Driving better business performance doesn’t happen without a vision and a plan. In this article, I’d like to give you the secrets of a business performance expert about how to drive your business to higher performance. What I’m giving you are concepts and principles that can be applied to any business regardless of size or industry. These secrets are learned from over twenty-five years of experience applying them in hundreds of companies, each in their own way, customized to who they are. These companies are now expanded by many millions of dollars in sales and in profits. These secrets can do the same for you!
First, a Few Definitions
When I say Driving Business Performance I mean one of several buzzwords you may know well such as Enterprise Performance Management (EPM). This is synonymous with Corporate Performance Management (CPM) and the simple concept of a company vision backed by a specific action plan for operating the company. CFO’s and other participants in the process may describe it as Financial Planning & Analysis (FP&A).
Your Company Information
The information you have in your company may come in two categories. Both categories are needed for you to drive your business success. The raw information your information systems provide may best be described as business intelligence. Business intelligence is no more than basic information creatively constructed to give you the next step: Higher value information such as business insights, also known as Business Analytics. For example, a recent study of one of my client’s revenue streams over time yields a visual picture of how their revenue rises and falls each season, and each year over the last few years. This is no more than business intelligence. By marking and applying price increases to the timeline, combined with the actual timing of the addition of labor to the timeline, we can gain insights into how well our combined efforts impacted the actual revenue increases. This leads to judgments of our own ability to reach our goals under the current strategy and action plan. This example means the insights lead to scoring our effectiveness in growing revenue and evaluating more new strategies to improve upon it!
Driving your business performance always begins with strategic planning. This is as simple as management deciding where the company will go in the future. Solid management strategies include the entire management team in creating this strategic plan so that each member of the team owns their respective slice of the plan and supports the other team members in accomplishing their plans.
Strategic planning is always followed by the preparation of a plan of action to accomplish the goals and strategic plan. The financial team often prepares this plan of action, with the collaboration of the entire management team, and subject to revision, discussion debate and refinement before becoming a firm plan of action.
This plan of action often involves every component of the business. It includes the many business rules in practice in the business as it is today, as it mirrors your business intelligence. I’ll give you some examples in the following few paragraphs for better illustration. The business rules are different for each group within any company. They represent the behavior of the company revenues and costs unique to each group.
The marketing portion of your plan of action will include the input of your marketing executives and/or staff. They are often tasked by management to prepare the marketing activity plan required to meet the branding desired and the lead generation levels required to support the sales goals. Business rules for marketing often include vendor provided quotes for each itemized marketing activity plan component along with anticipated responses by plan component and for the entire plan. Other business rules may use your past response rates to predict future responses to larger and wider marketing plan activities.
Care is given to balance marketing costs with target achievement to make the goals of the strategic plan. It is common to find more resources are needed to reach lofty goals. It is also common to find the goals are too easy to reach with existing resources. Management should use flexibility and judgment about applying more resources when needed versus lowering goals to use fewer resources.
The sales portion of your action plan often includes the input of your sales executives and/or sales staff. They are tasked by management to convert the leads projected by the marketing team into sales, with a specific goal of reaching the sales targets established in the strategic plan. Business rules often use past lead conversion rates to establish future sales volumes for each sales staff member. Rules may vary for inside sales versus outside sales as conversion rates will always differ. Your existing and planned number of sales staff will also play a role in your business rules within your action plan. The insights to watch here involve the upper limits of your sales team’s abilities, given the several constraints within the business rules. For example, what is the maximum sales volume and dollars you can accomplish with your existing sales team? What is the impact of improving their close rates? What is the marginal impact on sales? On costs? On profit? Of adding another sales staffer? Knowing this can impact your strategy for using your sales team to deliver the best for the company!
The revenue portion of your action plan may include the input of your sales executives, but will also involve your operations executives should you have a significant labor or materials component to your business. Business rules here are often simple and involve your list of products and services, the prices and volumes for each. Often, companies include cross-sales conversion rates, renewal rates and more, to predict the desired effect of sales that radiate across customers and across products/services. The insights to gain here involve your sales radiation rates. How much of the sale of one product/service impact the sale of another? What are your average sales per customer? Knowing these insights can lead you to greater strategies for cross selling products/ services. It can also lead to strategies for selling more to each customer.
The cost structures of your action plan are very different for cost of goods sold versus your administrative costs.
Cost of goods sold cost structures should always be automatically calculated from your sales volumes using your historical rates of relationship. For example, if you are a labor-intensive company, and in the recent past your labor costs indicate a specific ratio of costs to revenue, you should include this ratio in your business rule. Should you have widely varying ratios across products and/or services, you should become more detailed in your preparations to reflect costs parsed to each product and service.
Administrative cost structures always have business rules. Due to the varying nature of each administrative expense, the business rules change for each administrative cost line item. You will need to get creative here, but trust the method, as all costs are predictable in some way. Administrative labor, often the biggest administrative cost, is the easiest cost to predict.
Insights in these costs structures are many. For example, if you determine your ongoing cost of goods sold ratios to sales, you can find strategies to lower your cost of goods sold expenses. If you determine your administrative cost growth rates relative to your sales growth rates, you can better control your administrative costs. Overall, these insights mean you can build a predictably profitable and highly repeatable income statement.
Customer intelligence is a highly important factor in your action plan. The more you know about what your customer can or can’t do and at what price, and at what service level, the more accurate you can set your plan of action. This means the better you know your customer, the more you can impact your company performance by projecting more accurate sales, more accurate costs and more accurate business rules of how you are conducting your business in the future.
Your plan of action is also considered a forecast. If you create only one forecast, your future results will be measured on a pass-fail basis, as you will either exceed or fall short of your forecast when your future actual results are reported. Often a better practice is to keep several forecasts, each a specific scenario, on hand to provide you with a best case, worst case, likely case and any other case you can think of. Doing this will prepare you in several ways:
First, a best-case scenario can be your target for a high performance company. A good way to go!
Second, a worst case scenario will prepare you by giving you the insights into what decisions you need to make if business conditions sour. Knowing what to do in advance will give you a ready-to-go action plan that does not waste any time in implementing and turning around a bad business environment should it happen.
Third, other scenarios will give you insights into the upper and lower limits of your current resources. This means many things. For example you should know your breakeven sales in advance. Knowing this can allow you to set sales targets you know will produce a profit. It also allows you to immediately indentify breakeven sales and permit your real time reaction to business conditions and prevent losses from occurring. Preparing other scenarios can also reveal the upper limit of your labor force’s ability to deliver your products and/or services. This means you can easily manage high growth by taking a just-in-time approach to adding labor to your workforce. Experience shows that hundreds of other highly valuable insights can be gained from evaluating scenarios.
Driving business performance should be high on your management priority list. The formula to do this is simple, but must be adapted to your company:
- Prepare your strategic plan
- Use your business intelligence and business analytics to prepare an action plan
- Look in all areas of your business for insights
- Let your insights drive strategies
- An action plan is also a projection
- Prepare several scenarios
- When business conditions turn tough
- Use your insights to react quickly with a predetermined plan
- Avoid losses
I invite you to contact me if you have questions!
Rodger Stephens, CPA, CGMA
Prize Performance LLC is a consulting firm specializing in accelerating business performance for small to medium sized businesses. Contact Prize Performance LLC today to take your business to new places!