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Posts Tagged ‘financial models’
Financial Projections Are Crucial to Goal Setting
Projections can help CEOs chart a course from zero sales at the start of the year to the sales objective desired by year’s end
Years ago, I sat down with a new client, and we chatted for hours. The topic: Whether I could help him determine if he would have sufficient inflow of cash to double his company sales from $4 to $8 million in the coming year.
It turned out he had a good command of his product line and product margins. On that basis, I told him we could work together to produce a set of monthly projections designed to determine if he would experience a cash shortfall.
Together, we determined there would be a shortfall. As a result, he approached his bank to increase his credit line. His company ended up doubling its sales. I helped him again the next year. Sales doubled again. I then constructed a model to help his people perform projections, and they took over in year three.
The point of the story is that the client would not have doubled his sales in two consecutive years had he not benefited from financial projections that told him he’d experience a cash shortfall, and would need to extend his credit line.
Therein lies the benefit of projections. If CEOs follow them, the projections force them to focus on the numbers. The ritual of establishing projections helps set a starting point and an end point, or goal. The projections lay out a course for the company to go from zero sales on day one to the desired year-end sales goal.
Projections are also helpful as a scoreboard with which to compare actual results. As you move through the year, you always want to compare how well your company is doing with what you projected it would do. This gives you an opportunity to adjust your actions to achieve your desired results.
Finally, projections enable CEOs to flesh out action plans for marketing and sales teams. Unless you have a methodology or program that says, “This is what we’re going to do to achieve these sales numbers,” it’s not going to happen.
Marketing and salespeople benefit from action plans that flow from the projections. What’s more, those action plans can be broken down by month, week or day to give key employees a blueprint for action. By monitoring those plans, a CEO can determine whether or not employees are getting results.
Next time around, I’ll lay out best practices in developing realistic projections, to help keep companies focused on the numbers.
Measuring the Value of a True Leader
When the news broke about Steve Jobs retiring from Apple, many were disappointed and left confused. This is not because Jobs was a terrible leader or was in danger of sinking the stock of the company. It is because we are losing one of the sharpest minds and talented entrepreneurs we have seen in our lifetimes.
Steve Jobs means so much more to Apple than a Chief Executive Officer. Additionally, he means so much more to the world than another techie wearing jeans and a black turtleneck. He is an innovator capable of enrapturing audiences everywhere with his notions that become reality. This innovation has led to the financial stability and rapid growth of Apple, but it must be maintained in the generations to come.
“Innovation can’t be forced”
I read an editorial in the Chicago Tribune titled “Be like Steve” and found this statement to be the most powerful line in the article – “…innovation can’t be forced”. The same goes for financial success, financial strategy and financial models. You cannot force a company to become profitable, but having the assistance of a professional who can apply solid principles and strategies to weather unpredictable storms and challenges of business will reinforce the prominence of your company.
So, what is the value of innovation to your customers?
Most small business entrepreneurs do not have to worry about the stock valuation of their company because they are not publically traded. However, small business owners should focus on the value of innovation to their customers and clients. And, this innovation should extend beyond the expertise of your CEO.
Is your CEO the backbone of your organization? If so, your company’s value may not be as stable as originally believed. When a CEO is very hands-on and he or she connects with most of the clients on a regular basis, there may be some customers who will not be happy to suddenly begin working with a different leader, and as a result, may take their business elsewhere.
If enough clients leave, it is possible that the company will face some financial setbacks.
Think bigger to grow stronger
My challenge to small businesses is to think bigger and grow stronger. When you build a long-term financial model for your company, you are more likely to survive the bad times and focus on future growth instead of minor setbacks. For Apple, the resignation of Steve Jobs is just a minor setback because they have planned future product and service releases well in advance and employ one of the seemingly most forward thinking teams to drive the trends we enjoy today.