Firstly you need to consider – What type of business am I looking at here?
What type of industry or service are we addressing?
- Are we looking at a business where the sector in which they operate is in decline or has growth potential over the next twelve months or just plain level trading?
- Is there a seasonal aspect?
- Is the proprietor an eternal optimist or pessimist?
- Have previous forecasts been accurate and who prepared them?
- What monitoring controls are in place?
Now let’s drill down.
What is the basis of the sales forecast – level trading as for last year, decline or steady / fast growth?
- How does it compare to last year’s result?
- If an increase – what additional marketing support and reasons why growth is shown need to be identified.
- If a decline then what additional cost savings will be introduced to compensate.
- What is the breakdown of sales – any prominent names that comprise a large part of the total sales – traded before / credit reference necessary?
- If a business has several income streams from trading – what is the breakdown and what margins does each line produce?
- When was pricing reviewed – any increase or reduction proposed?
- Ask “What if” questions to ensure that key factors and their impact have been considered. For example, what if sales decline by 10% – how will this affect profitability?
- Is there a Cost Income ratio in place to control purchases to sales?
- How does this compare to last set of audited figures?
- Have potential price variations been considered in the projection?
- Any negotiations with suppliers taken place to agree price?
- If a seasonal business- have purchases been adjusted accordingly?
- Has a sensitivity analysis been considered if purchase costs increase by say 5%?
Is there a Cost Income ration in place to monitor wages to sales?
- How does this compare to last year’s actual cost?
- Does this include N.I and tax?
- How many staff does this relate to?
- What is the H.R Plan for the next twelve months?
- How is overtime monitored?
- Where are the potential cost savings if a downturn in trade?
- Where are the directors drawings – are they excessive?
- Needs to be shown separately if possible as this can often be a leaking tap.
- How are costs here monitored and what measures in place to review regularly?
Generally up to this point, this is where the proprietor has maximum control of the business so “Gross Margin” is key.
- Is a Cost Income in place for G.P?
- Compare to last figures and sector average.
- How is pricing calculated and reviewed?
- Do they understand the difference between Mark Up and Margin?
- Do they know their breakeven sales figure each month?
- To find out how to calculate breakeven go to the next blog to continue