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Rising from the ashes: A guide to business planning and forecasting in the new era of austerity

Author: Ian Sykes
16 March 2011

The unprecedented events of the last few years have made a dramatic and lasting impact on the business environment. The role of banks in contributing to the current economic woes of the country has dominated the press for some time.

Controversy continues over bankers’ bonuses and the willingness, or otherwise, of banks to lend to UK businesses, particularly in the small to medium enterprise sector. Indeed only recently, Mervyn King, Governor of The Bank of England, publicly criticised banks for prioritising short term profit over developing long term relationships with their customers.

In addition to this, the country has seen a new government embark upon a programme of spending cuts and tax rises, the likes of which have never been seen, in order to tackle the burgeoning spending deficit. So it seems that these austere times are widely expected to continue for the foreseeable future; however, it is not all doom and gloom. Many predict, with echoes of Darwinian theories, that businesses will emerge leaner and fitter as a result of having streamlined their operations to adapt to trading in harsher conditions.

Business planning and forecasting will continue to be key management tools, particularly as banks and other potential finance providers will demand evidence to demonstrate that the business in which they are being asked to invest is viable, and that those in charge have taken into account all factors which could affect the business.

The following factors should be considered when preparing forecasts, to ensure that they are relevant to the current time and are not merely the restatement of historic results, with some ‘hope factor’ applied:

• Review the makeup of historic sales and consider the impact that changes in economic circumstance, such as local government spending cuts, the faltering property market and the availability of finance, could have.
• Actively consider the impact that any changes in costs of sale will have on gross margin. Many businesses are being forced to absorb cost increases to remain competitive, so the fact that a certain gross margin may have been achieved historically, does not mean that it will be in the future.
• Be realistic when planning capital expenditure. It may be tempting to delay the replacement of plant and machinery in order to ease cashflow pressures, but the effects of allowing essential kit to become unreliable can be devastating on a business.
• Focus carefully on overheads. This is an area where significant savings can often be made, and a ‘zero based’ approach to planning can be effective in identifying where costs can be reduced. However, beware of cutting too deeply so that the capacity of the business is
•  impaired.
• Identify the key factors affecting the business and flex the projections to illustrate the anticipated impact of various scenarios. The value of preparing projections is not only to identify the likely end result, but also to develop an understanding between the level of sales, direct costs and overheads.

Effective planning will assist management and business owners in making the difficult decisions that are likely to be necessary to ensure that the business emerges from the recession in a strong position, equipping it to take full advantage of the good times, when they eventually return.

For further information, please contact Ian Sykes using the online form below.