Business Planning Advice
Forecasting Revenues, Costs and Labor Requirements
Written by Andrew Goldman for Gaebler Ventures
The creation of a long-term plan and strategy is not enough to adequately prepare the small business for the ups and downs in their markets. By outlining different forecast scenarios, the small business can be better prepared for any volatility in their market.
Before entering any battle, generals make sure that their military strategy has been defined and that detailed planning has been completed.
Before any big sporting event, coaches and managers prepare their strategies and plans in order to achieve victory.
You can pick the metaphor, but when there's victory, success or championships on the line, you can be certain thorough planning and due diligence was part of the formula.
If you want your small business to succeed, make sure proper planning is a part of your business formula.
Planning for Small Business Success
Planning encompasses both long-term and short-term horizons. While most small businesses are required to produce some form of long-term plan, less focus and attention is placed on detailed and thorough short-term planning.
In order to acquire loans or outside capital, the small business developer is typically responsible for producing data and long-term planning to support outside investment. This process gives both the investor and the small business owner a detailed map of where and how the company is going to reach sustainable profitability. Once the loan has been approved however, the small business owner often puts detailed planning on the backburner and does not use the same thoroughness in creating appropriate short-term business plans.
Short-term planning should deal with managing demand over weekly, monthly and quarterly periods.
The short-term plans should outline expected demand based on relevant information, expected purchases, expected labor and all relevant costs associated with delivering the final product or service. Your short-term plans should not be based solely on expected sales, you should outline several scenarios including best-case, worst-case and most likely.
By analyzing different scenarios on paper, the small business can get a better sense of where problem areas might arise and where costs appear to be ballooning.
A solid short-term plan will start with the forecast of demand. How consistent your demand is and how much historical data your company has will greatly determine the accuracy of your forecast. If your demand is seasonal or fluctuates, extra careful attention needs to be paid towards your forecasting techniques. There is plenty of literature on the topic of forecasting, but the key element is making sure that your forecasting numbers are being created with the most up-to-date information possible. Check your forecast numbers versus the actual numbers constantly and outline different forecast scenarios (best-case versus worst-case) to help cover your bases.
After your different forecasted demand scenarios are put on paper, you want to analyze and plan for what your expected costs will be for the various levels of demand. Leave no stone unturned when you undergo this process, it is far better to anticipate what your costs will be rather than get blindsided when cash is thin and margins are tight. By analyzing and planning for costs ahead of time, you can get a much better sense for which projects are worth selling and which ones may not be so appealing. If there are to be periods of cash flow constraints, you'll want to know when and why. Detailed short-term planning can address these problems, which are not as easily identified with long-term planning.
While planning your costs and demand, you can properly allocate your expected labor. This is crucial, especially if you're anticipating hiring or releasing any employees.
Knowing what your expected workload is and the subsequent labor staffing plan is a key element of successful small businesses.
During periods of low demand and high demand, proper staffing may very well be the difference between profitability and losing money. By anticipating demand and balancing your labor force ahead of time, you avoid many problems that are difficult to manage when they spring up without notice. Letting an employee know that there will be less work in 4 weeks is much better than having an employee show up for work only to find out there's nothing to do.
On the flipside, if it looks like demand is ramping up and your short-term plan indicates a need for an additional employee, you'll be in better shape that being seriously understaffed.
Plan to Succeed
Short-term planning and the analysis of demand, forecasting, costs and labor is a crucial element for any small business looking to succeed. The creation of a long-term plan and strategy is not enough to adequately prepare the small business for the ups and downs in their markets. By outlining different forecast scenarios, the small business can be better prepared for any volatility in their market.
Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.
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