Follow This Proven Process to Identify Where You Should Start When Making a Strategic Plan
Building a strategic plan to achieve targets and objectives is a fundamental practice of smart businesses. However, many strategic plans fall short of reaching their intended outcomes for one simple reason: They fail to consider the company’s starting point.
You can think of it similarly to how you use a GPS to navigate. If you don’t input a starting point, the system won’t be able to guide you to your destination. While you may still be able to get to your destination on your own, you run the risk of hitting unforeseen obstacles, making wrong turns, and losing precious time and resources along the way. The same is true for your strategic plan.
At Evolve CFO Services, we begin every client engagement with an assessment of the company’s current financial state. Once we know where we’re starting, we can then craft a realistic strategic plan.
The Benefits of a Financial Breakthrough Roadmap
The Financial Breakthrough Roadmap is designed to provide the fastest and most effective ways to create financial breakthroughs within a business.
By reviewing three years of financial statements – the previous fiscal year, two fiscal years ago, and the current fiscal year, annualized – the Roadmap can accurately shed light on the company’s current financial status, as well as larger trends within the organization. Insights such as revenue fluctuations, cost of goods, and net profit over time give a clear picture of your company’s overall financial health, problem areas, and business trajectory.
Another critical question considered during this process is whether the balance sheet makes sense. Why is this important? Well, let’s say you wanted to take out a business loan. An experienced financial advisor, banker, or investor would evaluate your balance sheet to gauge your skill at handling your company’s finances and to determine whether you would be a good steward of the money you’re asking to borrow. Ultimately, your balance sheet is what makes or breaks your loan request approval.
10 Critical Numbers You Should Know
Our Financial Breakthrough Roadmap identifies 10 key numbers that every CEO should know:
- Annual Revenue – from the last fiscal year, two fiscal years ago, and the current fiscal year, annualized.
- Gross Profit (GP) – the amount of profit you can directly attribute to the product or service sold. Look at GP from the last fiscal year, two fiscal years ago, and the current fiscal year, annualized.
- Net Profit (NP) – the profit left after paying all expenses. Also track this number from the last fiscal year, two fiscal years ago, and the current fiscal year, annualized.
- GP and NP compared to industry averages.
- Monthly operating expenses – the expenses you must pay regardless of whether you have revenue.
- Monthly break-even sales figure – the revenue or sales needed to cover operating expenses. (Remember that only gross profit can be used to cover operating expenses.)
- Monthly cash flow from operations – NP plus all non-cash expenses that were recorded.
- Operating cycle length – measured from when you start incurring expenses to create a product or service until you collect payment.
- Desired minimum cash balance – this should be at least enough to get you through one operating cycle.
- Line of credit – including the total line amount, how much is currently used, and how much remains to be used.
Monitoring these numbers will not only give you a clear look at the financial health of your business but also help you identify and resolve problems before they happen. These numbers also shine a light on opportunities for improvement when measured against industry benchmarks. For example, if your company is producing a 15 percent net profit, but the average net profit for your industry is 20 percent, it may be time to look into new ways to cut costs and increase revenue.
The Financial Breakthrough Roadmap in Action
In a recent consultation, our team met with the CEO of a law firm generating $9 million in annual revenue and 25 percent profit, with a vision to grow the business to $100 million in 10 years. To reach this goal, she reached out for support in creating a strategic financial plan.
On the surface, the company appeared to be doing well. But the company’s balance sheet told another story. This financial statement was missing critical information, including a cash section, receivables, and assets – all of which would have raised red flags to any bank or investor considering giving the business a loan. This was important because to achieve the company’s growth goals within the desired timeframe, the company would need to take on debt or investors to finance needed investments into infrastructure, marketing, team expansion, and more.
But future loan prospects weren’t the only concern. Two other critical issues were discovered as a result of the incomplete balance sheet. First, the firm managed trust accounts containing a total of $500,000 in cash. But this detail wasn’t documented on the balance sheet. The CEO didn’t realize that only $100,000 of the $600,000 in cash available actually belonged to her firm.
The second issue we discovered was that almost $500,000 in operating expenses were actually expenses that would be billed to clients. Even though the CEO realized the company had a much smaller cash balance than she had anticipated, the good news was that her net profit was actually higher than what had been reported.
After completing the Financial Breakthrough Roadmap, we made four major recommendations:
- Restructuring the chart of accounts to gain a better picture of where money was being spent.
- Switching to a management accounting system that would provide better reporting, including revealing how much revenue each attorney or area of the business was producing.
- Moving from cash-basis accounting to accrual-basis accounting to better show the real financial health of the company. Accrual accounting includes accounts receivables and payables, which would give a better picture of when revenue was being earned and expenses were being incurred, resulting in a more accurate picture of profits.
- By measuring the company’s performance against industry benchmarks, we were able to highlight missed opportunities totaling more than $800,000 in potential profit. From there we helped the CEO identify and strategize ways to boost her company’s gross profit to industry standards.
Your Pathway to Accelerated Business Growth
Whatever your company’s current financial state, information is the key to moving forward. The more you know about your company’s financial health, the better you can plan for future goals and take the actions you need to reach them.
To get a clear view of your company’s financial situation, start by following the 3 simple steps outlined in this article:
- Assess your company’s current financial status
- Compare company performance against industry standards
- Strategically plan – and implement – the necessary adjustments
Once you’ve gained the clarity and the confidence that comes from knowing and understanding your numbers, you’ll be in the perfect position to become an industry leader and a rapidly growing enterprise that makes a bigger impact on the clients you support.
Want help creating your Financial Breakthrough Roadmap and strategic financial plan? Book a complimentary, no-obligation Financial Strategies & Solutions Session with one of our highly trained virtual CFOs to explore how we can help.