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The Gap to Small Business Growth

MIND the GAP.  In London this phrase is constantly repeated in rail stations to remind and warn commuters about the gap between the train car and the platform.  The Gap is a space that can be an obstacle if not handled properly.  Every small business has a gap to overcome. Gaps are barriers to growth.  In order to achieve this growth strategic decisions need to be informed by data.  To achieve growth consistent financial analysis is necessary.  While every organization is different, analyzing the fiscal state follows a general pattern.  As we work with our clients we established a formula to assist with the process.  Coincidentally we call it GAP. Goal, Analyze and Project. Below is a brief introduction to that process.

 

GOAL

The first element in our process is called Goal.  This is by no means a sports reference.  However, every analysis of a small business should start with the anticipated goal, end state or in simple terms budget.  Many small businesses never setup a budget prior to the beginning of the year.  Every small business should set expense, revenue and profit goals for the year.  It is only after this setup is done that we can begin to measure success or dissect reasons for failure.  How does a small business set financial goals or craft a budget?  In short it depends.  The budget in essence depends on the agenda or focus for the upcoming year.  For example, we recently worked with a startup company in the beauty/personal care industry which had not recorded any sales.  We came up with a budget based on industry specific data and a deeper analysis of the target market.  While this was the approach we took in this situation it would vary based on the stage of the business (i.e. start-up, growth or maturity etc.), industry and specific objectives.

 

ANALYZE

The next step in this formula is to analyze.  This is an important step which requires a methodical review of a firm’s finances.  Many people assume that analyzing simply means to review or locate trends.  True analysis includes coming up with explanations for variances from your goal or budget and applying corrective action.  For example, let’s say a restaurant is busy every day serving meals to customers yet they fall short of the revenue targets for the year.  Should the business owner just leave it there and try the same thing next year.  To do that would be insane.  Instead a deep dive is needed to uncover the story behind the numbers.  An analysis may reveal that the customers were only buying the cheaper priced meals or simply taking advantage of specials.  A further dive may reveal that the prices were set lower than the true costs of the meal.  This is an important point as many restaurants set prices without doing an analysis on the true cost of the meal.  Meal costs go beyond the ingredients.  Costs include things which are directly associated with the meal and indirectly associated.  Direct costs would be the fruits, vegetables, spices and the chef’s time.  Indirect costs would include things like rent, electricity and other employee’s time.  A failure to include these would lead to wrong pricing and missing financial targets year after year.

 

Analyzing can take on many forms.  However, in a nutshell it involves isolating and explaining progress toward the goal.  These changes can be from your budget, prior year results or competitors just to name a few.  Our whitepaper entitled “Business Improvement and Performance Analysis with Microsoft Excel” dives deeper into various financial analytical techniques.

 

PROJECT

The final step in the financial analysis formula is to project year end financials. The information from the analysis phase will be used for projections.  For example, an analysis of an Accounting firm may reveal popular services and the demographics which typically use this service.  This information can be used to develop a marketing plan to increase the volume for these services.  We can then estimate future revenue based on the implementation of this marketing plan.  There are other ways to project such as looking at prior year growth rates and industry trends to name a few.

 

This formula is a helpful tool in dissecting the financial strengths, weaknesses, opportunities and threats of an organization.  Using this technique help business cross the GAP to growth.

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