So, Q1 has already passed, your tax returns have been filed, or, you have filed for an extension. For most companies, you have closed out the previous year, and are fully involved in the new year’s business activities. In either case, you are already part-way through the calendar year. Rather than just continuing with running your business, now is an excellent time to assess your progress in relationship to your Strategic Plan.
At Tom Vignali CPA, Inc., we believe that every company should have a Strategic Plan in place, and that this Strategic Plan should be periodically reviewed. The periodic review can be monthly, quarterly, or biannually. It should be done to measure your performance against the benchmarks that you established in your Strategic Plan.
First, let’s set some parameters: Do not confuse a Strategic Plan Review with a Spot Review. There is a big difference between the two.
Spot Reviews: Get Instant Snap-Shots of Where Your Business Stands
Many companies perform “Spot Reviews” on a weekly/monthly basis to measure their performance for a current month against the same month from the previous year. This is done to compare relative revenues and expenses to identify any anomalies which might be occurring. This is like an instant snap-shot of what is currently happening, like sales, cash flow, expenses, etc. It is not necessarily a strategic plan review as much as it is a comparison to point out certain things which might demand attention. If you are ½ way through the month, are your sales/revenues and expenses ½ of what they were in the same month from the previous year? Are your numbers ahead of, equal to, or behind of what you did in the previous period of time? This process merely allows you to make some relative comparisons to prior financial performance. There might be reasons why the comparisons differ, but, these are the questions which must be answered in “real time”. Some explanations for differences might be the size of contracts you are/were working on during each period of time, weather related issues (natural disasters), seasonality, loss or addition of a customer, discontinuation of a product or service, change of a vendor or changes in costs of goods.
Gain Control of Expenses, Profits, and Cash Flow
Whatever the reason for the differences, a Spot Review allows you to make “real time” immediate decisions to control your anticipated expenses, profits and cash flow. The changes you might make if your revenues are less than the previous period of time could be a suspension of certain activities to reduce expenses, a review of labor expenses, a postponement of planned purchases/acquisition, a review of marketing plans. You might make changes to your weekly/monthly budget in a variety of areas.
In any case, a Spot Review is just a comparison of a current period of time against a related previous period of time, which allows you to make specific adjustments to address current cash flow needs.
Strategic Plan Reviews: How Are You Doing Against Projections?
If you have developed a Strategic Plan, you probably made forecasts/projections for what your revenues and expenses would be for the current year. We strongly advise that projections be made on a monthly basis for the year in both a P&L and Cash Flow format. The reason for using both formats is that each format will indicate specific pieces of financial information which are important in controlling your business. The P&L format will reflect your profitability on a monthly and annual basis. The Cash Flow format will reflect your cash position on a monthly and annual basis. It is critical to note that although the P&L will reflect profitability, it will not reflect your cash position. It is possible to be profitable but have inadequate cash to meet your financial demands. Hence, the reason for using both forms of projections.
The development of a Strategic Plan allows you to project anticipated revenues and projections in advance of them occurring. You might project static revenues in your projections, in which case you will need to address any increase in expenses (payroll, costs of goods, and other normal increases in expenses) to address the static revenues to maintain profitability. You might project modest increases in revenues with little if any increases in expenses (other than normal increases as previously mentioned), in which case you might be able to project a modest increase in profits. Or, you might project some significant increases in revenues which will also have a major impact on many other expenses in many other categories.
In each of the three scenarios mentioned above: static, modest, significant; there are some expenses that will always increase from year to year,…it’s just a natural course of event,…..prices go up! In each scenario, these natural cost increases need to be addressed. A failure to address this process will have a major impact on profitability and cash flow/position.
Additionally, a Strategic Plan allows you to set goals and objectives. Are you going to do more, or less, or expand or contract? Are you going to expand staff expecting to increase sales/revenues? How do you fund payroll expansion? How long do you need to fund this expansion before revenues increase adequately enough to cover the increased payroll expense? Are you going to expand your product line? How much funding do you need to cover the increased inventory expense? How much funding do you need to market the new products/product line? Will you be using existing cash reserves, or will you need to fund these activities with additional financing?
Without a Strategic Plan, a Spot Review will only allow you to compare what you are currently doing against what you did in a previous period of time. It does not address goals, objectives and expectations since none were projected. You will be limited to “real time” thinking for “real time” events.
Make Critical Adjustments Based on Revenues and Expenses
With a Strategic Plan, a Spot Review will allow you to compare what you are currently doing against what you did in a previous period of time, AND it will allow you to compare what you are currently doing against what you projected you would be doing. It not only allows you to see if you are performing according to what you previously did, it also allows you to see if your projections were accurate, and it allows you to make timely adjustments to your projections if your goals and projections are not being met. If your Strategic Plan called for increasing certain expenses and/or operations to increase revenues, and if your revenues do not reflect the projected increase,…..now is the time to make adjustments.
With a Strategic Plan, you actually project your goals and objectives in financial terms, and the performance of your Strategic Plan can be measured at any point in time. There is a controlled evaluation of “cause and effect” of your Strategic Plan because you actually projected the “cause and effect”. This is vastly different from merely looking at an increase or decrease in sales and/or profits and thinking that things are going well or poorly. In one instance, you definitely project and control your business. In another, you try your best and hope for the best.
At Tom Vignali CPA, Inc., we work with all of our clients in assisting with the development of Strategic Plans. We believe they are a critical tool in maintaining profitability and a positive cash flow, allowing our clients to stay ahead of the curve, expand their businesses, and control their growth and stability. For additional information on how to develop a Strategic Plan and what should be included in one, feel free to give us a call or email us.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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