An introduction to financially planning for new opportunities
You’ve identified a new opportunity and the potential is tantalising. But how do you make sure you have the cash needed and forecast revenue when there are so many uncertainties?
A significant share of small businesses plan to pursue growth opportunities, with 32 per cent developing a new product or service and 25 per cent making capital investments in the next 12 months, according to government statistics. However, only 41 per cent had a business plan, suggesting a lack of financial planning.
Business owners can be hesitant to embrace financial modelling. You might not be comfortable with spreadsheets or find it difficult to start quantifying the opportunity you’ve identified. But financial planning allows you to articulate your ambitions and start putting them into action.
This guide will cover the main factors you need to think about when planning for new opportunities, highlight common mistakes and list a number of quick wins to kickstart your financial planning.
What factors influence financial planning?
Your company’s long-term goals
There are normally more opportunities than your company has the time or cash to pursue. That means working out what’s going to be most fruitful in pushing the business towards its objectives.
Your company goals should help you prioritise opportunities by framing what success looks like and thinking about the impact it could have.
Balancing short-term needs and long-term potential
It’s important to strike a balance between the short-term needs of the business and investing for the future. That means setting aside your time, and financial and team resources, to pursue opportunities that will take time to pay off in the future.
Failure to invest time in new opportunities can cause businesses to stagnate and eventually experience falling sales. It’s much better to start planning now than wait until you’re pushed into a corner. Financial planning can help you work out what’s available to invest.
Scenario planning
New opportunities come with uncertainty, because it’s hard to know how customers will react to a new product line or service. The amount of resources needed might be unclear too. For example, product development could be delayed pushing your revenue forecast forwards.
The uncertainty around new opportunities means financial modelling is crucial. You can tweak the model’s inputs, such as pricing, customer churn etc., to see the impact on cash flow and profitability in different scenarios.
Regular financial reviews
The routine of looking at your cash flow, profit and loss and balance sheet every week or month makes sure you have a firm grip on what’s possible. It might lead you to identify opportunities too – know those figures inside out and you’ll start spotting trends and finding ways to free up capital.
“By understanding your financials, you can know where you can save costs and where you can invest, so you can make sure your cash flow is always positive. By having envisioned costs, we can make decisions on where to invest, such as developing new products or bringing new talent in.”
Baoli Zhao, managing director of Allsee Technologies
The cold hard facts
What share of small businesses are planning for the future?
At the end of 2020, the SME Finance Monitor found 44 per cent of businesses with 10-49 employees were focusing on planning for the future. The number was marginally higher for businesses with 50-249 employees, at 45 per cent.
The remainder of the 10-49 employee group was either entirely focused on fire fighting because of the pandemic (19 per cent) or largely focused on it (37 per cent).
Common mistakes when financially planning for new opportunities
Failing to research the competitive landscape
The assumptions in your financial forecasting, particularly your pricing, need to be grounded in research. Understanding how much potential customers pay for comparable products and why (look at the reviews) informs your positioning.
Failing to model product costs – including staff time
If you’re looking into a new opportunity it’s crucial to consider both the cost of goods sold and the amount of team time it’ll require. These costs will impact your gross and net margin – and whether the opportunity will generate profit.
Team time often gets overlooked. This may go down over time as you find efficiencies and develop processes, but make sure you aren’t putting in all that effort for nothing.
Not having enough cash to cope with expansion
Pursuing a new business opportunity requires investment. You might need to tool up your manufacturing capabilities, invest in raw materials or hire new team members. And, that will all happen before the new opportunity generates any income.
That means you need to plan cash flow carefully to ensure your business can survive the period of time it takes to implement a new opportunity and fund the growth it brings.
That may mean scaling down your ambitions, going a different direction or seeking finance.
Relying solely on working capital to fund new opportunities
Growth that’s funded from profit is fantastic. It tends to be more sustainable and doesn’t require selling shares to raise investment or paying interest on a loan.
However, relying solely on profits to fund opportunities can stymie potential opportunities. Without additional funding, you might fail unnecessarily and extra investment should allow you to realise an opportunity sooner.
Whatever route you choose to fund your opportunity, it’s worth looking at the impact of getting capital through grants, loans, investment and other sources.
“We’ve done a bit of equity funding and a bit of debt funding. Last year we did a crowdfunding campaign. That’s provided funding for the brewery and the tap room project. You don’t want to give too much equity and dilute the people that have invested. Equally you don’t want to have too much debt in the business. We felt doing the combination was the best way to do it.”
Glenn White, managing director of Brew Monster
The cold hard facts
What are the key barriers to small business borrowing?
The main barriers for small businesses that have thought about borrowing was “reluctance to borrow now” at 81 per cent, according to SME Finance Monitor Q3 2020 report. Other factors included being discouraged (had asked informally but felt put off), the process (too expensive, too much hassle or needs security) and principle (prefer not to lose control).
Quick wins for developing a financial plan for a new opportunity
Think about the gross margin of new products
Ideas need to be tested through customer conversations. Once you have an idea of what people want and the new product’s unique selling point, you can estimate the sales price. Combining the sales price with the cost of producing the products will give you your gross margin.
This is a great way to qualify opportunities – if a new product isn’t going to contribute a sufficient gross margin, it may be better to go back to the drawing board.
Use product roadmaps to inform forecasts
It’s common for manufacturing, operations or development teams to create product roadmaps that include timelines for releases and expenditure of resources. Tapping into that information is a great way to build milestones in your financial forecasts.
For example, you might expect to launch a beta product in Q3 and go to market properly in Q1 the following year. That should be reflected in your revenue line.
Run different scenarios to test your thinking
The management accounts you develop for day-to-day use in the business can be adapted to make scenario planning more straightforward.
In some cases, this simply requires duplicating your forecast and adapting it to see how a certain opportunity, such as investing in a new warehouse, might impact the business. It’s also possible to build more complicated forecasts that allow you to tweak inputs easily and record different scenarios.
Once you have a financial model you can adjust easily, start testing assumptions. What would happen if you hired additional sales people to support the new opportunity or managed to increase the gross margin of a new product by ten per cent?
Run constraint and stretch goal exercises
Constraint exercises are a good way to tease out opportunities. Considering restraints, such as only being able to use contractors or providing advice rather than services, are useful ways to generate ideas.
Blair Enns, CEO of Win Without Pitching, explains that these types of exercises breed creativity. He gives examples of stretch goal games such as considering how you would 10x an opportunity or thinking about what businesses you could buy.
Don’t be afraid to consider scenarios that seem unlikely. Pushing into the periphery of what you think is normal can lead you to discover powerful ideas.
Set parameters for what you will consider
Setting financial parameters for opportunities the business will consider is a useful way to qualify your options. You might decide that products have to have a minimum gross margin or only launch a new service or event if it will generate a certain amount of revenue.
Create a financial one-pager to share with stakeholders
By now, you’ll be deep in the weeds of financial planning for a potential opportunity. That’s great because it means your plan is more robust and you’ve identified lots of potential opportunities. However, that includes a lot of detail.
A financial one-pager is a useful tool to succinctly communicate the opportunity to stakeholders, such as managers and board members. Forcing yourself to compile the financial plan into a concise snapshot develops your argument too; what are the critical elements of the opportunity?
Get outside advice
Peers, coaches, your accountant and financial advisers can support your financial planning. The level of advice ranges from a business owner in your sector providing financial benchmarks from their experience to an adviser building a detailed forecast.
Seeking that support is another way to make sure your financial plan is robust and overcome any elements you’re worried about. It can be easy to get stuck on a task like scenario planning, but there are people that can unpick that challenge for you and it’s not always necessary to share all the details with them.
“I thought about the fact that we had a healthy war chest and I asked our contractors if we could increase their hours. In one case, we quadrupled a contractor’s hours. It was quite a scary thing to do, but I knew that if we invested now to improve our systems we would be more prepared to go back up again, even if we saw a downturn in the short term.”
Lorraine Dallmeier, CEO of Formula Botanica
The cold hard facts
What share of small businesses seek external advice?
In 2019, 24 per cent of SME employers reported seeking external information or advice (defined as more than just a casual conversation) in the preceding 12 months, according to government research. The report noted that the use of external information or advice has declined significantly since the beginning of the decade, which is a worrying trend.
Now you’ve learnt about the underlying factors that affect financial planning for new opportunities, use our action plan to direct your improvement efforts.