Planning for Success

People say hindsight's 20/20. True. I'll concede that.   It's good to learn from our successes and failures and have some sort of measurement of our past performance. But how many have considered how important foresight is? Wouldn't you like to have an idea where you're going along with where you've been? Business planning is an integral part of achieving this goal.  Consider it a roadmap to success for your company to travel by. In a competitive industry driven by, in some cases, seasonal work a business plan can help you prepare for those "lean" months. Let's break this business plan concept down into three main components:

STEP #1 - FORECAST 

Want to be able to cover your overhead expenses? Better know whether you are going to produce enough gross margin in the future. This should be done on a monthly basis for your "existing" and "targeted" work. For your existing work, you basically know what kind of revenue you are going to be recognizing assuming you have lump sum projects. Time and material contract revenues will be a little trickier to forecast but still achievable for the purposes of your forecast. Once you have projected your revenues for your existing work over the next 12 months, you should evaluate where you stand on your in-progress jobs. What is your gross margin percentage? Do you expect to maintain, improve or worsen your position on the job?  These are factors you should consider when determining your forecasted gross margins on in-progress jobs.  Your jobs awarded, but not yet begun, should be fairly easy to forecast.  What gross margin percentage did you bid the job?  Has anything changed between the time the bid was prepared and expected start  date to make you think your gross margin should be any different than what you bid?  From your bid you should also be able to measure what month-to-month progress you'll make towards completion. Lastly, there is work out there you have targeted to bid on.  Maybe you are on the short list for some projects, and the rest is just a formality.  You should consider using these "targeted" projects in your revenue forecasts. Now that you have an idea of what kind of revenue and gross margins you are going to be making, let's move on to the next step and see how much it’s going to cost you in overhead to meet your business plan. 

STEP #2: OVERHEAD BUDGET 

Your overhead expenses are, in some cases, predictable. Have you had the same office staff the past 10 years? Has your insurance company raised your premiums at about the same rate every year? If yes, then you can reasonably predict what those expenses are going to be over the next 12 months. Situations may arise that would cause you to spend more in overhead than you customarily would. Do you have a large job starting in 2 months that you need to hire extra payroll personnel or buy extra machinery for? Do you have some older equipment that you know is going to need major repairs or replacement? Are you switching insurance carriers or telephone providers that are going to save you money? These are factors that can change the amount of salaries, payroll taxes, insurance, repairs & maintenance, depreciation expense, etc. that you'll have to shell out for. What you'd like to have prepared would be a budgeted general and administrative expense schedule for a 12 month period. This schedule should be adjusted for any spikes or shortfalls in expenses that can be reasonably expected. Hopefully, your forecasted gross margins in "Step l" should cover your budgeted overhead in "Step 2".  A comparison of actual results to budgeted amounts will give you idea of where you stand in respect to your business plan.  This will also help you determine whether you should expect a tax liability or refund. Now let's move on to the next step and take a look at how you're going to finance your business plan with the resources available to you.  

STEP #3: CASH MANAGEMENT 

Most of us practice cash management practically everyday. Will I have enough money to go eat Mexican for lunch, if Uncle Elroy pays me back for the Chinese buffet I bought him yesterday? Should I buy that "James Taylor" CD, if I know the electric bill is coming in the mail this week? Good cash management could mean the difference in making 8% on a $1million emergency repair job and having to pass on it because of insufficient capital to support the job.  Techniques of cash management include, but are not exclusive to, calculating your cash position on jobs in-progress and forecasting cash position at completion, weekly cash projections (usually no longer than a five week outlook), determining the best use or placement of excess funds or determining where additional funds are going to come from. Cash projections can be very beneficial to ensure that enough money will be available to fund future projects. Components of a cash projection are:   

• Projected accounts receivable receipts: A schedule can be set up to help track when receipts are expected on billed receivables and receivables expected to be billed. 

• Payments of accounts payable: A similar schedule can be set up for your accounts payable payments. 

• Payroll expenses: Reasonable estimates should be made of payroll expenses (payroll, taxes, fringes, etc.) 

• Other receipts/payments: You should have an idea of any other receipts or payments that are going to be made, with the exception of unforeseen circumstances. 

If you have questions on what to do with excess cash or you're finding yourself in a cash crunch, let us provide some suggestions to properly manage cash. 

Now that I've given you the skinny version of successful business planning, give us a call to sit down with you and help formulate your own roadmap custom-fit for your business.