Why Bother with a Financial Plan?

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by Mike Iverson, Numbers Coach

Any competent financial executive will say “a business needs a sound financial plan” to tie the numbers to a business owner’s strategy. But what does that really mean?

Yes, you need a plan. But how you develop the plan will depend on your business objectives. Question #1 should be “Why are you in business?” Your answer may be:

  • “I want a good, stable lifestyle-maintaining business.”
  • “I want to increase my net worth so I can retire early and enjoy the good life.”
  • “I’ll start a ground-breaking business, grow it quickly and sell it so I can move on to the next adventure. I don’t want to get bored!”
  • “I want to create a legacy for my family.”

You might hear yourself in one of the answers above, or maybe you have a unique reason for starting a business. No matter – there are common elements to be explored as you develop your plan, such as sales, marketing, operations, finance, competitors, which products and services to offer, etc.

Create a Plan

I know it sounds like a lot of work. But keep in mind: if you are in business to create a nice income/lifestyle with moderate growth, then you may choose to keep it simple and short. Your financial plan may be just the number of hours at a specified hourly rate that you need to work in order to achieve your goal. Why spend hours on a 40-page plan when two to three pages is enough?

On the other hand, if you plan to grow your business beyond a few people in order to create a net worth exit opportunity or a significant enough business to leave as a legacy to your children, then a more detailed comprehensive plan will be needed. This means the plan should include all of the elements noted above, with enough market data to support your business premise. You’ll need details to specify what exactly it will take to grow your business. Details such as:

  • Monthly financial projections for 12-24 months
  • Annual projections for 3-5 years
  • Assumptions outlined that support projected sales and expenses (pricing, number of clients, new products, marketing initiatives, comparative plans, product costs and more)
  • “What If” scenarios to illustrate the potential ups and downs.

It is easy to think of the plan as the tool. And it is – a well developed plan helps you manage to your expectations. It provides business measures to keep things on track. (Ever hear the old saying, “If you don’t measure it you can’t manage it?”) But often overlooked is the value gained in going through the planning process, whether it’s a simple two page plan or a full-blown book with multiple chapters. The business idea will be refined and honed, and valuable insights achieved.

Ready to Execute

Once the planning process is complete and documented, with a set of financial projections that tie to your vision and help you see what success looks like and what it might cost you in dollars to do it – you’ll be ready to execute your idea! (Don’t forget, however, the plan is dynamic, meaning it will need updating and modifying on a regular basis!)

In the following case study I will illustrate two key elements I have found among successful entrepreneurs who have implemented a planning process:

  1. They start with the end in mind.
  2. Execution, execution, execution…..

Case Study: The Financial Operations Network

I have been fortunate to have been involved with the start-up and launch of a unique business model in my work with a successful serial entrepreneur – Phil Binkow. I have tremendous respect for Phil and his ability to see opportunities and make them happen.

About 10 years ago, Phil had the vision of building a content rich website for financial professionals, specifically in the area of Accounts Payable. Phil produced one of the best business and financial plans that I have seen. He researched his target audience, asking questions about price, content, and their day-to-day challenges. He carefully studied competitors and the industry to find any gaps. He articulated where he felt the business could go and even reached out to competitors as partners.

After reading the plan, I was convinced that here was a business with solid recurring revenue in a niche no one else was serving. We built a comprehensive financial projection which included assumptions for pricing, ramp up of memberships sold, and types of ancillary services and products to sell. The model also helped us understand the potential capital needed to develop and launch the initial site and a future complimentary resource site.

What Determines Success or Failure?

Phil implemented the two key elements in the planning process that I believe can define the difference between success and failure:

  1. He started with the end in mind.
    In other words, he actually has aligned himself with competitors that could ultimately become potential buyers of the Company. Phil knew intuitively that it is better not to go up against the larger, well financed competitors in the industry, but instead, nibble at their Achilles heel with a product or service that they will not pay attention to until its too late. This makes a company a prime acquisition target. He has a game plan for how he would like to exit.
  2. Execution, execution, execution.
    Phil knew his plan had to have the right premise: to solve someone’s problem. But without a solid execution on the part of him and the management team the business would not have taken off. It would still be at the gate announcing its intention to depart.

Now, fast forward to today. Phil successfully exited that business by selling to a strategic buyer and he and his team have started several new business adventures since!

Need some guidance on financial planning for your business? Check out our Financial Planning Tool Kit

When Should You Prepare Your Exit Strategy? Now!

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by Collette Parker

The blood, sweat, tears, and late nights put into starting up a business will one day culminate in your exit strategy.  Whether you are passing the company to a son or daughter, a partner, or selling to a competitor or larger corporation, the day must come to say goodbye.

It helps to be prepared for that day, and the sooner the better. Ironically, the birth of a new company naturally inspires an exit strategy. To be prepared means to get the highest valuation for your company; to do that, you have to give yourself adequate time and do your homework.

“Start 15 years ago”

First of all, says Numbers Coach Mike Iverson, plan for the sale of a company well before the day you must sell. “Often business owners don’t give themselves enough time. Give yourself a three-to-five-year planning period to lay the groundwork so that your business is functioning at a high level.”

A buyer will wonder why you are selling your business, and will look for any gaps or holes in your business plan and market. Give yourself enough time to find the gaps yourself and fill them as best as you can.

Iverson has worked with business owners in the past that have very thoughtfully gone through the process of selling. They were contacted by other companies who asked, “Have you ever thought of selling your business?” They might answer, “I’m not ready now,” but cultivated those relationships with a specific purpose in mind. They knew that such relationships could result in connecting with a person who could acquire their company, and they understood how prudent it was to develop a business relationship with that individual to learn how they operate.

“Start those relationships early on, even as you start the company – maybe 15 years before you want to exit,” says Iverson. Then you have relationships in place, and the sale becomes a more natural result.


Do Your Homework

The other aspect of preparing to sell a company is making sure the company is ready for you to walk away from it, and still functions properly.

“Someone has to do the financial due diligence,” says Iverson. “You may have to hire someone to help clean things up, such as customer files and HR files. I can’t stress enough how important it is to get all records in order. It will make the process that much quicker.”

If you’re selling to an individual, that is a different process than selling to a public company.

Iverson spent several years at a public company working in mergers and acquisitions, and observed that emerging growth companies under $20 million that sold for higher valuations had good solid records and complete financial information. They closed their financial records on a regular monthly basis and had an accountant on staff who could ensure the information was complete, timely, and correct.

“Not only will the selling process go much smoother, but it can actually increase the value of the business,” says Iverson. “If you go into a business where administration, accounting, and operations are very disorganized, you will likely get limited or incomplete information which will cause you to question if the numbers given to you are correct.”

“Companies that get the best valuation, in my experience,” says Iverson, “are those that have their financial house, their administrative house and their operational house in order. They are the companies that have planned their sale for a period of time, and they have the right theme in place that could help perpetuate their business even without the owner being there.”

Be Ready to Let Go

If you’re going to sell and you are the sole owner, your business has much greater value if you have set it up so when you walk away, there are no hiccups. You should not be the only rainmaker, nor the only person who knows how to make it run.

“Some companies that are worth less than $10 million have an owner that wants to be in every piece of the business and has a strong personality that people equate to the business. That can run the risk of diminishing the value of the business,” says Iverson.

Ultimately, when someone is looking to buy your business, they want to buy an operating business they can run immediately without investing a lot of additional resources. Customer retention is one of the key elements of success, especially when the owner is gone. While some owners or management teams stay in place after a sale to help transition, nine out of ten times the owners will not be there 24 months after the sale.

Letting go is tough for an entrepreneur who has put their full energy and life’s savings into building a vibrant business.  Planning ahead for the day they want to exit will provide better odds that the business will continue in capable hands and make the sale easier for everyone.

If you want to be prepared for selling your business down the road, check out the Numbers Coach M&A Tool Kit

Building your 2024 financial plan? 3 factors to consider

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As we get ready to wind up 2023 and head into 2024, now is the opportune time for business financial planning.

A well-developed business financial plan, or budget, helps you manage to your expectations. It provides measures to keep things on track. (And as we all know, “If you don’t measure it, you can’t manage it.”)

Creating a financial plan for your business is critical to helping you navigate these 3 challenging issues that I see coming in 2024.

  1. Growth will be slower than in 2023.  According to IMF, the predicted GDP for 2024 will be 1.5%, down from 2.1% in 2023.  This change is in large part due to a slowdown in consumer spending as interest rate increases, inflation, and decelerating wage growth impacts spending.  If your business or your clients’ businesses are consumer focused, it could affect your predicted 2024 revenues.
  2. Inflation pressures continue along with rising labor costs.  Your budget should consider the changes to the rate of inflation.  A Vistage survey of manufacturers indicated 62% of them plan on increases in automation to help offset continued labor supply and cost issues.  Wage inflation will be strongest in the leisure and hospitality industry with education and health services a close second.
  3. .  Other factors that you should consider in your planning for next year:
    • Credit card delinquencies have risen sharply over the last 8 quarters to 2.8%
    • Higher interest rates including mortgage rates are approaching 8%
    • A weaker dollar makes imports more expensive
    • COVID-era stimulus is waning, and the savings rate is starting to lower
    • Transportation costs are in flux with consolidation occurring and this summer’s bankruptcy of Yellow Freight is an indicator of too much capacity

Now that you have your parameters in mind, the financial plan is simply a description of the day-to-day activities that will help you achieve it.  This can be as simple as determining how many new clients you will need at X dollars per month, or more detailed with specific key performance indicators for all areas of the business (finance, operations, sales and marketing, HR, etc.),

Start planning today so you can prepare for whatever comes your way tomorrow.  Let us know how we can help.

Here’s to planning a successful 2024!

Predicting The Next Recession

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I have read many articles where experts try to predict a recession based on their leading indicators. Some use the stock market, others use consumer confidence index, and the list goes on. I recently read an interesting article that plotted a measurement that seemed to predict every recession since 1976. While this may not be true for future recessions, a business owner should stay aware of a few indicators to be prepared. For recessions are opportunities for strong businesses to come out ahead of their competition.

What is the indicator?

It’s known as the “yield curve.” The yield curve is the interest rate of U.S. Treasuries at different maturity dates (6-month, 1 year, 3 years, etc.) that the U.S. government issues to finance some of its day-to-day operations.

During typical economic times, the short-term Treasury bond interest rate (“yield”) will be lower than the long-term Treasury bond yield. The reason is that the person investing in the long-term Treasury bond should get a larger yield (interest rate) for taking on the risk over a longer period, where inflation and other factors could impact the return on this investment.

How do you “Read the curve?”

When the yield curves align, referred to as “flat”, then their return is the same. For instance, a short-term and long-term Treasury bond both have a 5% interest rate yield.

It’s when the yield curve “inverts” which means the shorter-term Treasury bonds have a higher yield (i.e., interest rate) then the longer-term Treasury bonds, this becomes the red flag that a recession is coming. It’s the proverbial “canary in the coal mine” warning that the economy is about to turn down.

Ever since the Federal Reserve began publishing this information about short-term and long-term Treasury bond yields (that is, the ten-year two-year spread), it has accurately predicted a recession in the United States. It seems that none of the recessions in the last 70 years have occurred until the yield curve has inverted. Keep your eye on the ten-year, two-year interest rate yields; it might help you plan for the next downturn.

Looking to recession-proof your business? Check out our easy-to-use Financial Planning Tool Kit

Business Growth… Is Bigger Better?

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This is often a question that I ponder.  The tendency is to say but of course if you don’t grow, then you wither and die as an organization.  Some of the conventional wisdom says that size and growth matter.  However, is it really about being bigger or is it really about being great at what you do?

I read a book titled “Small Giants: Companies that Choose to be Great Instead of Big” by Bo Burlingame.  I really liked many of the concepts that emerged from his research on how companies with strong brands such as Clif Bar and Anchor Brewing became great companies in their industries.  Instead their focus was on becoming great companies delivering their products to their customers and creating a work environment where their employees thrive.

I challenge you to think outside the box and determine what your path should be—getting bigger or being the best? Knowing your business “why” will shape how you answer this question.

Here’s to thinking outside the box about what growth means to you!

Mike

Business Planning: Where Is The Exit?

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I have had the honor to work with many types of organizations of the 20 plus years of my business career.  What I have discovered is those business owners who have had a successful exit seemed to have a common theme—they started their business with the end in mind.  One the keystone habits from Steven Covey’s The 7 Habits Of Highly Effective People.

They could visualize what their business would look like and who would be interested in buying it.  And in some cases they even partnered or became familiar with those companies that would be the ultimate buyer.

We all “exit” our businesses in some way—sell to a third party, sell to an insider, pass on to the next generation, or simply close the shop…and no matter how its done, thinking about the end in mind can make it a reality someday.  Start your planning today even if you are starting out in business. The actions and decisions you make today will impact how you Exit the business in the future.

To your successful Exit!

Mike

Cash Flow Tips For Uncertain Times

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I’ve been watching the news and talking with colleagues and clients and wanted to share some strategies with you that may come in handy as you navigate through uncertain times.

Consider these cash preservation ideas…

  • Research refinance options for any high interest loans and ask for some or all of the closing costs to be waived.
  • The Small Business Administration has created a program to fast track low interest loans under its Economic Injury Disaster Loan, visit: www.sba.gov/disaster
  • Reach out to your lenders about deferring payments, or reducing to interest only payments, on debt.
  • Ask your landlord if you can pay rent at the end of the month (in arrears) for the next 90 days.
  • Ask your landlord about reducing or deferring Common Area Maintenance (CAM) charges for the next 90 days.
  • Call clients to see who can pay faster/earlier.
  • Call vendors to see if you can get extended terms or defer some portion of invoices to a later date.
  • Ask vendors to take payment on a company credit card.  Ask the vendor to charge the amount just after the credit card statement drop date.  This can defer a payment from 15-45 days if timed correctly.
  • Reach out to your credit card company to ask for reduced or zero interest for the next 90-120 days.
  • Bill customers as quickly as possible.
  • Consider whether you have any customers who might pay now for future delivery of services.
  • Defer your personal tax return filing and payment to July 15th.  The IRS issued recent ruling that is allowing a delayed 2019 tax filing until this date.  However, if you are owed a refund file your return now to get the funds.

If you think of other ideas, I’d love to hear them!  My belief is that we will come out of this stronger and definitely together when times are tough.  Stay well and here’s to more cash flow coming into your company!

Mike

Want To Improve Your Sales? Do This One Thing

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I recently ran across an article discussing how some companies are asking one simple question to get an understanding on whether a customer would recommend your product or service.  Referred to as the “net promoter score “, the question asked is the following.

On a scale of 0 to 10 how likely is it that you would recommend us to your friends or colleagues?

High responses in the 9 to 10 range are promoters.  Low responses from 0 to 6 are detractors and responses between 7 to 8 are somewhat satisfied.  This concept was embraced by GE Healthcare who at the time was doing traditional customer satisfaction surveys that only gave vague results.

GE went so far as to not only compile a score but also tie it to a bonus.  However, there are critics of this approach too.  While it is a simple measure some say its simplicity may point people in the wrong direction. My thought is we all need to start somewhere and having an actual metric gets you started thinking about how to make customers your best source of referrals.  Understanding why detractors answered the way that they did can only give you helpful information to become better at what you do.  The discussion with your customers on this question can be of great value that can accelerate your company’s growth.

Want More Creativity?

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Business owners often talk about the desire to bring more creativity to their company and their personal life.  Creativity certainly will have different meaning for each person, however, a common denominator in a business context is coming up with creative solutions for your customers or processes.

How does someone unlock creativity?  Is there a way to increase the likelihood of getting your creativity quotient higher?

I recently read an article that quoted Deanna Berg and Chuck Dymer, who have been speakers at various Vistage events, on ways to unlock creativity.  Here are a few tips.

Business Creativity

  • Brainstorm session with your team where the session has the following principles.
    • Defer judgement…criticism derails creativity.
    • Freewheeling…no idea is a bad one.
    • Quantity not quality…get the ideas out there.
    • Speed is important…impose a time limit on the session.

Personal Creativity

  • Consider the following for personal creativity boost.
    • Change a habit…change the time you work out.
    • Experiment with something new…. learn a new hobby.
    • Find a new path…. take a different route to work.
    • Change an attitude…. take something that annoys you and change your attitude about it.

Carve out time on a regular basis to get creative.  It can be the best time spent to build your business.

Here’s how taking time for creativity can propel your business to new levels!

Mike

Planning

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Have you heard the quote “work on the business vs working in the business?”  As leaders in our businesses and communities, some self-reflection is important if we are to gain wisdom from our experiences.  A research study done by Giada Di Stefano, Francesca Gino, Gary Pisano, and Bradley Staats, indicated that employees who spent 15 minutes at the end of each day reflecting about their lessons learned experiences did 23% better than those who didn’t do this self-reflection exercise.

Many leaders at driven individuals who are focused on accomplishment and making results happen.  Taking time out of their day to do self-reflection seems too much given their busy schedule.  Other excuses include they don’t see the return on their time invested or they don’t want to slow down.

I recommend self-reflection because it causes you to pause and think about what was good and what could be improved during your day.  I use a journal to help me document not just my daily gratitude but also what went well and what did not go well.  Here are some questions to ask that could help you in your journey on self-reflection.

  • What are you avoiding?
  • Are you helping someone achieve their objectives?
  • Are you a hindrance or a help with someone you are working with or for?
  • How could you be more effective in meetings?

Asking these or other questions will help you move forward in a more positive path on your leadership journey.

Mike

Lessons Learned From a Restaurant

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Pals is a fast food restaurant located in Kingsport, Tennessee and was the first restaurant company to win the prestigious Malcolm Baldridge Quality Award.  Putting it in the company of companies like Ritz Carlton, and FedEx.  This small 26 location company has a crazy low turnover rate given the fast food industry.  For front line employees, it’s just 1/3 of the industry average and for its assistant managers it’s a meager 1.4%.  How do they do it?

 3 key ingredients

  • Hire for attitude and train for skill.

What Pals found out was if you got the attitude right with an employee, you could train them for the skills you need.  Attitude over skill any day.

  • Lots of opportunity for training and improvement.

Employees spend a lot of time on training and retraining.  They get certifications and opportunities to continue to learn.

  • Get serious about teaching.

The company has assembled a reading list of key books that an employee is expected to read.  And not all the books are on business but rather include some timeless classics such as The Prince by Machiavelli.

What is your secret sauce to hire and retain a great work force?

Mike

Company Growth: Know Your Speed Limit

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Have you heard the saying “you’re either growing or dying?” 

For me, growth is in the eye of the beholder.  What I mean by that is growth means different things to different people and larger is not necessarily better.  The seduction of “bigger is better” exists because you can scale, get better pricing from vendors, and have a wider impact on your market.

However, as Basecamp founder Jason Fried explains in his article “The Zen Approach to Growth,” size may be important but it should be a by-product of meeting the mission of your company.  Getting bigger means more personnel to manage, larger customer base to manage, and so on.  Employees become a number vs. a name and family.

A business owner should think about why they want to grow and how it will impact the culture.  Being intentional about your growth is important.  Careful, methodical growth where the rate of growth is at least within the company’s affordable growth rate, which I often referred to as your “speed limit.”  Every company has a speed limit, and going excessively fast has its consequences.  Know your limit and why growth is important to you.

Here’s to knowing your speed limit and staying within it.

Mike