Part V of V
The statement of cash flows
This is the most critical part of business planning. More companies have gone bankrupt because of inadequate funds to meet their commitments than because of inadequate profits.
The simple explanation of a month-over-month cash flow statement is that it records planned cash receipts, minus planned cash payments drawn from the working capital plan and other one-time payments such as taxes and dividends, leaving a balance that must be financed.financed This balance can be financed by injection of shareholders’ capital, short-term bank overdrafts and long-term loans.
A general rule of thumb for loan types is that short-term loans should be used for short-term purposes, such as working capital, and long-term loans for long-term investments, such as capital expenditures. In general, if there is a basic level of bank overdraft below which the overdraft never falls, then this level should have been financed by longer-term loans.
scale sheet
A Planned Balance shows the Capital injected by the shareholders plus the profit of the exercise and the long-term loans on the one hand, and how this capital is deployed in the business on the other hand. This deployment will include Fixed Assets and Working Capital.
All the required information will already be available from the previously generated plans.
Gap Analysis
It often happens that the desired level of earnings or return on investment for shareholders reflected in the initial plan is inadequate. This gap needs a lot of thoughtful energy to close. Too often I have seen management close the gap with a simple upsell on the plan, producing a result on paper that is unrealistic and not justified by a specific marketing strategy to achieve it.
Some methods to close the gap are:
- increasing Gross Margin by improving the sales mix, discontinuing lower profit margin products and introducing some higher margin products. It’s harder to get away with simple sales price increases unless the product is exclusive and a leading brand. Even then, this can only be done for a limited time.
- negotiating price reductions with Suppliers.
- reducing direct expenses, maintaining sales levels and customer service.
- reducing the amount of working capital required to operate the business without causing an overtraded position.
- development of new distribution channels
- examine the potential for growth through mergers or acquisitions.
conclusion
This concludes my summary on the elements of a business plan. This has been a simple treatise on Business Planning. In practice, it gets much more complicated and you need a disciplined approach to be successful.
If you need more business planning advice, do yourself a favor and call in the services of a professional. I am sure you will find that the cost will justify the end results.
