In Part 1 of this blog I talked about values and why they are important and how they help with decision making. There was an important reason as to why we all went down the route of starting our own companies and this mustn’t be forgotten when important decision are having to be made.
A huge part of why I created Cambridge Payroll was about making sure I can do the things that I love which are working, exercising (mostly running) and being with my family. I wanted to make sure that my ‘job’ gave me the flexibility to fit all this in. I also really wanted to create a business that really did things well, with passion, skill and kindness, something I could really be proud of. As I have already mentioned, I had to make a big decision recently as I realised that I had lost my way a bit and needed to turn things around.
Once I realised that I had to make some changes I needed to know financially, which option was the correct one to take. The best way I think to do this is to create a model that looks at your previous figures, looks at your budgets for the year ahead and then allows you to ‘try out’ different scenarios. I ended up quite surprised with my findings!
How can I create a financial model for my business?
I will do my best now to give you some examples and sheets that you can use and also explanations of how to do it yourself however if you have any questions at all then head over to our Facebook Q&A on a Friday or drop me an email. We also offer this as a service if you think that you would benefit from a one to one session. You can find out more about our Budgeting, Planning and Forecasting for small businesses service here.
So, here’s the process to help you create a financial model for your business:
1. Start off looking at your figures from the previous 12 months. If you use computerised software then you should easily be able to print out a Profit and Loss.
2. Add these figures to your next 12 month business model so that you have a solid base to work from.
3. Look at your business as it is now, analyse each line on your P&L and estimate how it will change in the next 12 months. For example:
- You may know that your rent will be increasing by £50 a month from July 2018 onwards
- You may have a new client starting next month that will bring in an extra £100 income.
- You may be increasing salaries in April (which will also then increase employers NI)
I have shown these examples on a spreadsheet for you to see –
4. Now you are left with a model of how you think your business will perform in the next 12 months if you keep the structure as it is. This is where you can start having some real fun with it!
- What if you are thinking of taking on a very large new client which would mean that you would also need to take on a new member of staff – is it worth it?
- What if you have seen the ideal premises that you would like to buy – do you need to rent out some of the space to make it achievable or could you afford to keep it all for your own business?
- What if one of your clients is causing you real distress, could your business afford to let them go. If it can, what month is best?
All these different scenarios can be tested out by adding tabs to your spreadsheet and bringing the figures into or out of your model. We have an example model that shows these tabs available on our resources page – you can download the Budget Template here.
You can also see here an example of how the business model would change if we took on the new client, take a look at the Profit / Loss for the year – do you think it’s worth the risk?
You can play around with your model as much as you like but do remember to keep a back-up template in case you cause any real damage!
5. Once you have used your model to determine the best option(s) to take you can then work closely with it each month to make sure you are sticking to plan. You can also amend it along the way if things change like an unexpected hike in telephone costs. Make sure you keep notes of any changes as these will be invaluable for when you plan our your next 12 months.
You want to try and leave as little to chance as possible. Don’t hide from your finances, your power is in knowing your business, inside and out.
As usual, I will be running a Facebook Q&A on Friday, 2nd March 2018 between, 12 and 1:00pm for any questions you may have on this blog post or any of our recent posts too.
One of the best ways to ensure your business is strong for 2018 is to keep on top of the financial matters, and we can help with that! We offer payroll, bookkeeping services, support for start-ups, self-assessment tax returns service, our new budgeting, planning and forecasting service, and even Credit Control through our sister company Cambridge Credit Control – so get in touch today and see how we can help your business grow.