Posts Tagged ‘assumption’

More Heat Less Chill

Tuesday, July 26th, 2011

Although the weather’s changed a bit since my last post – Don’t Let The Summer Heat Cause A Winter Chill – we’re still in vacation season and it’s still hot.

But we’re also well into the third quarter of 2011 and heading for the annual business planning; budgeting; whatever you call it, process for 2012.

And I believe that process is the engine that drives your growth. So in the last post I talked about 2 things business owners should be thinking about now. Here are another 3……

1. The Opinion Trap.

The planning process has to be completed by a specific date. Often that’s set to enable Finance to use the output/numbers to produce projected financials for the upcoming year(s) while still completing their regular work. 

However vacations, short work weeks and long Holiday weekends and a more laid back, summer mind set can result in the focus being on doing the things that are urgent rather than the things that are important. 

So, even although the deadline is well known, the process is often started later than it need be. And that puts the value of the output at risk.

Why – because the logical thinking required to make the process effective declines in direct proportion to the increasing proximity of the deadline. It becomes more and more about getting it done on time and less and less about getting it done right.

When that happens the basis on which key assumptions are made is less likely to be well collected and considered data and more likely to be someone’s opinion. And by definition an opinion is a subjective belief, often the result of emotion.

2. Who’s Baby Is It Anyway?

The owner must take ownership of, and remain the champion of, the planning process. If the perception that anyone else is driving it is allowed to take hold, the motivation for doing it thoroughly will suffer.

If, for example, the accounting department are seen to be driving the process it will be seen only as a number crunching exercise. And people will treat it simply as something to be completed as quickly as possible and get off their desk.

The only way to get everyone involved, engaged and buying in is if the owner demonstrates the importance of the process by leading it personally.

3. Keep It Together.

I talked to an executive recently who was busy completing annual expense budgets. This at a time when many of the people who had the detailed knowledge required to complete the schedules thoroughly were on vacation.

They told me that budgeting had been separated from the creative, thinking part of the planning process so that the Finance department could meet their internal deadlines.

But I’ve also seen other variations of this in the past. A favourite with companies which have enjoyed a leadership position in their industry for some years, is to start by producing the numbers – revenue, bottom line etc. – and then develop action plans and programs to fit them.

That’s as bad as a company that completes the creative, thinking part of the process then becomes distracted by tactical issues, allowing a lengthy period of time to pass before completing the numbers. Valuable momentum is lost and the participants are left to wonder if anything is being done with their input.

4. Last Words.

It’s not enough just to have a planning process and to complete it.

Like any other engine, if you want to get maximum output from it the parts must work smoothly, without friction, and you must use a high energy, premium power source/fuel.

Otherwise it’s unlikely to carry you anywhere near to where you want to go.

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Have You Ever Seen a Business Plan that Worked?

Saturday, October 3rd, 2009

Well have you? Personally, I’d say “Yes, but….” But what you may ask? Well, firstly the plan wasn’t written from the back forwards. In other words it wasn’t written as a result of a statement like “We need to get $X thousand/million from the bank/lenders.” Secondly, it wasn’t written because someone (I hope it wasn’t a consultant) said “A company of our size should have one”. Thirdly, once written it wasn’t put on the shelf and forgotten for the rest of the year. And, finally, no one expected things to happen exactly, and I mean exactly, the way the plan predicted.

A plan that starts with a look at what’s going to happen in the industry and then at how the competition are positioned, helps highlight opportunities and threats. Combine this with an honest assessment of the company’s own strengths and weaknesses and you’re on the way to developing a fairly logical strategy. Using that to develop three financial forecasts – a “best case”, a “worst case” and a “most likely case” helps keep people’s feet on the ground. It also helps if the assumptions made in each case are carefully recorded. Compare this approach to starting to write a plan knowing what the final financial numbers have to look like and you can figure out, fairly quickly, which of the two plans is most likely to “work”.

A good reason to write a plan is to figure out the answer to a question – like “What would we have to do to increase our profits in each of the next 3 years?” People will be more motivated to approach the process in a logical, thoughtful way than if we’re doing it because “we should have one”. Part of the answer is working out what the company will have to do – for example buy plant and equipment, add people, and change the way things are done. Those things would probably be written down somewhere anyway – with, once again, all of the assumptions made – so why not put them in a plan? If the money we’ll have to spend and the people we’ll have to hire are related to the increases in sales they’ll help to generate, it becomes easier to see them as investments instead of expenses.

Plans that work are dog eared. Why? Because they’re pulled out regularly and reviewed. During the planning sessions the “big” goals – increase sales by $500K – are broken down into smaller actions – introduce a new product, hire new sales people. Action plans – with SMART (specific, measurable, attainable, realistic and time related) objectives – are developed and written right into the business plan. Someone is designated as the “champion” for each action. She/he is responsible for getting it done. It’s easy to check, for example once a quarter, whether well defined actions like these have been completed. At the same time actual developments in the economy, industry and marketplace are compared to the assumptions and the strategy updated. Financial results are compared with the forecasts and adjusted if necessary. These are “no blame” sessions – if there are performance problems with some individuals they’re dealt with separately – just an opportunity to update some projections with reality.

Why aren’t these guilt filled, finger pointing sessions? Because the people who did the planning know that they can’t predict what the weather will be tomorrow, what the stock market will do next week or how their favorite sports team will finish the season. They measure how well their plan has worked by how close their estimates came to reality. If any of us could exactly predict the future – well, I wouldn’t be writing this and you wouldn’t be reading it.

I tell myself that one of the advantages of getting older (there have to be some surely) is that you gain a lot of practical experience – both good and bad. A couple of the things I’ve noticed, along the way, are related to business plans. Firstly, the companies that I’ve been involved with which had good business plans always performed better than those which didn’t. Secondly, those companies hadn’t written their plans to meet some predetermined outcome; they’d written them to help answer key questions affecting the future of the business. Finally the owners had a realistic approach to forecasting the future and, most importantly, they made their plan come to life.

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