Streetwise: Hindsight May Be 20/20, But It’s Not Profitable
From our friends at Eure Consulting
In case you didn’t already know, shoulda, coulda, woulda isn’t the smartest way to run your company.
Instead of dealing with problems after they’ve already shown up, you need to be proactive in forecasting which issues might turn into real challenges for your company.
The easiest areas to forecast are those with hard data to look into.
Which is why the most common tools for forecasting have to do with money. Profit planning, sales forecasting, and cash flow management. All three focus on making sure your company always has enough income and profit to keep the lights on. These are non-negotiable items for any growing business.
This is simply the creation of a budget and it is a key forecasting tool. People tend to have a negative reaction to the concept of budgeting, so we sometimes refer to this exercise as planning to be profitable – hence, a profit plan. Whereas budgeting seems restrictive, profit planning opens people’s minds to the company’s potential.
A company’s profit plan examines in detail how much money it takes to keep the doors open (administrative and overhead expenses), how much money it takes to produce a product or service (cost of sales), and how much revenue/sales the company must generate to create a net profit. Your leadership team should be involved in all aspects of the profit planning process. And this process should be as collaborative as possible.
A profit plan will help you:
- Forecast when you can afford to hire that next employee, purchase new equipment, or provide pay increases.
- Prepare for downturns in revenue so you can make adjustments before you drive off a cliff.
- Forecast changes in gross margins so you can adjust your pricing, re-negotiate vendor supply costs, or improve sales.
There is no magic in sales forecasting, but the beauty of numbers is they don’t lie. If you are paying attention to all aspects of your financials, you will be ahead of the game. And it’s not just about sales per se; it’s about how to use these numbers to ensure profitability. Many companies have gone under despite driving a lot of sales into their company.
Critical sales forecasting questions include:
- What is your pre-tax net profit goal?
- How many units do you have to sell and at what price to hit your goal? What’s the plan to generate those sales?
- Are sales goals written down with an operating approach on how each sale will be made?
- Do your salespeople understand how to fill and manage a pipeline? Do they track their leads and seek out new leads daily?
- Are they accountable to reach established targets on a daily basis?
- Do you receive daily reports from your sales team on how they are doing?
Cash Flow Management:
As a forecasting tool, cash flow is another critical indicator that helps a company plan for the future, pay taxes, expand facilities, and make large capital expenditures when needed. Too often business owners don’t understand where their cash goes. And they tend to have an overly optimistic idea of where it’s coming from. It’s not unusual for accounts that you expected to land to suddenly vanish into thin air. That huge deposit you were counting on never materializes and now you are caught short. But not if you properly manage your cash flow.
Make sure you know:
- Your cash flow cycle.
- How fast cash comes into the business and how fast it goes out.
- What your “never go below” cash-in-the-bank dollar amount should be.
Historically, forecasting has been reserved to these more hard number type of areas.
Many CEOs have a hard time forecasting when there aren’t metrics to reference. But it is just as important to forecast the softer side of the company as well. Hiring or onboarding issues. Company morale or team health issues. Leadership development or training issues. The list goes on. If you don’t nip these problems in the bud they will cause just as much damage as poor cash flow.
In the simplest terms, forecasting is the attempt to predict future outcomes based on past events and management insight. Insight is gained from information. Another reason why forecasting has generally stuck to the hard numbers. There’s lots of information in numbers. But it is possible to gather information about the less numbers-driven side of your company. You just have to talk to people.
When you can’t look at a dashboard and quickly see the numbers, you have to engage your entire staff in helping to uncover the “softer” issues before they become real problems. You have to proactively create a dialogue with your employees. They are on the front lines and know what’s going on, but they often keep their insights to themselves.
You have to break down the barriers that exist between people in charge and people not in charge. Developing this rapport and creating an environment where employees truly feel heard will help keep issues from festering. It will uncover areas of concern, allowing problems to be dealt with sooner.
The simplest way to open up this dialogue is to start having weekly one-on-ones.
Every manager should be meeting with each of their direct reports once a week. These one-on-ones should be focused on the employee and their needs and viewpoints. What are they proud of? What do they need help with? Where can you, the manager, help? Where can the company improve?
If one-on-ones are new to your company, start by introducing the concept to each direct report. Explain why you’re starting these one-on-ones. Let your employees know that you want to hear their feedback. That you are actively trying to uncover areas for improvement. And that you want to get better at listening to them.
Select a day and time that is consistent and try not to allow work issues to cancel these sessions. It will take a while to build up the trust necessary for your direct reports to be truly honest in these meetings. If you don’t take this time together seriously, or if you continually reschedule it, you’ll never get there.
Successful businesses take the time to engage their entire staff in open dialogue to see what is working well and ask what you can do better.
Without forecasting, you’ll be running your company blind.
You might be extremely confident in your ability to roll with the punches as they arise, but you’ll never grow your company that way. If your workdays consist of responding to the next fire, you’ll never make any real progress. Taking the time to anticipate problems before they arise will save you many a sleepless night. Hindsight may be 20/20, but foresight will save you money.