BUSINESS PLANNING V/S FINANCIAL PLANNING
Do SMEs need any financial planning?
Financial planning is such a nice sounding, responsible term. Like most plans, it fails almost as soon as we finish our planning.
So, what are financial plans? What are the prerequisites for a plan to work?
Financial planning in its true perspective refers to a long-term approach to one’s financial goals. It takes into account investments, asset creation, planned spends, returns and capital building. It also reviews when and how the money can be best put to use.
But, the starting point and an essential ingredient to all of this is…. you guessed it right…. Finance!
At the cost of committing hara-kiri, let me say that most SMEs really do NOT need financial planning. Financial planning is mixed up with many things and is rarely done right.
Then what do we really need?
Before we jump to any conclusions, let’s understand what we are talking about through an example at an entrepreneurs meet.
Rakesh and Palani were animatedly discussing differing points of view about financial planning. Both were business owners and eager to grow. Both were forward – looking and analytical businessmen, always ready to try the next new thing. The issue at hand was about cash flows and financial planning. Palani was wanting to hire a new consulting company to manage their finances. His challenge was that in spite of growth or perhaps because of it, they were permanently into cash flow challenges. Unlike Rakesh, Palani was into the services sector. He believed he did not have enough stocks and assets to leverage like Rakesh. However, Rakesh’s point was that when cash was already in short supply, why spend m o r e o n a f i n a n ci a l consultant. His argument was that the challenge was in the business, not in the finance. What is the difference, the other entrepreneurs who were part of the discussion, wanted to know? Does this sound familiar?
What really needs Planning – Finance or Business?
On paper, a business is healthy, but on-hand, the cash is in short supply. Actually, finance is rarely in short supply…but, the business processes that generate it are not always working in sync. So, what needs planning – Finance or the business?
Most SMEs struggle to find money in their business even to run operations. They are constantly caught in firefighting and spending monies that are yet to be received. Borrowings are used to keep the fire burning in the kitchen and often, long term funds are used for short term uses. They invest money into the business, without a clear idea of when and what returns will accrue. Many Business Owners cannot give a reasonable answer to the question of Return on Capital invested.
Differentiate between the symptom and the disease
When we are caught-up with cash flow management, we need prudent business planning before we need financial planning. Cash flow challenges are the mere symptom of a disease which cannot be solved by working with finance alone.
We need to solve the root cause which lies in the business cycle – prices, margins, billing terms, deliveries, lead times, costs, payment terms, and so on. This needs some tough but correct decisions in the business and we need to wait a few cycles for the business to stabilize. Predictability and stability are key to the process, before an Owner starts working on the financial planning goals.
The risk of financial planning done in isolation is that the focus shifts to quick, short term actions which often hurt the long-term goals. Forexample, actions like delaying payments, picking up wrong orders, re-valuing stocks, cost cutting etc., if done in a knee-jerk fashion magnifies the side-effects of financial prudence.
So, what blocks us from financial stability?
As with any plan that fails, it has to do with lack of alignment between what we really want and the habits we need to make it happen. Human nature is to do what is easy or looks good, rather than what is right. This often leads us down a path which defeats the very purpose we start off with. This is specially so with anything to do with “planning”.
We like planning, but hate execution. So, we are not always prepared to do the things that make the plan successful.
Focus on the business -The money follows
Money is a result of good business decisions. So, focus on the business before you focus on the money. As it is so well said, Orders are vanity, Revenues are sanity, but Cash is reality.
Review the key steps that impact cash generation – order pricing and terms, delivery lead times, purchase lead times, variable costs, vendor terms and receivables. Quite often, the real culprits are our decisions related to customer qualification, product mix and delivery priorities.
In our eagerness to increase the billing month-on-month, we accumulate receivables and spend money on expediting wrong things. The right approach lies in reviewing policies upfront and setting some rules for the teams to follow.
Financial Planning – Step-by-step
A deliberate attempt to start financial planning is to ensure that your accountant prepares a cash flow statement, emanating from an annual business plan. The format or the accuracy of the statement does not matter when you begin.
Start with what you get and then, review it diligently month after month with your key team members across sales, purchase, operations and finance. Take small actions to align plans with actuals…monitor it.
You will see magic start to happen in a few months and people will align their actions to cash generation, as opposed to merely billing and fire-fighting!
How things fall into place
Back to the story. After some in tens e discussion, it emerged that three of Palani’s key customers were constantly delaying his payments. They contributed well over 40% of his revenues and were great relationships. So Palani was always wary of chasing them.
His friends advised him to be upfront with the customers and seek a 30% advance.Act in gone it, Palani discovered that they were quite agreeable to it once they knew the situation. After all, that is the reward for great service.
This one act of focus eased an on-going worry and allowed Palani to work on better things for his business.
It is an important lesson that what we measure, gets done. So, be careful to chase the right things and review them incessantly. And once you start making money, you are ready to really start your financial planning.
Ramas Krishnan is an original management thinker who heads Aspire Infinite, a consulting firm based in Mumbai and The Alternative Board, India, a peer advisory board, which works exclusively with Owner Managed Businesses in 18 countries across the world. (firstname.lastname@example.org)
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