In my 20 plus years of consulting small and medium size
businesses it is rare that I find a business with a
financial plan that is being monitored. Most financial
plans are generated to obtain a bank loan and once that
purpose is served the plan usually finds its way to the
lower bottom draw of the owner's desk to collect dust. The
other day I had an occasion to check one of these plans out
with a client whose business was in trouble and sure enough,
most everything in the plan had been ignored. If only part
of the plan had been followed and monitored the business
would have been profitable and not in need of any outside
help.
Usually when a financial plan or budget is first put
together it is based on the business history, knowledge of
the business and industry, and some valid assumptions
about the business future. A flight plan is put together in
much the same way, however as soon as the plane takes off
and winds change, adjustments must be made in order for the
plane to reach its destination. The same holds true for a
financial plan. Once the business is put into operation,
some things change either with the product or the
marketplace, and adjustments must be made to achieve the
profit objective. Therefore, a financial plan must be
monitored to identify the variables as they present themselves.
In a business these variables usually present themselves when
a Profit and Loss statement is compared to a financial plan.
Unfortunately, since most small business owners do not value
their financial plan there is no urgency to check it against
a P&L statement that tells you what actually happened in
the business for the particular period of the report. Since
the plan is not being monitored it is very easy for the
business to head off course and in the opposite direction
of its profit objective.
Comparing each item in the Profit and Loss Statement (What
is actually happening in a period) to the Financial Plan
(What you want to happen) will identify the variables and
help you identify where problem(s) exist in meeting your
profit objectives. However, identifying the problem is only
the first step in solving it. You must research further to
find what is really causing the problem and then make the
necessary adjustments. Various solutions should be
considered before picking the best solution, and after
implemented, the new solution should be monitored to
see if it really solved the problem.
The importance of a Variance Report that compares a
financial plan (budget) with a profit and loss statement.
cannot be overstated. These are two important
management tools to control your business and reach
your profit objectives. If you have a financial plan, start
using it to control your business, and if you do not have
one, create one, it could mean the difference between
success and survival. Good Luck!
Copyright © Donald N. Lombardi
http://www.HomeBasedBusinessWizard.com
Donald N. Lombardi, Is A Business Consultant, As Well As,
Expert Author on Home Based Business.
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