A Projection as a Path to Success

Oct 07, 2019 by Roger Scherping

I'm working with a small, family-owned manufacturing company. For a number of years they had been suffering from declining sales, and like a lot of companies, they just didn't do anything about it. They just assumed that the situation would get better all by itself. Then they began to see that they were running out of cash. Still they didn't do anything right away. Finally, when they were at the end of their rope, they reached out to me for help.

I went in and assessed the situation and realized that they had waited longer than they should have. Their sales were down dramatically, and their cash reserves were gone. They were in deep trouble. I fumed that they should have called me a year earlier, when the problems were smaller and easier to deal with. Unfortunately, waiting too long is also very common with struggling companies.

Their accounting was a full six months behind, so to really understand where they were at financially, the first thing we had to do was get their accounting updated. This lack of current accounting information was a big red flag about the management team. They had apparently never taken the time to understand the numbers of their business. Unfortunately it’s very common for small business owners to be so concerned with day-to-day operations that they don't invest the time in looking at their numbers. Without accurate numbers we couldn’t tell how their sales had been trending, how much money they were losing, or where their cash was going. Their lack of insight into their true situation is part of why they waited so long to take action. If they had known the truth, they probably would have reacted sooner.

Once we got their numbers updated, we saw how the loss of a major customer had really hurt them. But because they didn't understand their numbers, they didn't really understand the full impact that losing this major customer would have on their business.

So we sat down together and talked about options. Can we save the business? What changes would we have to make? Is it time to sell the business? Or do we have to just close the doors? They didn't know where to even begin answering that question.

The answer, of course, was to do a business projection for them. We needed a way to look into the future to see the impact of the different decisions that were open to us. We needed to determine our best options and whether they were going to be adequate to save the business. We had to see how we could generate more cash and how a renewed effort at generating additional sales could improve profitability. A business projection would be a model of the business, and we could adjust the model to figure out what our best options were.

So we started with a budget for the coming year. What changes would we have to make to start generating new sales? If we realigned the team, how much new sales could we generate in the next 12 months? We came up with an estimate. Then we turned our attention to costs. How much gross margin could we generate on those new sales? We came up with an estimate there, too. Then we went through overhead line by line. What can we cut to improve profitability? We put all this into a budget and determined our best guess at what the profit would be next year.

Then we put our budget into the financial projection, and the financial projection became our “What if?” machine. It immediately showed us what our cash position would be under the current situation. Then we began to model different decisions. What if we were able to raise sales by more than estimated? What if we were able to reduce our cost of sales by 2%? What if we sold the building? What if we got a bigger mortgage and pulled out some cash for the business? What if we refinanced the equipment for a longer term and reduced our monthly payments? What if we closed the business – would we be able to pay off the debts?

The financial projection became our tool for looking into the future to quantify the impact of our decisions. No gut instinct involved here. There are estimates involved in a projection, of course, but every time we put a new scenario into our financial projection it helped us objectively calculate the impact of that decision and helped us determine the correct path to success.

That’s exactly what ProjectionSmart Growth does. Users have told us that Growth is their “crystal ball” that allows them to see into the future. It shows them where their business will be in 12 months based on their best guess at sales and profit and their answers to a few simple questions. Then they learn how to model different scenarios by answering the questions differently. All by themselves they can quantify the results of their decisions. They can objectively see the future and can stop relying on gut instinct for critical decisions. They tell us that that ability gives them confidence and peace of mind.

If you have any questions about how ProjectionSmart can help you understand your numbers, email me. I'd love to hear from you.
 

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