Effective business planning is a little more complicated.

Of all the problems I’ve seen in troubled companies, the most common and dangerous is wishful thinking. Whether it’s a new business that never should have started, or a mature one that has run into unexpected circumstances, more businesses fail from lack of proper planning than anything else. It is usually excused by its victims as "undercapitalization", but more money is rarely the answer. In fact, it frequently is only a temporary cover-up to a problem rather than a solution.

Too often when I ask a business owner about expectations, the answer starts with "I hope..." :revenues he hopes to achieve, expense levels he hopes to accomplish, inventory turns he hopes to make, accounts receivable collection times he hopes will happen. Typically, none have ever been accomplished in the past. Rarely are historical revenue and expense relationships and trends analyzed. Even less frequently are considerations objectively given to "reasonable worst cases". If a financial plan is done at all, first a decision is made and then a plan is manipulated to justify it. Almost nobody knows what sales level they need to break even on a cash basis.

Most owners only do plans when their lenders require them, and have financial statements produced because they need them for their tax returns. This is unfortunate, because most businesses (even startups) have information available which, if analyzed properly and used objectively, can prevent most problems and increase the probability and degree of success.

WHAT CAN YOU LEARN FROM AN EFFECTIVE BUSINESS PLAN?

A few examples are:

1) What is my cash position likely to be a month or even several months from now?

2) If I have a seasonal business, what do I need to consider to cover the low sales and collection periods?

3) How much money will I have to provide for inventory?

4) How much will be tied up in accounts receivable?

5) How much money do I need to invest or borrow to properly operate my business or fund a particular project?

6) How will various loan structures affect my cash position at various times?

7) What level of sales do I need to break even on a cash basis?

8) How will various payment terms offered to customers affect my cash needs?

9) Should I buy, or make a particular product?

10) How should I price what I sell?

11) How much should I bid on a particular contract?

12) Should I start a new business or buy an existing one?

YOU CAN'T GET GOOD PLANS FROM BAD RECORDS.

Proper planning starts with detailed, complete and accurate historical records:

1) If you don’t know what records you will need for planning purposes, you are unlikely to regularly maintain information except from your checking account, invoicing and payroll records. You should decide what records will be needed based on what you want to investigate or track.

2) Most owners assume that financial statements and reports are standard. They aren’t. If they are going to serve as anything except as a basis for tax returns, they need to be tailored to your particular business and how you intend to use them.

3) By the way, if you’re considering starting a new business, useful records or statistics are available from industry sources, or from consultants or accountants who have worked with similar businesses.

See our Measurement & Evaluation Service.

WHAT DO YOU DO WITH ALL THE DATA?

Once you have the proper data, it needs to be thoroughly and objectively analyzed to determine important relationships (many of which are not obvious) between various sales levels and associated cash needs, what level of sales can be reasonably expected (not wished), and what happens if you are wrong on your sales plans in either direction. Everyone knows that a business will suffer if sales are too low, but it can also be hurt by sales that are too high (cash tied up in higher inventory and accounts receivable).

WHAT DO YOU DO WHEN THE PLAN IS F1NISHED?

Effective Business Planning is never finished. It is a continuous process that must be reviewed and modified as actual data replaces planned results and as conditions change. Periodically, you should compare your last set of basic assumptions with current ones and adjust the plan to reflect changing reality. It won’t always tell you what you wish it would, but you’ll be surprised how well it can prevent unpleasant surprises if you do it right, pay attention and act appropriately.

If you don’t have a current business plan, do it now. If things aren’t going as well as you’d like, a good plan can help. If business is great, it can help you stay out of trouble.

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