Business planning for growth
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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:
First up, ask yourself some key questions:
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.
The other key balance sheet issue to consider when planning for growth is your operating costs. Ask yourself:
Areas you may wish to review include stock levels and dead stock, warehousing, labour costs and transport costs. Other actions could include:
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.
Advertising and marketing is a necessity, but are you getting the best return on your investment? Ask yourself:
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.
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.
This webinar was produced by the Davidson Institute, Westpac's home of free financial education resources, building confidence today for a better financial future.
General advice: This information is general only and does not constitute any recommendation or advice. It is current at the time of publication, and is subject to change. It has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on the information, consider its appropriateness, having regard to these matters. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this document, including when considering the finance options for your business.