Entrepreneurial Tip Corner: Business Planning and Management Made Easy
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What is a business plan?
A business plan is a comprehensive vision of the future goals and objectives of the business, and a roadmap of how such goals will be achieved.
Why should my business have a plan?
Have you ever heard of an NFL coach being interviewed just before an important game say that he doesn’t have a game plan? In order to win the game, he must have specific strategies ready to be utilized and backup plans ready to be deployed if the primary strategy fails. Remember: Failing to plan results in planning to fail.
Where do I start?
First you need to really understand your business. What makes it tick? What makes your business unique? How do you differentiate your business from its competitors? What are the “best practices” for your industry? Is your business utilizing the “best practices” on a regular basis? Identify the strengths in each area of your business on which to build and areas within your business to improve or upgrade. Keep in mind that in order to positively differentiate your business from your competitors, you need to continually strive for improvement in your business processes.
Set goals for your business that are realistic, reasonable, challenging and attainable. Goals should be established for the short-term (next 12 months), the intermediate term (the next two years) and the long-term (next 3 to 5 years). You should involve each department manager in this goal-setting process to ensure that managers share your view of the future of their department. Each manager will be much more likely to follow a business plan for which they were asked to provide and contribute ideas, goals and other input.
Plans of Action
Within your business plan, you should develop programs, methods and plans of action. These plans should include the requirements for achieving the established goals. You should delineate the person(s) responsible for implementing each plan of action and examine how the different plans of action tie together to formulate the overall plan. Make sure that each of the sub-plans are compatible with each other and the overall plan. If the plans are time sensitive and/or have distinct phases, define such timing and phases clearly and determine who will take primary responsibility for each phase. Define the beginning, middle and end of each phase.
Driving the Process
I can’t tell you how many companies I have seen that formulated a good business plan which ended up gathering dust on a bookshelf in the CEO’s office. If you take the effort to create a detailed business plan, delegate the implementation to a responsible manager who is very organized and time-conscious. All other managers must be made aware that this person has the authority to drive the process. The CEO should not micro-manage this process, but should encourage this individual to have regular meetings with the other managers to determine their respective progress and whether or not they need additional resources to accomplish their set of goals in a timely fashion.
Costs of the Plan
Every business plan has various costs attributable to it. There are the Financial costs that consist of funds which must be expended for improvements in plant, property and equipment, and infrastructure. The cost of firm capital should be taken into account, as well as the opportunity costs of alternative plans. This will assist in crystallizing the capital required for specific plans versus alternative plans. There are the Human Resources costs, which consist of the efforts that individuals will put into the implementation of the plans, as well as the opportunity cost of investing these efforts into such plans versus alternative activities. Finally, you should consider the cost of Time, which not only accounts for the amount of time that managers will need to devote to the implementation of the plans, but also the related opportunity costs.
Prior to the implementation phase, delineate the benchmarks for interim progress and earmark deadlines. You should also create metrics to measure strengths and target improvement areas. As CEO, you should have regular meetings with the project manager to ensure that the business plan is on track and stays on track. Remember the famous line of former NYC Mayor Koch, “How my doing?”
Once you have the business plan well under way, you should turn your focus to business management. Establish a detailed monthly budget that can roll up into a quarterly and annual timeframe. Utilize an established reputable accounting software package that can easily generate a detailed monthly P&L statement. These P&Ls should be compared to the prior month and the same month in the prior year, to account for potential business seasonality. The P&Ls should also be compared to the detailed budgeted numbers and significant differences should be investigated (both favorable and unfavorable variances). You should take note of positive and negative trends and adjust your projections accordingly. You should also prepare monthly balance sheets and cash flow statements and compare these to historical and budgeted numbers to better understand your business liquidity, leverage and cash conversion cycle.
Be aware of what your break-even point is in dollars of revenue and understand the relationship between fixed and variable expenses on your break-even analysis. You should also understand what your marginal cost of supply is and when it might be time to reduce production, if you create a product.
Business planning is a critical component of every successful business. Running your business without a plan is comparable to trying to drive cross-country without a map or GPS. Benchmarking your business against your competitors is important so that you understand your business strengths and weaknesses. Actively managing your business so that you know the monthly results of your business operations and key trends on a monthly basis is crucial to be able to make better informed decisions about the direction your business will take. Understanding your break-even equation and the relationship played by both fixed and variable costs is equally important to understanding how to improved your business. The bottom line is…the bottom line.
--Michael Herz, CPA, MBA