My first blog on this subject (Business Turnaround) discussed why successful business turnarounds are so difficult. My second blog on this subject (Turnaround – Elements for Success – Action One) discussed action 1 “avoiding cash surprises”. The next blog article (How to Achieve a Successful Business Turnaround) discussed action 2 “using financial information to proactively run the business”. This final blog article in this “Turnaround” series discusses the benefits of using budgeting and forecasting.
The budgeting process sets the business’s goals and game plan and formalizes it in a budget. A budget allows a business owner to monitor actual results against formal expectations. The budgeting process utilizes a budget model. Having a budget provides a feedback loop as to how the business is performing against expectations. The business owner can proactively make decisions to ensure that the business meets or exceeds it goals. This is key to a successful turnaround. The margin of error in a business turnaround is much lower than in a healthy business. The business owner must be making the right decisions at the right time. Monitoring actual results against expected (budgeted) results and taking the correct action is the difference between success and failure. Most small business owners don’t know how to properly create and use a business budget.
Just as critical to turnaround success is the use of forecasting. A budget tells the business owner how the business is doing against expected results. Forecasting is a very powerful tool as it is forward looking. A good forecast model allows the business owner to establish the business assumptions for a specified period of time and to see the consequential results. If the results are not the desired outcome, the business owner can take action to impact the outcome to achieve the desired results. The real power of forecasting is that it allows the business owner to see a future outcome that, if it is not the desired outcome, can be changed through current decision making.
The forecasting process, using a model, provides a crystal ball of various scenarios. The most likely scenario is utilized. An operational forecasting model forecasts the business results by month for the year. Thus at any point in time the business owner can know his full year forecasted results. This is extremely important as it allows for timely decisions to impact the full year result.
I have found using this tool to be the difference between success and failure. In a turnaround, failure is going out of business.
In summary, the key elements of business turnaround include having no cash surprises, utilizing financial information to proactively run the business, and using budgeting and forecasting to guide the business to the desired outcome.
My forte in business has been my ability to use business information to make a difference in better performance of business results. I have help guide several successful business turnarounds. If you could use help please contact me.
Dave Mayo, CPA, CGMA
CFO 4 Small BizTM Founder & Partner