How to Plan for Future Financing Needs

Studies overwhelmingly identify bad management as the leading cause of business failure. Bad management translates to poor planning by management.

All too often, the owner is so caught up in the day-to-day tasks of getting the product out the door and struggling to collect receivables to meet the payroll that he or she does not plan. There never seems to be time to prepare Pro Formas or Budgets. Often new managers understand their products but not the financial statements or the bookkeeping records, which they feel are for the benefit of the IRS or the bank. Such overburdened owner/­managers can scarcely identify what will affect their businesses next week, let alone over the coming months and years. But, you may ask, "What should I do? How can I, as a small business owner/manager, avoid getting bogged down? How can I ensure success?"

Success may be ensured only by focusing on all factors affecting a business's performance. Focusing on planning is essential to survival.

Short-term planning is generally concerned with profit planning or budgeting. Long-term planning is generally strategic, setting goals for sales growth and profitability over a minimum of three to five years.

The tools for short- and long-term plans have been explained previously in this section: Pro Forma Income Statements, Cash Flow Statements or Budgets, Ratio Analysis, and pricing considerations. The business's short-term plan should be prepared on a monthly basis for a year into the future, employing the Pro Forma Income Statement and the Cash Flow Budget.

Long-Term Planning

The long-term or strategic plan focuses on Pro Forma Statements of Income prepared for annual periods three to five years into the future. You may be asking yourself, "How can I possibly predict what will affect my business that far into the future?" Granted, it's hard to imagine all the variables that will affect your business in the next year, let alone the next three to five years. The key, however, is control - control of your business's future course of expansion through the use of the financial tools explained in this section.

First determine a rate of growth that is desirable and reasonably attainable. Then employ Pro Formas and Cash Flow Budgets to calculate the capital required to finance the inventory, plant, equipment, and personnel needs necessary to attain that growth in sales volume. The business owner/manager must anticipate capital needs in time to make satisfactory arrangements for outside funds if internally generated funds from retained earnings are insufficient.

Growth can be funded in only two ways: with profits or by borrowing. If expansion outstrips the capital available to support higher levels of accounts receivable, inventory, fixed assets, and operating expenses, a business's development will be slowed or stopped entirely by its failure to meet debts as they become payable. Such insolvency will result in the business’s assets being liquidated to meet the demands of the creditors. The only way to avoid this “outstripping of capital" is by planning to control growth. Growth must be understood to be controlled. This understanding requires knowledge of past financial performance and of the future requirements of the business.

These needs must be forecast in writing - using the Pro Forma Income Statement in particular - for three to five years in the future. After projecting reasonable sales volumes and profitability, use the Cash Flow Budget to determine (on a quarterly basis for the next three to five years) how these projected sales volumes translate into the flow of cash in and out of the business during normal operations. Where additional inventory, equipment, or other physical assets are necessary to support the sales forecast, you must determine whether or not the business will generate enough profit to sustain the growth forecast.

Often, businesses simply grow too rapidly for internally generated cash to sufficiently support the growth. If profits are inadequate to carry the growth forecast, the owner/manager must either make arrangements for working growth capital to borrowed, or slow growth to allow internal cash to "catch up" and keep pace with the expansion. Because arranging financing and obtaining additional equity capital takes time, this need must be anticipated well in advance to avoid business interruption.

To develop effective long-term plans, you should do the following steps:

1. Determine your personal objectives and how they affect your willingness and ability to pursue financial goals for your business. This consideration, often overlooked, will help you determine whether or not your business goals fit your personal plans. For example, suppose you hope to become a millionaire by age 45 through your business but your long-term strategic plan reveals that only modest sales growth and very slim profit margins on that volume are attainable in your industry. You must either adjust your personal goals or get into a different business. Long­ range planning enables you to be realistic about the future of your personal and business expectations.

2. Set goals and objectives for the company (growth rates, return on investment, and direction as the business expands and matures). Express these goals in specific numbers, for example, sales growth of 10 percent a year, increases in gross and net profit margins of 2 to 3 percent a year, a return on investment of not less than 9 to 10 percent a year. Use these long-range plans to develop forecasts of sales and profitability and compare actual results from operations to these forecasts. If after these goals are established actual performance continuously falls short of target, the wise business owner will reassess both the realism of expectations and the desirability of continuing to pursue the enterprise.

3. Develop long-range plans that enable you to attain your goals and objectives. Focus on the strengths and weaknesses of your business and on internal and external factors that will affect the accomplishment of your goals. Develop strategies based upon careful analysis of all relevant factors (pricing strategies, market potential, competition, cost of borrowed and equity capital as compared to using only profits for expansions, etc.) to provide direction for the future of your business.

Compare your budget occasionally with actual operations figures. With effective records you can do this. Then, where discrepancies
show up it is possible to take corrective actions before it is too late. The proper decisions for the ideal corrective action
depends upon your understanding of management techniques in purchasing, pricing, selling, selecting and training personnel, and
handling other management issues.

You're thinking you are able to hire a bookkeeper or a Accountant to handle the record keeping for you. Yes, you can. But remember
two very important details:

1. Supply the accountant with accurate input. If you buy something And also do not record the amount in your business checkbook,
the accountant can't enter it. If you sell something for money and don't record it, then the accountant won't understand about it.
The records the accountant prepares will be no greater than the information that you provide.

2. Use the records to make conclusions. If you went to a doctor And he told you you were ill and needed certain medication to get
well, you'd follow his guidance. If you pay an accountant and he tells you that your earnings are down this season, don't hide
your head in the sand and pretend that the issue will go off. It won't.

Business Management Roll in Personnel Selection. If your Small Business Will be large enough to require external assistance, an
important responsibility will be the selection and coaching of one or more employees. You may start out with relatives or business
partners that will assist you. But if the company grows - as you expect it will - the time will come when you have to select and
train employees.

Careful selection of employees is vital. To select the right Employees decide beforehand what you need each one to do.

Then search for applicants to fill these specific needs. In a small Business you may need flexible employees who can shift from
task to task as needed. Include this in the outline of all the tasks you wish to fill. At the exact same time, look ahead and plan
your hiring to assure an organization of people capable of performing every crucial function. At a retail store, a salesperson may
also do stock-keeping or bookkeeping at the start, but as the business grows you will need sales people, stock-keepers and
bookkeepers.

Once the project descriptions are written, line up applicants from whom To make a choice. Don't be swayed by clients who may
suggest relatives. In the event the applicant does not succeed, you may drop a client in addition to a worker. Some sources of
possible new employees are:

1. Tips by friends, business acquaintances. 2. Employment agencies. 3. Placement bureaus of high schools, business schools, and
schools. 4. Trade and industrial institutions. 5. Help-wanted advertisements in local papers.

Your next job is to screen want ad answers or program Forms sent by employment agencies. Some applicants will be eliminated sight
unseen. For each of those other people, the application form or letter will act as a basis for the interview that ought to be
conducted in private. Put the applicant at ease by describing your company generally and the job particularly. Once you have done
this, encourage the applicant to speak. Picking the right individual is extremely important. Consult your questions carefully to
learn everything about the applicant that is pertinent to the job.

References are a must, and should be checked before making a final decision. Check through an individual visit or a phone call
directly to the applicant's immediate former manager, if possible. Verify that the information given you is accurate. Consider,
with conclusion, any negative remarks you hear and what isn't said.

Checking references can bring to light significant Details Which may help save you money and potential annoyance.

Personnel Training. A well-selected employee is only a potential Asset to your organization. Whether he or she becomes a real
asset is dependent upon your own training. Remember:

To allow sufficient time for training. Not to expect too much from The trainee in too brief a time. To let the worker learn by
doing under actual working conditions, together with close supervision. To follow along with your training.

Check the worker's performance after he or she has been in work For a time. Re-explain important points and short cuts; bring the
employee current on new developments and invite inquiries. Training is an ongoing process which becomes constructive oversight.

Personnel Supervision. Supervision is the third essential of personnel control. Fantastic oversight will reduce the expense of
operating your company by cutting down on the amount of employee errors. When mistakes are corrected early, workers will find more
satisfaction out of their jobs and perform better.

Motivating Employees. Small businesses sometimes face particular Problems in motivating employees. In a large business, a good
employee can see An opportunity to advance into management. In a small business, you are the management. One thing you Might Wish
to consider is to provide good employees a Small share of their profits, either through part-ownership or a profit-sharing plan.
Somebody Who has a"share of this activity" is going to be more Worried about helping to make a success of the business enterprise.

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