Creating a financial road map is one of the most important roles of an entrepreneur. Giving financial direction to those involved in your business is important so that everyone is pulling in the same direction, thus creating synergy. Synergy is defined as: the simultaneous action of separate activities which, together, have a greater total effect than the sum of their individual effects. That is when one plus one equals a number greater than two.
But where to begin? Generally, a good place to start is by looking at last year. While you may not like what happened, it is important to have a realistic and accurate picture of what transpired. It is not uncommon for more income to be generated in certain times of the year than in others. Sometimes particular expenses will be higher at one time of the year than at another. These so-called business cycles differ for every business.
The next step is to paint the picture of how the new year should be. The easiest way to do this is to look at what you didn’t like about last year. Would you have preferred to have a higher gross profit? Do you need to turn a loss situation into a profitable one? Would you need to drive revenue higher or control costs? Do you just feel out of control? Whatever the issue, you now have the opportunity to plan out a situation which will hopefully measure up to your expectations. Diligent use of the accrual method of accounting should allow for use of prior year numbers as a starting point for changes.
Once a clear picture is painted, programs can be installed to achieve the budget. Monitor financial activities to see how the actual results compare to the budget you have set; then make mid-course corrections. Making mid-course corrections is the art of changing the future. Getting accurate financial information as early as possible allows you to make these mid-course corrections and actually “drive” your business in the direction you want.
