You may just be glad to have made it to the end of the year for a break, but if the holiday season allows you some time to breathe and reflect, it’s a great time to review your business performance for the first half of the year. How are you doing compared to your business plan (because you have one, right?) and for the same period last year?
If you sell inventory you may literally be counting stock at the year’s end and trying to move slow moving products with sales and discounting, but taking stock and asking questions is a more holistic process of looking at the reasons behind your business performance. What has gone well, and how do we keep doing it? What mistakes do we need to put safely behind us, never to make again?
If you don’t have a business plan and a look back at the year doesn’t fill you with joy, now may be the time to introduce some structured planning. A business plan is a written document that sets out what you plan to do in your business, and how. You may start with a mission for the future, and use your plan as a map to reach your goals.
Business plans can vary in length, structure and content depending on the type of business, stage of business, and what the plan is being used for. If you are in an established business and just want to set some stretch targets for you and some key employees, you may have a one page high level plan that everyone understands.
If you are using your business plan to raise funds from the bank or investors, or are in a period of significant change or growth (such as adding new divisions or products), your business plan may be a detailed document of 30 pages or more. Business plans are often talked about at the start-up phase, particularly if the business owner seeks funding. Business plans are important throughout all stages of business, with only a subtle difference in the context.
A start-up business plan will need to demonstrate the potential of a business without having past performance as evidence. Therefore, it relies on information such as the potential target market, a marketing plan to reach that market, projected sales, pricing and profitability. In the first few years of a business this can be hard to estimate, and looking back at actual performance vs the plan may not be all that helpful, except in creating a more realistic plan for the next year.
For an established business that has a proven concept and existing customer base, the business plan will usually build on past performance. You may have a target to increase profit by 10%, and then look at areas in the business that will help you reach it, looking at the resources you have or need to acquire. This may include your marketing strategy and spend, online enquiries, sales conversion rate, units sold, chargeable hours (for service industries), sales $, cost per unit and gross profit. All of these feed into your financial plans – your projected income and cash flow statements. A business plan is inherently forward looking in nature, so whether you live by your plan each month, or have never created one, you may not have thought to use it to measure past performance. But what good is a plan if you don’t understand why you haven’t achieved the results?
Your plan was based on a number of assumptions about the future, so if you haven’t reached your planned profit or cash balance for the first half of the year, look at how you are tracking against each of those metrics. Did you plan for a price increase, but find you lost customers as a result? Did your suppliers pass on price increases you weren’t expecting? Have your sales team been making enough calls to achieve sales targets, or has your marketing spend generated the leads you expected? Was your pre-Christmas sale a success? Once you dig into the details of the metrics that impact your profit and cash, you will be able to take action. That could be directing money and resources to more profitable areas, or looking at ways to reduce costs.
If you’re overwhelmed by masses of financial data, focus on a handful of key performance indicators (KPIs) that you can measure and monitor each month, your accountant can help you to set up a dashboard to track them. Once you know your key numbers and whether you are hitting them each month, you can make timely decisions to steer your business on the right track.
“A BUSINESS PLAN IS INHERENTLY FORWARD LOOKING IN NATURE.”