Business planning for growth

You’re running your own business to make a profit, however achieving an appropriate return for your efforts requires strategy and planning. An annual review of the factors influencing your success – and the challenges your business faces – will help you act to ensure your profits remain healthy.

In updating your business plan each year, a key action is to review your profit and loss (income) statement. This period for reflection will form the basis of your profit plan, which in turn will inform your plan for growth. Some of the things you’ll need to consider are as follows:

Your sales performance and pricing strategy

First up, ask yourself some key questions:

 

• How have my sales performed? 
• What are my expectations for the year ahead?
• Are my prices too high (which can stifle sales) or too low (which puts pressure on margins)?
• What would be the likely effect of dropping my prices? 
• Is there an opportunity to increase prices to increase my profits?

 

Developing a clear pricing strategy requires you to understand what your total offer is and if it’s good value. After all, not everyone shops on price, and you need to factor in the market and any similarities between offerings. Consider too, why people buy from you and what makes them come back.

 

Using last year’s profit and loss statement is a good base for next year’s predictions. Overlay this with your views on current market conditions and movements, and any promotions or price changes you have in mind. Then decide if it’s time to adjust your pricing strategy.

Your costs and how they are impacting profits

The other key balance sheet issue to consider when planning for growth is your operating costs. Ask yourself:

 

• Are there ways to reduce costs and increase my margin, without increasing price?
• Should I look for cheaper suppliers and/or renegotiate my current contracts? 
• How is the Australian dollar affecting me, positively or negatively?

 

Areas you may wish to review include stock levels and dead stock, warehousing, labour costs and transport costs. Other actions could include:

 

• Monitor your expenses and ensure they are held in check. 
• Review your cash flow, which can reveal areas for improvement. 
• Put processes such as payment plans in place that will help you avoid discounting to collect money owed. 

 

If you’re in the manufacturing industry, increasing production could help get your unit price down, but are you risking being left with unwanted stock? It’s a fine line.

The effectiveness of promotions

Advertising and marketing is a necessity, but are you getting the best return on your investment? Ask yourself:

 

• Are my marketing efforts and special offers really working for me? 
• Am I correctly measuring the effects and profitability of my promotions?
• Am I standing out from the crowd to differentiate myself from my competitors?

 

Your marketing and sales force spending should be considered against how many sales were made, and how much profitability was contributed.

 

For example, if your product/service has a profit margin of 20%, how much of an increase in sales do you need if you run a ‘10% off all stock!’ promotion? The tough answer is that you need to double sales, at the very least, as you are halving your margin. And this doesn’t factor in the costs of advertising, spoilage, depreciation etc.

Funding business growth

If you’re looking to grow, you want to be in a financial position to do so. If you’re considering expanding your premises, production or workforce you’ll need to consider how to finance this business growth.

 

Your lender will expect you to build a business case for securing more funds if the amount required is above your existing credit limits and reserves. This is just as important an exercise for you as it is for your bank, who will be happy to talk you through all the options for funding vehicle, machinery, equipment and other purchases.

 

Then your cash flow projections will highlight how much cash is required in your business and when. If you break down your profit and loss statement month by month, you should be able to identify if there any potential cash flow tight sports. The tips in our options to cover cash shortfalls article may help.

Next steps: Watch our Managing Growth webinar

This webinar was produced by the Davidson Institute, Westpac's home of free financial education resources, building confidence today for a better financial future.