Staying Ahead of the Game: Leveraging What-If Scenarios via MRR's
Howdy, it’s already May - just 7 weeks until the days start getting longer again 🙂, but for now I would like to refocus your attention on MRR’s, What-If scenarios and how these fit in with your financial performance.
In any business, success truly depends on knowing the numbers. I have met too many companies who continue to do their ‘thing’ with scant attention towards the financials. Some get away with this while the wind blows in the right direction, but we all know that does not last forever.
While creating a budget is not essential, without one you are just making life that much harder for yourself. Equally important is to ensure that your reconciliation is completed within the first two days of the new month. And yes, I know that this is near impossible for some business types, but there are workarounds to achieve this.
In this brief article, I would like to explore one aspect that is related to the above, and it is built on the assumption that you do have a budget and you reconcile timeously.
There are 3 primary reasons why at the beginning of every month you need to explore the month ahead, together with running ‘What-if’ scenarios.
1. Forward Planning
When a budget is created, sometimes many months ahead of the ‘now’, many assumptions are made. By reexamining your budget, but just for the month ahead, your assumptions can be fine tuned.
Read more on budgeting here: The Importance of Budgeting and Creating What-If Scenarios
By examining different scenarios, a business can identify potential risks and opportunities and take proactive measures to mitigate risks and capitalize on opportunities.
2. Motivate You and Your Staff
When employees understand the business's financial position, they are more likely to be motivated to work harder and smarter to achieve financial goals. Sharing financial information with employees and involving them in budgeting can help them feel more invested in the business's success. Running what-if scenarios can also help employees understand the impact of their actions on the business's financial performance and motivate them to make decisions that will benefit the business.
Related Article: How To Create Impact With Your 1-1 Conversations
3. To Stimulate Creativity
Many experiments have been undertaken around our (humans) ‘System 1’ thinking. With System 1 thinking our understanding of the world, and our budget, is formed through our heuristics and assumptions. This serves us both well and poorly. One way to improve the limitations of this System 1 thinking with regard to our finances is to ‘see’ your data differently and this involves ‘What-if’ scenarios
Does your accounting program allow you to do the above? Probably not.
And this is the reason why we created a section in Sukuma’s One-page Financials called MRR, or: Minimum Revenue Requirements.
Well, they say a picture paints a thousand words, so with reference to this image, do you believe the MRR would benefit your business?
I have left all the data out, I would not want you to be swayed by numbers that are not relevant to your business, but the messaging is:
- What impact will you have on your business if you change one or more of the key drivers, on profitability?
- ‘Seeing’ these numbers in black and white is half the battle won. Now let your, and your team’s creativity get to work by figuring out how you can make these numbers a reality.
A Final Note
The financial performance of your business may be your responsibility but it’s not solely up to you to realise this potential. If you have any employees that do not actively contribute to improving the numbers then why are you still employing them? i.e. everyone matters with regard to financial performance.
The secret ingredient to ensuring your company’s financial success is through improving financial literacy at all levels in the business. And once they have a financial grounding, your job is to ensure the numbers are always at the ‘top of mind’. A useful tool to ensure this is maintained is to consider profit share - now that’s a topic all on its own.
Business Advisor - Coach
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