How Understanding Your Business’ History Helps You Plan for the Future
Your vision and goals for the future of your business are important, but you may not be able to fully realize them unless you’re learning from your business history. To most productively plan ahead, cycle through business planning, plan execution, and then evaluation.
Evaluate your business plans
You likely already know how to plan for your business and execute these business plans—but you may not be paying as much attention to evaluating those plans. To evaluate them, take time to retrospectively ask what worked well or as expected in your plan, what didn’t work well, what you could change to make it work better next time, if the outcome was worth the cost and effort, and if the result aligned with your mission and vision.
Ensure your evaluation is qualitative, considering how you and your customers feel about the result and if your final product output looks like you thought it would. Also ensure it’s quantitative, determining if your revenue and costs were what you expected and if specific costs or sources of revenue stood out.
Use your business history to predict the future
By understanding your financial history and interpreting the results in your evaluations, you can powerfully optimize your:
Forecasts
Knowing your historical pattern of overhead, you can build break-even analyses. Since most revenue cycles aren’t the same each month, you can use historical sales information to determine when to expect highs and lows throughout the year. Historical reviews can also help you compare your operations to industry benchmarks, such as cost of sales/gross profit percentage, salary levels, and headcount vs. revenue.
Profitability
Knowing your most-profitable products can help you drive your sales and marketing efforts, largely affecting your bottom line. Even just seeking out the right type of sales can impact profitability.
Cash flow
Your historical cash flow can help you uncover your future cash flow needs. For example, knowing when sales are slow, how quickly (or slowly!) your customers pay, how far in advance you need inventory, and your fixed overall costs can all valuably help you plan cash flow.
Capital and investment needs
The costs of your historical growth can indicate the capital you’ll need for future growth. For example, knowing your work capacity for employees can help you determine when to make your next hire, producing the necessary equipment can help you plan your next capital investment, and knowing the space you need per person or process can help you plan new office or warehouse investments.
To best use your historical financial information as an evaluation tool, first and foremost, ensure it’s accurate. A great accountant provides accurate, timely, relevant, and understandable reporting to empower their clients with knowledge about their business.
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