How to make the best decisions on what your business should do in the short and medium term
At this time of the year many small businesses are in the middle of their planning for the next financial year. Some engage external facilitators, others involve their trusted business advisor or accountant. No matter how it is done the goal is to make the most of your resources and add as much value to your business as is possible. Easier said than done!
To increase the value of the business, business planning must influence everyday activities so that all activities are aligned with the company goals. Critically these activities have to produce the outcomes necessary to achieve the desired company goals. Business planning has to make the right decision to direct how the resources of the company are going to be utilised. The best decisions create the most value for the business. The best strategic decisions deliver competitive advantages that are difficult to emulate but usually are expensive to unwind.
But how do you make the right decisions? Ever since I started my business in 1985 I have wrestled with this challenge. Like my 11 year old son you ask, are we there yet? Give me that silver bullet. Give me the ‘One Minute Decision Maker’ guide to making the right decisions to maximise my profits. I might not have a silver bullet and I certainly don’t proffer a wealth creation guide for idiots. This is hard stuff that requires deep insight, diligence and good judgement. But I can share a process that seems to work for some.
Connecting the big vision to the right activities that maximise profits
The process that I outlined in my last Blog described in some detail a phased approached to business planning. What I would like to do here is discuss the very difficult task of how to move from two or three audacious goals to an effective business plan. An effective business plan has to firstly win the trust and respect of the staff because without that it is just a con job on other parties whether they be the bank, an investor or the board.
The starting point is three (and I would argue there should not be more than three) goals that are not too audacious to the point where they are unrealistic but also they should not be too conservative, like Goldilocks’ porridge they need to be just right. For these three goals to be just right there needs to be sufficient major opportunities to realise the goals. Major opportunities are known to the imaginative, the hard working, the connected and the collaborative people in any market. They are not plucked out of thin air they are documented carefully with hard evidence to support their inclusion in your business plan. They must be real or your plan will only guide you, like Don Quixote*, *to tilt at windmills.
Whilst the above is difficult now comes the hard part. The major or primary objectives, together with important sub or enabling objectives to achieve the goals and realise the major opportunities must be identified. For each line of objectives the measures, targets, resources and milestones must be detailed in the plan. This provides the financial information to construct the budget.
You have now completed the first iteration. Does this project the right revenue growth, the desired EBIT all within the financial constraints to fund the business (cash flow, retained earnings or debt)? If the leadership team are aggressive and ambitious the budget and detailed project plans will show that hard choices now must be made. There will be not enough time for staff to do the work, the profit targets will make it difficult to hire additional resources and the leadership team has to choose what to do and what not to do. Some objectives will produce more value than others and decisions must be made. Do you invest more this year or delay a major expense till next year when the company will have more free cash flow? The value of this process is you have done the hard work to properly inform the choices you make. Those choices will determine how good you are as a leadership team.
By having the leadership team challenge all the assumptions and implications of this planning process the optimised business plan and financial budget can be signed off knowing that the staff will have the trust and respect for the plan because they have been engaged in the process. In a future Blog I will describe my ideas for how a good business plan should be executed and verified to maximise the chances of achieving its desired outcomes.