Institutionalize Change, Part 2
Why you need a business plan and how to get one
Last month's Best Practices column was about fostering the capacity for change in your organization. This month we look at a key tool for supporting a change-able business approach: The Dreaded Business Plan. When I sit down with management teams to focus on the goals and outcomes they want for their businesses, we often find we are missing some key data. Specifically, what have the goals been up to this point and how did the company fare? If there has not been a plan in place before, many teams struggle to see how planning will help going forward. So, Step #1 in learning how to change your company is to learn how to plan. Step #2, if there is no plan in place, start by defining the plan you have been following up until now.
You make a plan, so you can change it.
When managers get together to talk about planning, the discussion will often focus on the past challenges and current obstacles to change. Sometimes the room can get quite noisy with opinions or sullen with frustration. In either case, there can be too much "noise" in the room to turn the session into a productive discourse. However, when we can introduce the existing business plan as a baseline, the team can focus on the variances between the plan and reality. If there isn't a plan in place, then we create one.
The elements of business plans vary by company and industry, but there are some common elements. When trying to reconstruct a non-existent plan, stick with the basics and focus on the NOW:
- Explain the business model and the type of products or services you offer. You will be surprised how often this is the toughest part of the process. If your company lacks focus, this could become a long list. One way to make this task easier is to separate it into two lists: what you do now and what you hope to do in the future.
- Describe your Customer: who needs your services, who are channel partners, and where can you find these entities? This may be another disputed list. So if it helps keep the discussion moving forward, divide the list into Core Customers and Secondary Customers.
- List the key Trends in your market and for your customers. What changes or developments have caused you to focus on your business plan today? Divide these into two types of trends: Hard trends are inevitable and probably can't be reversed or redirected. Most technology trends are like this. Soft trends are cyclical and often reflect changes in customer preferences or economic conditions.
- Describe your existing Marketing Plan in a couple of sentences. It may be brief: "We have a website and we answer the phone," or describe a more methodical approach. Again, two lists may be in order here: What you have accomplished and What you hope to accomplish. A new website in progress is the latter.
- List recent (12 months') successes and failures. These should be things that are apparent to the management team and could include personnel changes, major projects completed (or imploded), broken revenue records (good or bad), or new skills or services introduced. Separate this list into the items that will matter for a long time and the ones that are short-term. A successful project that leads to more work is a long-term success. A bad month is a short-term failure.
- The hardest part for most companies (besides agreeing on what matters in items 1 to 5) is presenting a Financial Plan. Many companies only use financials to look backwards or see results. However, the real benefit of financial results is to develop budgets for the future.
Most management teams can outline Items 1 through 4 in under an hour. Having two lists for each item helps separate the universally agreed upon items from those items under debate. My recommendation is that if more than one team member endorses a point, put it on the list. It may come in to play when you are defining what your future business plan hopes to achieve. Discussing Item 5 may take longer if there have been a lot of changes, but companies that regularly have management meetings can knock this one out quickly too.
Understanding financial results poses the biggest potential challenge in some companies, especially if they are not in the habit of reviewing finances at the management level. In a future installment of AV Matters, we will examine financial statements in more detail. For now, let's embrace two important concepts that will help with Item 6:
A. Common Size your P&L statements and always compare to the previous period. Common-sizing is the practice of expressing all values as a percentage of the whole. In P&L statements, every income and expense is expressed as a value and as a percentage of total revenue. And when you are looking at a month, quarter, or year it is best to see the previous corresponding period alongside.
B. Trailing twelve months (TTM) is extremely helpful method to see results reflected as long-term trends. It is useful as a replacement for year-to-date (YTD). In TTM statements, the current month is viewed as the last month in a 12-month cycle. In other words, you can view short-term results in terms of how they affect an entire year.
If you practice the above techniques you will learn that direct expenses are best understood as a percentage of revenue. Eg: Direct labor will increase as a cost when you are busy, but does it increase proportionally to the amount of revenue? Overhead expenses can be tracked as TTM to see whether those values are affected in the right direction according to how overall business volume is trending. Rent is not going to change much, but if the annual cost of rent compared to revenue is declining, it could reflect more efficient use of space or perhaps a need for more space.
I think the biggest obstacle to business planning is the mistaken assumption that a plan forces you to make inflexible decisions. This is a fundamental misconception. The process I want to convey is that you can first define where you have been in order to narrow your choices about where you are going (or want to go). The Business Plan helps you define those goals in context of what you have achieved in the past. Knowing where you have been can help prevent you from defining impossible goals, but it can also show that you have more capability than you realize. Once your "as-is" business plan is complete, you can start the process of modifying it to reflect your goals and plans. Remember that the theme of this exercise is to create a culture of change. Your Business Plan may start evolving before the ink is even dry (or the data bits have been backed up). To put this in Integration terms, "Red-lines lead to As-builts".
Thanks for reading!
