I love Christmas. I love the music, the lights, the time spent with friends and family, and of course the significance of the holiday for those of us who attempt to follow Christ. The crowded streets and stores I could do without, but the good comes with the bad and all in all, it’s a joyful time of year for most of us.
We’ve been working on our budget for LoCo Think Tank for 2019, forecasting continued growth in chapter membership and a couple more chapter launches projected. With our business model as a membership organization, it’s a fairly simple exercise - we know the revenues from each member, and the ratio of LoCo Facilitator expenses to that top line, and then we have our overhead expenses for office rent and tech spending, marketing and meals, figure in my meager salary and intern wages, and viola! We can project our profitability on a monthly basis, and budget when we can finally get a good office printer and Jill can have her inkjet back at home! (Looks like probably April babe…)
Forecasting is something small business owners tend to spend too little time on - to my chagrin and to their detriment. By definition, to forecast is to calculate or predict some future event or condition as a result of study and analysis of available pertinent data. Weather forecasting and financial forecasting are the two main areas of application. But these two are actually very different, because in the case of weather there’s really nothing you can do to change it (at least in the short run - this isn’t a climate change article), whereas in financial forecasting the very act of forecasting, and the activities undertaken along the way, significantly impact the outcomes.
Let’s unpack that a bit, shall we? Let’s imagine you’re a business owner (even if you already are) but in this story you’ve got a custom hot rod business you started in your garage. Last year, you took on three projects, billed a total of $400,000, parts and supplies cost $200,000, and your subcontracted painter cost you $75,000. You took home a tidy $125,000 profit for the year.
But now you’re preparing to take a big step and lease a three-stall garage in town, you’re going to take on a full-time painter plus a half-time mechanic/helper, and a half-time bookkeeper/office manager, and you’re targeting seven projects instead of three. Big growth forecasted, and even bigger profits. $1,000,000 is the target for revenues, parts and supplies cost $500,000, the painter, helper and bookkeeper take home a total of $175,000, and rent is $75,000. Your net profit is now $250,000!
Now imagine you’re one year down the road after making this leap. You completed only six projects but one was big, revenues were $950,000 and net profit was $220,000. Good job Bob, your forecasting was pretty accurate.
But in a small business setting like this, the doing of the forecasting influences the actions that are taken and therefore the outcomes that are achieved. If I want to do seven projects, I’ve got to work on my marketing tactics and networking or whatever it is that leads to the sales and corresponding revenue. If I’m hiring a painter and a helper and a bookkeeper, I’ve got to find and train the right team members. If I’m going to rent a three-stall garage for $75,000 annually - I’ve got to find a three-stall garage that I can rent for that price… The point is that, unlike a weather forecast, a financial forecast actually drives the actions taken to meet those forecasts.
And this scales up too - if I’m a larger organization and I’m forecasting 20% revenue growth for 2019, this means that my sales team is either going to have to grow by 20% or become 20% more effective, or some combination of the two. Some sales reps performance may go up 30%, others may have an off-year and dip 10% or just stay flat, and some may leave the organization for greener pastures altogether - but collectively across the organization if we’re going to meet our revenue growth forecast this is ultimately dependent upon individual actions of the people in the trenches.
It scales up even more - let’s say it’s another year later and you’re watching the news, and the talking heads are going on about how the consumer confidence survey results just came in, and the numbers are way down. Hiring is slowing in most sectors, and big layoffs have been announced the last few weeks. It looks like a recession is imminent, if not already taking place. All of these factors lead you to forecast that demand for hot rods is going to tank in the year ahead - in fact you might be lucky to get three jobs next year! So you layoff the mechanic/helper, and go to subcontracted bookkeeping and painter, exit the leased space and move the business back into your garage. Cumulatively, all these layoffs and vacant garage spaces lead to a big slowdown in consumer spending, which in turn plunges the country into a deep recession. So much of our economy is driven by human psychology...but that seems like a rabbit hole for another day.
So, WHEN you are forecasting (not if) and setting your budgets for your small business for next year, make sure you are looking at it from the perspective of actions needed to influence the outcomes, and not just guessing at a hoped-for result. Use your historic data, recent trends, market conditions, staff talent level and trends, and all the rest, and forecast for a tidy net profit...and then make sure your actions line up with what’s needed to achieve that result.
One thing that can stand in the way of making a profit - not charging enough. In fact, “raise your price” is the most common bit of advice I’ve given as a banker and consultant and whatever I am now. The Larimer Small Business Development Center has a class with a great title - Are You Charging Enough? - which is linked to in the LoCo Learning section. Take the class, make sure you’re charging enough to plan for profit, and then do the things you need to do to achieve your forecasted results.
Thanks for reading, and for the emails of encouragement on the newsletter - it really makes me smile. Because I can now forecast at least one encouraging note from each issue, the time spent writing these posts has become a joy. I’ll be headed to sunny North Dakota for the Christmas holiday, and I’m forecasting cold and snowy and windy based on analysis of historic weather data, plus a lot of time playing cards and eating sweets and seeing loved ones I don’t see often enough. My hope is that you forecast for yourself a very Merry Christmas and a profitable 2019, and then go and make it happen!
- Curt Bear
Founder, LoCo Think Tank