It's ironic that seizing a major sales contract or big new client can be your business's ruin but it's more common than you think.
Grabbing hold of what looks like a brilliant opportunity to grow the business can actually have a sudden and unintended impact on the business's financial position. A rush of sales might be a great thing, but it is not always counterbalanced by a rush of income and profit given that the opportunity can actually mop up free cash.
Many business operators are very good at what they do. Most have an excellent knowledge of the business they conduct and understand their products and services. Most also have an in depth knowledge of sales performance and revenue.
Few however, have a high level of financial management expertise, so when a big new opportunity presents, critical financial questions are not part of the vocabulary.
For businesses without strong financial management and control, there is simply no way of understanding what impact the opportunity will have until they have experienced it. With no background history to rely on, the warning signs of impending financial crisis don't appear.
When evaluating a potential sale to a customer, new business opportunity or contract, there are some fundamental questions that will help businesses address whether or not the business can absorb the costs associated with taking on the opportunity, as well as identify whether it is actually right for the business. We explore five key questions below:
1. Can I continue to deliver to my existing clients?
It is so much harder to acquire new clients than it is to keep servicing existing clients. Those existing clients make up the core of your business and they are what makes you successful.
2. Will this business opportunity produce the profit I need?
he old mantra that we continuously chant to clients:
- Growth (or Revenue) is Vanity
- Profit is Sanity
- And Cash is King
The opportunity in front of you might sound good until you document the assumptions properly, then map those assumptions out into your cash flows
. You cannot simply measure the marginal impact of the opportunity on its own without considering the resources that may be consumed in the existing business.
Additional questions need to be answered before you commit to following the opportunity, for example:
3. Can we deliver?
- Will the overheads increase?
- Do we have adequate finance to get over the delivery humps?
- Will this additional cost (application fees, reporting to banks etc) cost too much when weighed up against the rewards?
You should always play to your strengths. This doesn't mean failing to be dynamic in an ever changing environment: you just need to consider and plan very carefully how you intend to deliver the product or service – including the appropriate implementation and support plan. Know your limitations and plan accordingly.
4. Does this fit with our strategy?
Ideally, businesses should review their strategic plans at least annually. This process helps them identify what goals they want to achieve in the long-term, and this in turn is broken down into strategy to determine the steps required to get to the goal. The budget is part of this process. It breaks down the steps for how to get there. But smart businesses do things with an end-game in mind. Will it complement what you do or help you achieve the desired longer-term goals?
5. What is Plan B?
Know what you are in for if it doesn't all go to plan. Budget appropriately
for the opportunity but don't throw good money after bad – determine the things that may go wrong before they do – and determine a plan B that clearly states the limitations.
These questions should be discussed with your accountant and financial management teams to ensure that the risks, opportunity and growth outcomes are clear. Your accountant will also be able to look at the opportunity from a tax perspective, which will enable the business to plan for expenditure and take advantage of grants or tax breaks.
Thinking of expanding your business? Contact us on 02 9957 4033.
Want to keep up to date with tax news for small business? Follow batescosgraveCA on Linkedin, Google+ or Twitter
Last updated July 2013. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.