Most businesses need to carry out some longer-range planning (usually three to five years) in order to place shorter-term action plans into a broader strategic framework.
The direction for your longer-term action plans can be focused by such questions as “Where would I like the business to be in three (or five) years?” and “What do I want to be doing by then?”
The various business time horizons can be illustrated using a triangle:
At the longer-term apex of the triangle you focus on broad concepts, strategies and direction. At the short-term broad base of the triangle, attention to day-to-day detail, especially with respect to cash movements, is the order of the day.
- Need for the longer view
Why should you look beyond one year out in your planning?
Probably the most important reasons are very practical ones:
- It is highly unlikely you can achieve everything you want from your business in 12 months
- Your investment, or at least part of it, will in many cases involve plant and equipment that has a payback period of two to three years, thus requiring you to think and plan beyond one year.
The five stagesEdit
How then does this longer-term planning process work?
It is easy if you see it as a five-stage process that is continuous. Progress needs to be reviewed and the planning direction adjusted as appropriate every year.
The five stages are as follows:
Day-to-day management of your businessEdit
Many small business managers believe they prepare business plans, budgets and cashflow forecasts mainly to keep their bank manager happy. While there may be a requirement in this area, the primary use of these important planning tools is to help you manage your business on a day-to-day basis.
Your projected income and expenditure and cashflow budgets are the tools that you use on a regular basis to measure if your business performance is meeting planned expectations. They will confirm for you on a regular basis that you are heading in the right direction. To run well, your business demands that you look and plan ahead and regularly monitor the important performance indicators.
What are the key indicators?
- 1. Level of sales
Sales contribute a gross margin, which in turn pays for the fixed costs and hopefully leaves a profit. If sales levels fall then the overall margin to pay these costs is less.
- 2. Gross margins
If you achieve lower than budgeted margins (perhaps because of offering discounts) you again have less to pay fixed costs.
- 3. Monitoring fixed and variable costs
Make sure they do not creep upwards over time. Continually question if you need to spend money on that particular cost item. Regularly review key performance indicators.
- 4. Debt collecting
Next to cash the money people owe to you is the most liquid asset you own. Make sure your cashflow forecast is not thrown out because you are slow to collect what is owed to you.
- 5. Stock control
Your business will probably need to hold stock to maximise the level of sales. Make sure you do not hold too much.
Potential problems and opportunitiesEdit
Regular availability and analysis of information relating to the key performance indicators of your business will allow you to identify potential problems and opportunities. In turn, this information will allow you to plan future direction better via developing positive management responses to these issues. Corrective or reinforcing action could take many forms depending on the nature of the problem or opportunity.
Some examples are:
- Employing extra sales staff when a competitor’s failure creates a gap in the marketplace
- Changing suppliers when raw material quality decreases
- Refinancing to reduce interest costs when a loan falls due
- Negotiating a more flexible agreement with staff to achieve productivity gains
- Introducing a new stock control system to increase stock turns and improve delivery times.
The important point is that sensible management decisions cannot be made in any of the above examples if you, the manager, do not have access to information on the key areas of your business that is relevant, timely and accurate.
Be warned, however. You will not be able to pre-empt all the problems that may beset your business. When the unexpected does occur, the secret is to be in a position to react quickly and positively with decisions based on factual information.
Planning: present and futureEdit
It goes without saying that unless you plan what your business is going to achieve it is difficult—if not impossible—to manage it effectively. It is therefore good practice to get into the habit of regularly thinking about the future of your business and to write down your key objectives and how you intend to make them happen.
This information can then form the basis for developing your performance indicators that become the benchmarks for measuring the daily, weekly and monthly health of your business.
One final reminderEdit
Business planning has to be an on-going exercise if it is to reflect the dynamic, ever-changing nature of your business. So recognise that as your business grows and changes, you should return to the planning process at regular intervals.