In a previous blog titled Numbers tell stories – what are yours saying about the state of your business?, we emphasized the importance of having compelling reasons for growth and a comprehensive financial reporting system in the pursuit of better financial performance.
Now that you’re (hopefully) convinced of the importance of a company’s ‘numbers’, we shift our focus to developing a business planning process that can drive great financial results.
Many business owner-managers may say they don’t need a business planning process because it’s firmly imbedded in their head. If this is the case, are these ‘plans’ clearly and regularly articulated to the team that must execute them? Unfortunately, we find that such plans are often developed in isolation from and without the input of the team, making the plans challenging or even impossible to execute. Not surprisingly, this significantly limits business success.
As a business owner, you naturally want to see your business thrive. However, if your financial numbers are going to tell a better story, you need to develop a better business planning process and execute it effectively. That’s why our planning process is focused on producing better results each year as part of the fulfilment of your company’s vision.
FOUR-STEP BUSINESS PLANNING PROCESS TO DRIVE BUSINESS SUCCESS
Step 1: Clarify the longer-term business vision
Nokia – once the world’s dominant cell phone manufacturer – used to view Apple as a music device company rather than a competitor. The rest is history.
That’s why the first step in our business planning process is to ask yourself hard questions that most business owners want to avoid, including:
- What will your business look like when it’s done? How will you add value and for whom?
- How can you satisfy your customers’ needs efficiently and still generate an attractive gross margin?
- How can you build excellence into every process in order to out-innovate your competition?
Taking the Nokia example to heart, be mindful that your competitors of tomorrow may not look anything like those of today. Analyze your operating environment, taking into account external factors and how they are changing.
From this vision, craft your expectation for what your business should look like at the end of 5 years.
- What are your expected sales, margins, expenses and profit?
- How will your team be affected and when?
- Do you need new skill sets within your team?
- What sort of technology changes will be needed to become more efficient?
- How about capex?
- Is your team adequately trained to produce the desired growth?
Now that you have 5 years of planning to finesse, focus intently on the upcoming year and taking actions in the months ahead that will provide momentum during years 2 through 5. This approach will help you map out a route to achieving your intermediate 5-year goals.
Step 2: Crystallize your immediate strategy
Within the context of your longer-term business vision, lay out the strategy for the next year. Be very diligent, reflecting in detail on your products or services and what mix you will emphasize.
- What financial and human resources will be required?
- How and when will expenses be affected?
- How will this affect cash flow?
- Will additional debt or equity be needed?
Next, draft a set of actions that give life to your strategy. Each action should define a commencement and completion date and should be assigned to a specific team member. Where appropriate, specify the expected incremental profit, margin and revenue, as well as other relevant impacts.
It’s vital to engage with your team on the business’ strategy and ensure agreement on their workload, otherwise you’ll need to expand the team.
Step 3: Operating budgets: ‘what you can measure you can manage’
Now that you have a strategy backed by a list of concrete actions and their timing, the next step is to develop operating budgets for the year. Sound operating budgets will present your business planning process in the context of financial numbers specific to your business. This will allow you – as the business owner – to understand the limits, challenges and potential of your business plan.
Use a spreadsheet to capture the monthly costs and revenues established in the above steps, in addition to thoughtful estimates for the remaining revenues and expenses of the business. Always verify all totals.
Next, load the revenues and costs into your accounting software, again confirming the accuracy of the totals with your spreadsheet. Depending on the sophistication of your model, load your balance sheet into the accounting software as well. If not, this can come later.
Cash flow is the lifeblood of any organization, yet many business owners completely ignore cash flow planning – at their peril! Since it is absolutely critical, a cash flow budget (projection) is one of the operating budgets that should be prepared on a routine basis.
Your operating budget spreadsheet should have an estimate of the timing of the revenue and expense cash flows on a monthly basis over the year. Don’t forget to add cash outlays associated with loan principal repayments and capital asset additions, and be sure to deduct depreciation. At this point you can already see how income and cash flow can be materially different. Remember that the cash flow statement and income statement measure different components, and for most businesses these will not be the same.
Now, review your cash flow projection and consider what it’s telling you:
- In what month is your projected cash balance the lowest?
- Do you have an operating line that will cover it?
If not, you may need to seek financing. Generally, it is easier to obtain an increased line of credit before you need it than when you are in a crunch. Lenders are particularly adept at sensing desperation, making your financing job extremely difficult. Further, it reflects poorly on you as a business leader, so lenders lose confidence in your business acumen.
Running out of cash can lead to the rapid demise of your business; preparing a cash flow budget and updating it monthly will help you avoid this fate. If your business is going through a sensitive period, daily or weekly cash flow updates may be required.
Step 4: Where rubber hits the road: monthly performance reviews
With the advent of online banking offering instantaneous access to banking information, there is generally no reason why your month-end reports cannot be generated with reasonable precision within 15 days of the month-end. If you don’t have the accounting capability in-house, this will be a problem. If you talk to virtually any CEO who has built their company from the ground up, they will invariably tell you that a good accountant was a core part of their success.
Monthly performance reviews are critical, so I recommend that you schedule these review meeting dates a year in advance. Let your core team know you expect them to attend these meetings fully prepared.
These meetings are where the rubber hits the road. They are where you measure your success in relation to your plan for the year, as well as the congruence of your results with the company’s longer-term plan.
At these meetings, your accounting resource should lead your team through a review of the reports and highlight all material variances from the plan, whether positive or negative. Adverse trends should be identified and placed before the team for further analysis and to determine corrective actions where needed. The action steps, individuals responsible and timing should be clearly assigned and a follow-up procedure should be established.
In my experience, if you have the discipline to follow this process, your business results will be like night and day compared to a ‘go-with-the-flow’ approach. I would even argue that it could be the difference between the success and failure of your business.
By the way, if you’re a smaller organization or even a one-person show, you still need to do this. It’s one of the reasons small companies become bigger ones.
Business success is rarely accidental. Without a strong planning process and the execution commitment that it entails, your company’s results may be hit or miss. What’s worse is that without a benchmark, you have no way of knowing whether you’re winning or losing. However, by following the process outlined above, you can improve your numbers and ultimately ensure that your business story is one of success!
If you are looking for a business partner to help you make sense of your financial numbers and share responsibility for your business success by developing ongoing business plans and conducting reviews, we may be able to help.
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The financial reports referenced in this post are basic to every organization. They are high-level reports and show periodically whether your company is winning or losing. However, almost all organizations have a need for more granular levels of information that are not part of the suite discussed. For example, a company offering engineering services will require comprehensive data on its people and projects. They will need to know utilization rates, whether projects are on time and budget, and much more. These critical data pieces are often referred to as key performance indicators (KPIs). To fully understand your business and improve your decision making, the right set of KPIs is absolutely necessary. If they already exist, they should be included in the monthly financial reporting package for discussion and, more importantly, action!