The ABC's of Business Planning

Every business should have an Annual Business Plan that includes goals for the year that are backed up by your desired financial results. Goals can vary from business to business, e.g., increase sales by 20% for a certain product or service line, open a new location as part of a longer-term scaling strategy, increase marketing spend to drive more prospects to your store/website which will hopefully convert to sales. Whatever the goal is, you want to build a plan that will help you take the right steps towards achieving that goal. Additionally, you want to model out what it's going to take to achieve these goals so you can establish a budget for how much you want to spend which will help you manage your cash flows.

Building an annual business plan is a huge achievement. Just figuring out what you want the goals of the business to be takes much thought and blue-sky thinking about what is possible. Now, this is where the plan typically starts to collect dust for most businesses; the plan is set and when the year starts you are too busy with managing the day-to-day operations of the business to stop and think about what you're doing all this for in the first place. This is where the ABC's come into play.

1. Appraisal

   1. Appraisal is the process of reviewing the actual business performance on a periodic basis to assess delivery against the plan.

      1. This can take the form of Monthly or Quarterly Performance Reviews in which Financial Statements and Key Performance Metrics are reviewed, and strategy is discussed to understand any major changes.

   2. Here are some common performance topics that might get a lot of attention:

      1. Top-line revenue: Sales sets the course for everything else. I.e., is the demand for our product or service strong and growing in the right direction.

         1. Sales growth is the most positive result a business experiences but can also be very stressful since you now have some important operational decisions to make (ensuring quality remains high, do you invest in new products or marketing areas, do you need to higher more employees to support the growth and if so, do you have the resources in place to manage staff).

         2. When reviewing actual revenue results, try to reflect on the sales strategy that you built your plan on. Is the strategy working or is it something else driving the achievement of the sales target such as seasonality, a competitor bankruptcy, or some macro trend that you did not factor into your plan? You need to know the answer to this question so you can decide where your capital will be deployed.

      2. Operating Expenses: Ensuring the operations of the business are running efficiently is key to delivering strong bottom-line profitability.

         1. During the building of your annual business plan, you would've established a baseline budget for expenses.

         2. Part of your appraisal process should be an extensive review of operating expenses, which are the day-to-day costs of running the business (Office supplies, Advertising, Subscriptions, Licenses & Fees, Accounting and Legal fees, Utilities, etc.).

         3. You should seek to understand the cost drivers (why do you need to spend money on a certain thing) and identify areas of wasteful spending that is not truly necessary for running the business, or that can be replaced/absorbed into an existing process.

         4. Don't focus just on internal factors, also look at external market factors, i.e., inflation, market trends, supply chain, etc.

         5. Lastly, you should start to figure out cost run-rates, i.e., projected annual expenditures. You can then start to zoom in on estimated profitability trends and compare that to what you had initially planned for the year.

      3. Cash Flows: Cash management is arguably the most vital exercise for every business since cash is what keeps the business solvent (able to pay its bills) and what makes the business valuable (cash generation). Cash monitoring should happen each and every day to ensure that sufficient funds are in the bank to operate the business, but in the context of the annual plan, you want to think about overall cash that the business is delivering and how you will use that cash to grow the business as well as return some of that cash to the owner(s) of the business.

         1. Working Capital - this is the total amount of cash you have tied up in the business, for example, Accounts Receivable, Short-term loans, Inventory, etc. The key here is to make sure you are converting these items to cash in a timely manner so that cash can free up for the business.

         2. Investments - the thinking around investments is having a strategy for how you will grow the business and/or reinvest cash back in for major repairs/maintenance. The discussion should focus on Capital Spending in these areas and there should also be an understanding of tax strategy behind these big expenditures to see how certain deductions can be accelerated in the current year.

         3. People - "People costs" are typically one of biggest expenses for a business, i.e., wages for employees or contractors that work in the business. A discussion on cash management should always consider how compensation will change year-over-year in order to keep up with market trends. Additionally, consider workforce utilization when reviewing actual expenses to make sure decisions on hiring come out of meaningful analysis where you are able to identify a gap that needs to be filled.

2. Business Input

   1. Reviewing the financial figures for the business is just the start of effective business plan management. We need to understand the underlying story behind the financials which requires input from the individuals running the commercial and operational aspects of the day-to-day business.

   2. The Business Input stage is all about ownership - who owns the delivery of the business plan as well as making sure the goals are understood and accepted by all employees.

      1. The owner or managers of the business should determine the right course of action to solve a problem encountered by the business.

      2. The appraisal process in step 1 should provide some areas where the business leaders should focus, for example, missed sales targets, overspend in a certain expense category, or even under-utilization of people and resources.

   3. In a small business, usually the owner wears all the hats, and the biggest hat will be Sales. Selling your products or services drives revenue.

      1. A typical conversation with the business owner on this topic would be focused on marketing activities, new clients obtained, seasonal slowdowns, etc.

      2. At the same time, expenses start to become highly visible when sales are moving in the wrong direction. You should come out of the appraisal process knowing which expense categories are eating up too much cash and have a view on where you can streamline activities across the business.

   4. Judging Performance

      1. Consider assigning Cost Centers to specific individuals that are accountable for managing specific costs.

      2. For Revenue or Profit, you can assign a Profit Center to specific individuals which would hold them accountable for both revenues and costs in that specific area of the business.

      3. Having these "Responsibility" measures in place allows for more engagement from the business leaders during the Business Input process and ties back their delivery to the overall organizational goals.

   5. In conclusion, the Business Input stage should act as more of a continuous process throughout the year so that the business leaders understand the actual progress towards the plan goals, and know what part of the strategy they need to focus more effort on or possibly even change the strategy...this is where the Change Management phase comes in.

3. Change Management

   1. At this point, the financials have been reviewed, and the business leaders have provided the background of what happened in the business for the period.

   2. There will most likely be both positive and negative takeaways; this is where business plan monitoring really ADDS VALUE. A business plan is only as good as the follow-up and real-time assessment. This allows you to take action now to make sure you make the necessary improvements that will help you achieve the plan. In other words, don't wait till the end of the year to say "What If" we would have done this or that.

   3. You've reviewed the numbers, you've gotten feedback from the business, now it's time to take action and keep the business plan on track:

      1. Sales

         1. Did you meet your monthly/quarterly Revenue goal?

            1. Answer = YES: Identify what went well. Is it seasonality? Did you increase your customer base? Was it higher volume?

            2. Answer = NO: Identify what didn't go according to plan (same ideas as above) and come up with a strategy to get back on track.

         2. Sometimes you might have to rethink the strategy if you believe there is something structurally broken in the business model. This could be the result of a new technology or market trend. If this is the case, decisions must be made to invest in new technology or a marketing approach that can help the business stay competitive. As a result, the sales goal for the year might not be feasible any longer because the investment in these new areas will take some time.

            1. If this is the case, update your annual plan with your new estimates - call this "Latest Forecast v1." And so on and so forth for each quarter.

      2. Expenses/Cash

         1. Don't overanalyze this one - cash flows will either be better than expected or down versus plan.

            1. If better than expected, make sure you keep plenty reserved in the bank to manage unexpected events that might come or take advantage of opportunities that may arise. The closer you get to year-end that easier these decisions get but you want to make sure you have the flexibility to make these decisions.

            2. If cash is running low, it's time to get laser-focused on expenses. Expenses should always be a focus, even in times of high profitability, but it jumps to the top of the priority list when cash reserves are running low. The appraisal process should've captured Actual vs. Budget for the various expense categories so start there and address the discretionary spending first, i.e., expenses that are not necessary to run the day-to-day operations (Ex: employee perks, advertising, non-essential travel, meals, etc.)

      3. People

         1. Time to refer back to the Business Input stage. Which area will benefit the most from adding headcount to? Sales, Operations, Administrative? The Input from the Business Leaders should have provided this answer.

         2. Make sure that the additional employee(s) you plan to add will free up time for someone else to create more value, or that the new employee will fill a key gap you have identified in the Appraisal process and confirmed from the Business Input.

         3. When deciding to make a new hire, the key thought should be on the Return. The new hire should return something back to the business - this can be greater flexibility, more efficiency, stronger sales, etc. Don't just blindly hire new employees without thinking about the strategy.

Follow these ABCs to deliver your business goals and keep your organization moving in the right direction.