It seems like a silly question: Can you afford to grow your small business? However, many business owners don’t take the time to ask themselves that question and it ends up costing them. Growing sales doesn’t necessarily mean your business is growing its profits. In fact, growing your sales oftentimes leads to decreased net income when you don’t take the time to plan your growth. So, the next time you decide to attempt to grow your business, ask yourself: Can I afford to grow my business?
Why Build A Forecast?
Many small business owners don’t see the value in building a financial forecast because they feel there is too much guesswork. What is the value in guessing what will happen? Instead, they would rather put that effort into actually doing something to grow their business, like starting a new marketing campaign or closing a new deal.
Don’t think of a forecast as guesswork; instead, think of it as a way to validate your growth opportunities. It is important to not only forecast your sales, but also the expenses you will incur in order to produce those sales.
What To Look For In Your Forecast
When a business does a forecast, it is sometimes unclear as to how to use it. You go through all this effort to produce a forecast and when you look at it, you kind of think to yourself: “OK, so what?” While there are lots things to look for in your forecast, let’s focus on three: value, profits, and cash flow.
After you have built a forecast for a new opportunity you are thinking of implementing, ask yourself if the result adds value to your business. Are you making your business more valuable by pursuing this opportunity? Is this opportunity helping achieve your vision? If your growth opportunity is adding value to your business, it is probably worth pursuing; but don’t forget about profitability.
Next, take a look at the net income (sales minus expenses) that you are forecasting your opportunity will produce. Are you satisfied with the profit or does it seem like a lot of work and risk for very little reward? Only pursue opportunities where you are satisfied with the bottom-line results that they produce.
Last, take a look at potential cash flow problems. Are there any months where your costs exceed your income? If so, how are you going to fund these shortages? It is not uncommon to have to take a step back in order to take two steps forward in your business. Just make sure you are going to be able to fund the implementation of any growth opportunity.
Understanding Your Growth
Financial forecasts can help you understand your growth. Forecasts can help you identify not only whether an idea is worth pursuing, but also whether you can even afford to implement the idea. Many people get so excited about their great new idea that they fail to plan how to best implement it. This often leads to frustration when things don’t work out quite as expected. I refer to this approach as, “Just try it and see what sticks.” This approach is neither calculated nor very profitable. It is a slightly chaotic and oftentimes damaging way of doing business. The "try it and see what happens" approach causes stress to both your team and your business.
I would much rather analyze the potential outcomes of trying a new idea before implementing it. Although it may seem like a waste of time and resources, it often saves a business tons of money in the long run. Don’t just jump into your next great idea; first, take a look at the likely outcomes to decide whether your idea is worth implementing.
If you are building a budget or creating a forecast once a year, you are doing it wrong. Forecasting should be an ongoing task in your business. I recommend rebuilding your forecast toward the close of every single month.
Business owners get so focused on past financials. They always want to see last month’s or last quarter’s profit and loss. While it is important to look at past financials, it is equally important to look at what the financial future of your business looks like. The past is history; it’s done, so don’t obsess over it. Instead, take a look at how events affect the future of your business. At the close of each month, it is important to redo your forecast based on what actually happened in your business. This gives you complete control over your business financials and allows you to move the business forward in a predictable manner.