I make no apology for bringing up the subject again - we are officially in a recession and there has never been a more important time to understand how sensible, regular planning is a discipline in business that can help you not only survive but flourish.
But I'm A Nimble SME, Why Do I Need To Plan?
I have blogged ad nauseum that this recession has struck at a merciless speed and how, in short trading cycles, household name companies with long, proud trading histories have literally collapsed in front of ours eyes and gone bust.
Insolvency Practitioners and Liquidators are having a boom time as many more companies go to the wall and require their services - it's the nature of the beast.
One way to avoid all this is to do some basic, disciplined planning. And in my estimation this comes in two forms: 1) Front End - Sales and 2) Back Office - Finance. In reality the two are inextricably linked as one fuels the other. However, very often planning is only actually done in Finance - at the front end we have only Forecasting.
Forecasting vs Planning in Sales
It's a nit pick but I would say a basic salesman's forecast is pretty much guesswork based on historical data with a guesstimate on some of the more sizable deals which may have a larger effect. When this is rolled up to management level, very often there are factors and trends applied to arrive at the sales forecast en masse. By that time, the overall number is pretty much a real guess and bears little resemblance to the sum of the raw data. This may actually work fine when sales are buoyant as what often happens is that opportunities are plentiful enough to accommodate the odd deal drop out - the overall number becomes more predictable.
Generally, little planning is involved in that process. It's just an approximation and if sales are close to budget there are no real causes for concern. It's when things start to go wrong that you realise that a bit of planning might have helped.
Planning, when applied to forecasting, is actually reviewing every single deal and working out what is required to win that deal, what margin does it yield, is the customer capable of paying, making sure the terms are agreed, what factors in the market can effect it and what can you do mitigate their effect. This not only gives you a realistic view of every sale but it also gives a very full view of the cost implications of either winning or losing a sale.
Again, these implications seem less important when the graphs are pointing up and to the right, but when there are hazardous market conditions like downturns around, suddenly this level of understanding becomes important.
Right now, it's not a good time for a sizable proportion of your business being in sales to car makers or banks for example and even if they are it is highly likely that the sales may get protracted, become more price sensitive and possibly involve longer payment terms. This level of detail is vital as the Finance Planning is the key part that balances resources to sales.
Financial Planning
Most companies do a budget and a cashflow forecast but it is very likely that SMEs will tend to do these on a monthly, at best, and usually quarterly basis - some may only budget once a year. However, there are plenty of natty tools out there that could make Planning simple and a daily task (cf. www.adaptiveplanning.com)
If the Sales Planning has been done properly, then the Finance side can take the input and do a new level of scrutiny. The first step maybe to review the credit lines to every company on the sales forecast to take account of the prospective sales - the outcome may be to ensure that all existing invoice queries on the accounts are cleared down and settled, credit lines actually raised ahead of a big sale or the credit team can swing into action to look at options to help the customer pay like leasing or debt assignment etc. If the Planning is done properly, Finance can be proactive in helping to deliver sales rather than an order arriving and then tantrums occur as Finance won't extend the necessary credit.
For new customers, get a credit check done. They are not that expensive and they can save wasted effort and heartache. So often a deal comes in and Credit Control (sometimes called Sales Prevention) step in and say 'no credit'. Good Sales Planning will alert Finance early and they can get the checks done ahead and have time to plan if and how a sale can be managed. And there is a downside - sometimes sales are not worth pursuing because the customer does not have the necessary ability to pay - Sales need to know the hard truth early and in these austere times they need to be told if they have to go find another customer to make up the shortfall. Good planning breeds realistic thinking and focuses everyone on the really vital things and avoids 'wishful thinking'.
Once Finance has a realistic view on when sales will drop, when and how customers will pay and if this can be smoothed in any way, then they can take a detailed look at the overall cash position. When times get harder, they can start making decisions on policy to help get resources into winning sales rather than on less important things - a classic example might be cancelling the Corporate Jet when sales drop (take note Citigroup)!
The Results
What Business Planning can do is focus in on the really important things that can directly affect driving sales, creating cash and maximising profits (or indeed, minimising losses in some cases). In harmony, Sales can focus on tactics to close orders and get invoices out early, while Finance can help offer incentives for the customer to settle early or get leasing involved to secure the cash. Meanwhile, Finance can also turn their attention to suppliers to renegotiate or back off the terms of deals so that pain is shared on the cash front.
The key thing is anticipation of issues - when cash is tight you have to be on top of everything from negotiating terms, to collecting cash and extending terms with suppliers and paying as late as you can. One of the biggest areas of cash slowdown is mismatching terms or invoicing inaccurately - communication between front and back office becomes ever more important and this is where Planning really pays dividends so that all discounts, rate plans and terms are agreed formally and the details passed to Finance and equally Finance make sure the invoices are sent out accurately and early. Debt chasing should be more vigorous and leveraging the Sales relationship can often get customers to pay up on time especially when they need something urgently - Sales should have a handle on all that and get leverage.
Expenditure
While cash is king, profit is crucial and maximising it in tough times is a priority. Now is the time to challenge why people travel so much, entertain so often, travel Business Class or use trains when a car could be cheaper or vice versa, then look at all cost lines and squeeze every penny of saving you can so that as much resources can be applied to winning sales as possible and not go on flowery 'nice to haves'.
I have said this before but never underestimate the power of communication with staff. Everyone loves to get good news and pats on the back. But there seems to be an automatic assumption that either staff don't want to hear bad news or they can't handle it or they can't be trusted with it. All of those assumptions are wrong - in tough times, the support and innovation of your staff will help share pain when needed and equally help make sure cost cuts are achieved without a large loss of productivity and sales are made as planned. Leaving them out of the loop can really affect the plan detrimentally as well as ruin motivation.
Get Innovative
So much of sales behaviour is driven by compensation plans and you need to be able to gear the plans toward meeting priorities in tougher times. A profitable deal is not profitable until the cash is in, so why not think of either changing the point of commission payment to when the cash is collected or accelerate the earnings for early payment and the opposite for late payment. Further, focus on success so raise the barriers at which commission is paid but give more for overachieving.
Planning will also reveal the margin hotspots and highlight those deals where margins are low. If such deals are with customers whose payment records are poor then you know that your real margin is lower while possibly smaller deals with customers at higher margin and good payment records are worth proportionally more to you. Make sure you have all the information to make the judgement calls and give the bad news to salespeople early rather than wait for deals to come in or, worse still, snipe at them later. The decisions to accept these deals should be shared.
Tackle Cash Requirements Early
What this detailed Planning will allow you to do is to get a much more realistic picture of how your cash positions will pan out and therefore dictate how much cash may be needed and when. So much of what is going on in business right seems to be guesswork but in your own company it should not be that way. Having all the deals and expenditures explored, terms agreed, collections strategies in place, credit checks done will actually make the task of going to your bank or similar far easier. Why? Because you can answer their questions. There is nothing worse than bluffing in this situation as you don't get a second chance at that but having a detailed Plan with contingencies built in and the even the compensation plans geared to help, the Banks cannot fail to be impressed with your ability to know and run your business. They still lend on trust and that should be your priority.
Get Advice
There are going to be a lot of vultures out there who will want to start telling you how to cut and restructure your business, turnaround experts who are just accountants with knives. What you need is to give yourself a better chance to win business with a cost line that can support it. Too many companies Plan badly and then just hand over the company to accountants when things go wrong.
Plan better now and you will not only survive - you will THRIVE when the recession is over. Make sure your planning is done with your Sales and Customers in mind as the key priority - focusing inwardly will make you lose sight of your path to survival.
For help on planning to survive, call me on 0207 193 2356 or drop me a line at nigel.dunn@calxeurope.com.
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