Financial scenario planning is an essential tool for SMEs in weathering this economic storm, says AFM Services managing director John Zerella, and having a formal business plan can also help a thriving business grow.

There would be few small- or medium-sized businesses not feeling the pressure of today’s increasingly challenging economic conditions.

Rising costs and interest rates – the Reserve Bank’s current cash rate is the highest since October 2012 – mean every dollar earned or spent counts.

AFM Services managing director John Zerella says it’s important for business owners to review budgets and undertake scenario planning now, if they haven’t already, and to get outside help rather than going at it alone.

“Most business owners are really, really good at what they do,” says John, whose firm’s offering runs the gamut from bookkeeping and accounting to finance solutions and advisory services. “But they tend to spend all their time on the provision of the service.”

John says the key tasks that underpin the management of the business (budgeting, KPI analysis, business plan development, scenario analysis) are often sidelined as owners focus on “the day-to-day grind” and servicing customers – working in rather than on their business.

“They genuinely feel that there’s always this silver bullet that’s going to help them expand, or be twice the size, or solve a particular cashflow problem,” he says.

“But it’s actually the one-percenters [that improve cashflow].

“Simple things like looking at your expense lines, one by one, and seeing where you can reduce some costs – $200 here and $300 there, $1,000 here, collectively adds up to a lot of money.”

On the income side, John says businesses should look for opportunities to improve efficiencies, increase prices and negotiate with suppliers to improve margins. He says small business owners don’t often get to the latter two points.

“I think they have an unrealistic perception of how it will be taken by the supplier or the customer,” John says.

“Quite often people undervalue what they do and so they don’t properly price it, although sometimes it’s governed by market.

“The other thing is not having the courage to ask a supplier, ‘how can we reduce our costs?’ Or ‘what can we do that makes it easier for you to reduce your costs or introduce efficiencies?’”

John says having an accountant identify feasible options can give a business owner the confidence to have tricky conversations.

Scenario analysis is another under-utilised tool, he says – one that offers a deeper understanding of what may lie ahead and can enable a business owner to prepare for, or avoid, a potential cashflow crisis.

John says businesses should explore what would happen if interest rates or costs, including labour, were to rise.

“What are the impacts on our future profitability and, ultimately, our cashflow? Because at the end of the day, cash is king,” he says.

This should be an ongoing process, John says, not a one-off analysis.

“Having the tools [to analyse] a scenario can at least provide you with the time to put in potential changes or to look at alternatives before you’re actually in the moment, before you’ve actually lost that money, before you’re in a cashflow crisis,” he says.

AFM Services is a sponsor of the City of Norwood Payneham & St Peters’ 2023 Eastside Business Awards. Winners receive the business advisory services of their choosing from the company, which can include guidance and assistance with developing a business plan.

John says a business plan could unlock finance for expansion, particularly in the absence of any security that may be requested by banks, such as securing a loan against the business premises.

“We’re finding more and more banks are asking for things like business plans, budgets and forecasts,” he says.

“[This is] to demonstrate that the business owner has either thought about what sort of returns the loan is going to generate, or has engaged in some professional services to help them with that part of it.”

Business planning and budgeting need not be a seemingly enormous task.

“We get the client to sit down and think about the future of the business – what are the things they want to [accomplish]?” John says.

The final outcome is a plan that is broken down into manageable tasks and timelines.

“So that a business can achieve the things that they want to achieve – rather than just dreaming about it when they’re in bed at night,” John says.

The Eastside Business Awards recognise and celebrate exceptional and outstanding businesses in the City of Norwood Payneham & St Peters, as voted for by the public.

Vote for your favourite business by Thursday, 16 March.