Solid Business Planning Drives High Performance
Every company that’s ever been greatly successful has included solid business planning into their management’s activities as a means to drive their future performance. Every company should be doing it. Whether your purpose is to gain funding, impress investors or to drive your own business forward profitably, you should be doing it as a key part of managing your business. I’ll be describing business planning in this article in the context of driving a bright and profitable future business performance.
Business planning is often described in many different ways. You may hear terms like budgeting, planning, forecasting, projections and many other labels. The purpose of business planning is to take the vision of management for the future of the company and create an action plan of how to carry out that vision. This may sound very simple, however, successful planning requires different plans for different future conditions, all prepared at an operating level with resulting financial performance predictions.
This means if you are operating a movie theater, you may want to plan at an operational level such as number of attendance each night. Doing so will give you a view into whether your planning exceeds your resources. For example, in your plan, are you overbooking the number of seats you have available for moviegoers? If yes, your plan is overly optimistic and unachievable.
In another example, if you are in the consulting industry, you may want to plan in terms of billable hours, as your actual revenue is derived from consultants billing clients in hours. Doing this will give you a visibility into the number of consultants on your staff. It will also give you the asso
ciated hours each consultant spends on clients. You will easily see when your client billings exceed your capacity and when additional consultants are needed for hire.
Every business needs to plan, whether just beginning or if you’ve been in business for decades, the planning process remains highly important to achieving your desired business future.
Business planning is highly important for several reasons.
How to best use the company resources to achieve a future vision is not left to chance, conjecture or guessing. Business is too complex for that. These weak attempts lead to misused resources and wasted time to reach company goals putting you at risk for exhausting cash, poor competitiveness and lost opportunities. A detailed plan is the best way to determine exactly what resources you need, when you need them and your ability to afford new resources as they are needed.
You can anticipate when you need additional resources and become proactive to acquire your needed resources on your desired time schedule. Doing this allows you to become nimble as a company and easily adapt to rapidly expanding demand.
You can see the financial impact of your planning and determine if your plan leads you to financial success or financial ruin. Knowing this in advance of committing your resources can save you from massive losses, and alternatively, lead you to massive success!
Alternate business planning, often described as scenarios, allow you to see the impacts of slight changes in your businesses on your financial performance. This allows you to visualize the impact of your decisions under evaluation before you commit your resources and put cash at risk. Examples of this include planning the impact of different pricing schedules on your customer volume, sales and profitability. Another example would be to evaluate the impact of different sales compensation plans on your profitability.
Better business planning means planning your operating activities in conjunction with your financial statements.
Your business planning working canvas begins with your financial statements. This means the Balance Sheet, Income Statement and Cash Flow. Each statement will get different business planning built around it of an operational nature. Here’s a brief on how each statement can be expanded upon to get your desired plan.
The income statement will get most of your operational plan built around it. Expect most of your planning time to be spent on your income statement. Projecting each line item may require a different set of calculations, also known as business rules, which govern how the revenue or cost estimates will take place. For example, business rules governing your revenues include your price schedule, sales volumes and sales dollars. Many companies today find their labor to be the largest component of Cost of Goods Sold. Business rules for labor often include individual employees, pay rates (or salaries), payroll taxes and benefits and time worked. Your administrative expense section will likely be an assemblage of your known or expected expenses under each administrative line item. When done, the operational information becomes your targeted performance goals for each of your departments.
Your balance sheet planning activities are most likely centered around your cash accounts and debt accounts. It’s expected you will project your capital spending, your loans, your cash inflows and outflows. This planning will be custom to your organization, so you ca
n expect your operations planning to impact projected cash and your capital and financing activities to carry over to your debt and debt service.
Your cash flow statement will be your cornerstone for translating your operational activities into cash inflows and outflows. It will also project your cash inflows and outflows for investing and financing activities not accounting for in your income statement. These figures planned from cash flow will direct the upward or downward movement of your balance sheet balances for cash, debt and other balances.
You should be planning with an appropriate time frame in mind. Most companies plan for five years into the future with each year being planned by the month. This allows for gradual adjustments in your business operations planning during the year. While this is normal and usual for most companies, there are exceptions for some industries such as a weekly plan for some retail industries.
As time goes by, you should update your business planning for the ever-changing conditions of business. This is normal to expect the change. You should be keeping up by readjusting your planning.
Many software systems exist to perform business planning activities. Software companies that offer this functionality include Oracle Hyperion planning, IBM Cognos TM1 and others. Companies with simpler business models can plan using spreadsheets. These software systems work in a way where your business model, and all it’s business rules can be assembled in a way that automates your business planning. They are very comprehensive and can accommodate the most complex of businesses and business rules.
Business planning is highly important. It allows you to direct your business future with a plan for what to do.
- Business planning uses your resources well
- Reach your business goals with less wasted time and money
- Be ready to add resources when they are needed
- Get a preview of your financial results
- Using scenarios lets you evaluate alternate decisions
- Plan your operations, but translate operations into your financial statements
- Update your plans as time goes by and business conditions change
- Software systems are available for business planning
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!