensure continuity of their business and put in place steps help to achieve the chosen exit strategy.