Ever struggle to make decisions when competing against others before budget time? Read on to improve your decision making abilities. This blog will be a heavier read and is what I classify mostly as technical read. Usually I concentrate on developing readers’ softer skills to improve their cash flows – but every now and then we have to delve into the more technical side as it is really important too. It is a necessary evil. The model is also necessary around budgeting and forecasting time, when you are trying to decide where to allocate your limited resources.
What to do before budget time – Fail to plan, plan to fail!
A SWOT analysis of your business is a planned approach or what others call strategy or road-map that will help you make clearer decisions. It helps decide where to allocate your resources i.e. how to budget. Once you have done a SWOT analysis, please guard it with your life. This is as important as your budget or your forecast or your cash flow. If a competitor gets his/her slimy hands on it, you are completely screwed. They will be able to anticipate your every move and beat you to it.
Typically, you should perform this analysis before you start putting together your budget. As you read, you will see how this model can assist deciding where you want to spend your budget to outsmart your competitors.
In my opinion, the analysis is quite simple and easy to implement. However, be careful where you go through with it. Although it is used wildly in business, there is literature out there that argues that it may actually harm performance. To attempt to get around that aspect of the analysis, do not ignore any factors when you are putting your analysis together – even if it does not fit in the matrices we talk about below. Also, look at your personal circumstances before taking any particular course of action. If you have a larger business, it may take you longer to put one together. Please read on, it makes more sense below.
Budgets, budgets, budgets…
You may already be using some of this one way or another in your business, but using this tool brings all these attempts together in a wholesome and more importantly, manageable way.
There are four elements to a SWOT analysis. SWOT stands for “Strengths”, “Weaknesses”, “Opportunities” and “Threats”. Strengths and weaknesses are more internal factors v/s Opportunities and threats are external ones.
One of the criticisms of this model is that the exercise effectively creates a long list. However, that is the same criticism of the balanced scorecard. Yet, both are still used wildly in successful businesses to varying extents. Again, if you don’t have any framework at all, please use it. It does not matter how big or small your business is – like all my other advice.
In this case, strengths mean what unique attributes that your business possesses that give you a competitive edge. For example, you could look at the people you have if they possess unique, highly desirable abilities that your competitors do not possess. Do you have any particular rare equipment to produce what is in demand in your market? Do you have market presence i.e. a strong brand? Can you adapt quicker to a different market through staff that also has experience in another sector? Please make a list of these under the heading “strengths”. Usually, people create a table with 4 squares in them: one for “Strengths”, another for “weaknesses”, etc. Others create lists with 4 headings.
Weaknesses are exactly the opposite. The same characteristics I mention above could be your weakest points, where your competitors are just making a killing at your expense. You could have crap and undependable staff. Maybe you sold a few duds before and your brand is now synonymous with failure! Do you have costly equipment where you are struggling with interest expenses or maintenance? Maybe you want to diversify and no one on your staff have experience other than the current industry or market?
The other two factors are external ones. Opportunities could be changes in politics. A few years back, the Australian government decided to pour money into infrastructure projects. This paid off personally, as I decided to work in civil projects. My skills were translatable. Are there skills in your business that could benefit from areas where your country’s government has decided to spend more? Is the market shifting to new technology and younger buyers, and you have younger staff eager to develop such? Are some of your competitors struggling? Anyway you get the jist of it – they have to be external. Some businesses go to a lot of expense e.g. paid market research. This is up to you and your personal circumstances. The spin-offs from analysing your external opportunities are numerous anyway, if you have the time or money to invest in this activity. It also helps with positivity in general as it shows you more options, whereas a lot of times, business owners feel cornered with limited resources at their disposal.
External “Threats” can achieve exactly the opposite. Looking at strengthening competitors can either be galvanizing or depressing. Government withdrawing funds from a previously lucrative area can be gutting too. But by identifying these threats, you can develop mitigating strategies. You can be better prepared or you can downsize your expectations to size. At least, you get to have a fighting chance to do something about it. You get to have more say in your life – instead of burying your head in the sand.
Overall, I will not give you a rigid structure here. This is to able you to have a go at creating one that works for you. Please don’t cheat and google the SWOT matrix, yet!! Try your own first, then google it and see if yours was more suited to your business. By adopting a few additional tweaks, you can then get the best of both the prescribed model and one that you developed to fit your business, if that makes any sense. Otherwise, one limitation is that you may adopt something that does not fit your business.
Another limitation of the SWOT analysis is that it can be quite subjective because it is being prepared by one person i.e. yourself. Now, you probably think highly of yourself, and so you should whether you are successful or not. This is not about your abilities but more to do with the limitation of the model and what it allows you to do. Like I have pointed before, there is research that says it is limited. One mitigating strategy is to get it reviewed by people in your business you trust. One can also google existing SWOT analysis available online to compare and contrast.
Be mindful of not drawing a firm line between external and internal factors and related ones i.e. opportunities can be within your business to streamline your processes and reduce your costs, to pass on cost reduction to your end customers. This also enables to compete more effectively. However, by categorising each element, you may miss out on these synergies. A SWOT analysis is a good start as long as you are aware that it is not the answer to all your prayers.
Actionable items will arise out of generating these lists in terms of identifying areas of development and/or converting unfavourable positions into positive ones. For instance, you can analyse your strengths and use them to capitalise on the opportunities you have uncovered in your SWOT analysis. This then assists to decide where you are going to spend your budget on say, advertising. It also gives you guidance on how much to budget on these activities.
An analysis can be completed from any point of view. You can look at the overall business or personal goals. You can also look at isolated items such as financial performance and profit. For the purpose of this exercise, please start with one that has a scope focused on your cash flow. Once you have acquired a level of comfort, you may decide to move on to develop one for your overall business. Often people ask me the question, how to budget? There are many aspects to this process. When it comes to your competitors and decision-making, you can use this model to help you decide “how to budget”. Or, you may decide to build another decision making model using one of those mentioned below.
For further reading on these strategic approaches and on how to budget, you can either drop me a line or google Porter’s 5 forces and PEST and go on from there. Most importantly, you should at least put any one of these frameworks in place if you do not have anything right now before the budget time comes.