In business, as in our personal lives, it’s often too easy to concentrate on short-term challenges while neglecting long-term planning, particularly when the world is so uncertain and unpredictable that looking ahead more than a year or two can sometimes seem futile or pointless.
This is particularly true for SMEs, which have fewer resources and fewer alternatives, not to mention a higher failure rate, than large businesses.
Fortunately, there are two very practical steps that SME owners can take to avoid the pitfalls of “short-termism”.
Ensure Your Financial Forecasting is Meaningful
Firstly, we’ve said it before and will say it again: you can remove a lot of uncertainty simply by understanding your financial numbers the right way. Most SMEs have lots of financial data lying around but it needs to be put to work, as soon as possible, to support your short- and long-term decision-making. And the performance metrics need to be not only relevant to your business but also proportionate to its scale.
Most SME owners are (quite rightly) focussed on cashflow, the lifeblood of business, because lack of liquidity kills more businesses than lack of capital. Cash inflows are obviously gratifying and reassuring. But too many SME owners are less clear and confident about explaining where their long-term profits actually come from, whether they’re sustainable, and the potential obstacles lying in the path of success.
Financial forecasting, based on solid management accounting, may be regarded as a kind of “weather forecast”. It tells you:
- Revenue patterns, such as seasonality
- Which costs are rising
- When cash gaps may appear
- Sources of profit
- When it’s safe – and necessary – to invest for the long-term
With plausible scenarios and realistic stress testing assumptions, you can transform dry financial data into valuable insights for creating a resilient and sustainable business.
Knowing Your Business Model
The second way of reconciling short-term and long-term interests is to have a credible and coherent business model. Can you explain, succinctly and convincingly, how your business earns and spends money to generate a profit?
Having a clear narrative, in your own head, about your business model isn’t just an intellectual exercise or a rehearsal for your next interview with the bank manager.
A strong business model helps you:
- Allocate resources to achieve your goals
- Manage risks and challenges
- Identify competitive advantages and weaknesses
- Spot new opportunities
Let us help you
If you want to a fresh and impartial perspective on how you’re balancing the short- and long-term needs of your business to achieve your personal and professional objectives, please get in touch and we’ll be happy to offer you the help and guidance you need.