Your business plan can provide substantial benefits, including the opportunity to obtain financing, a working calendar for getting your business started, and a yardstick against which you can measure your business's progress. Tracking appropriate performance criteria against your business plan involves gathering and compiling performance information to help you meet or exceed your goals and objectives.
No matter how good your business idea is, your analysis of the overall market situation may convince you that you can't profitably exploit your idea right now. There may be financial limitations, imposing competitors, or other factors that simply make it not worth your while to pursue your idea, however good. If you followed our advice and documented your decision making process, you'll have created most of a business plan anyway. The exercise will obviously have been well worth it.
The more likely outcome of your planning, however, is a business plan that you intend to use as you begin or continue to conduct business. You should expect to derive substantial benefits in exchange for the time and energy you expended on your written plan. And, you will have a document that you can use to communicate with both internal and external audiences.
Most important, however, you will have established a documented planning process that you can use repeatedly, improving it each time by incorporating the experience you have gained. The existence of the document and the process enable you to derive the maximum benefit from the work you put into creating the plan. The benefits include:
- Having an action document for your business. The plan can serve as a blueprint to help you manage your operations. This type of management tool is invaluable to keeping focused on your goals and to evaluating alternatives.
- Forming the basis of a tracking and evaluation tool. Because your plan will set forth a timetable of operational and financial milestones, you can meaningfully interpret your actual operating results against the baseline established by the plan.
How do you go about getting these benefits? Focus on the plan as a monitoring tool (or the basis for one). Make sure you have systems in place to gather the information you need to assess how your business is doing. Make sure those systems can provide the information to you in time for it to help. And, make sure that the information you gathered is the right information.
A whole new field of business-information specialists has evolved to make sure business owners get the information they need when they need it. As a small business owner, you'll probably be the information specialist as well. It's just another back office responsibility. Let's look at how you can effectively use your business plan to run your business.
Monitoring Your Progress
A well-written business plan defines the goals and objectives that you wish to achieve over the next few years in specific, quantifiable terms. It may project a certain level of sales by a given date, the acquisition of a certain number of clients, or any of a number of other objective measures of success. Whatever the conditions that spell success, you'll want to watch your progress toward those goals over time. If you're on track, great! If not, you're in a position to take steps to get back on track before it's too late.
The process of monitoring your business's performance can be relatively painless. Here are the issues to consider:
- Which aspects of your business's performance should you look at, and what information will best establish how you're doing?
- How will you gather, compile, and analyze performance information?
- How often should you look?
Selecting Performance Measures
When you created your business plan, you made some conscious decisions regarding how to market your product or service. These decisions should help you select meaningful performance measures for your business. As a business owner, you need information regarding how the various areas of your business are doing. Tracking progress of your goals and objectives means keeping abreast of how your business is doing currently. The very act of setting goals and objectives defines, in large part, the performance measures you'll adopt.
For example, assume that for valid business reasons your plan calls for a certain number of units to be sold in order to achieve a particular level of profit. If your pricing policy involves matching competitors who reduce their prices below yours, selling the projected number of units won't necessarily generate the level of income you projected. So what do you track? If your competitors don't try to undercut your prices, tracking units or revenues would provide the same information. But if the price at which you sell each unit varies, tracking revenues may be a more important indicator.
The same considerations apply to expenses. Let's assume that a manufacturing company employs several processes to turn raw materials into several types of finished goods. The cost of each process varies because some processes require more highly skilled (and paid) people. Also, some of the products require more processing than others. To get a true picture of production costs, you would be better off tracking labor costs than labor hours.
Almost every aspect of your business can probably be measured against some objective yardstick of success. The ability of a salesperson can be measured by the number of sales per month or by the cumulative amount of sales per month. If your business gets most of its profit from the more expensive products or services you provide, sales revenue (or dollar amount per sale) will be of far more interest than the raw number of sales.
Tracking Business Performance
The purpose of tracking how your business is performing against your business plan is to gather, compile, and analyze performance information in order to meet or exceed your goals and objectives. Choose the information to collect based on three considerations:
- The information must be useful to you as you make ongoing decisions about the operation and direction of your business.
- The process of gathering and processing the information must not involve the expenditure of time or effort that outweighs the value of having the information.
- The information has to be available in time for it to be meaningful.
Realistically, most businesses require certain systems as a condition of doing business. Imagine running even a small retail establishment without a cash register. It's possible, but not much fun and very inefficient. Similarly, if a business has periodic bills to pay (e.g., rent, utilities, employee wages, etc.), there will probably be at least a rudimentary bookkeeping system in place. Add in federal tax withholding and payment rules, sales tax payments to the state, and other regulatory requirements, and the base recordkeeping requirements grow.
Fortunately, you can rely on the systems you put in place for these other purposes as a source of performance measures. If possible, try to integrate all of your performance measures into the routine of your business. For example, if a lender requires monthly statements of income and expense, use them to monitor performance. You may want to track information the lender doesn't want, but you can piggyback that data gathering onto your required reports.
Establish some performance measure for parts of your business that don't directly affect finances. For example, a local pizza place set up its cash register so that it keeps a running count of how many times a particular customer has placed an order. That information can be used to measure how effective the business is at retaining long-term customers. Similarly, employee morale can be measured, in part, by employee turnover. If you see that your business has turned into a revolving door for employees, it's a good sign that you should look at things that might affect morale.
How Frequently Should You Review Actual Performance Against Your Plan?
Monitoring your business's performance is, again, another of those back office activities that doesn't contribute directly to providing goods and services to your customers. As a practical matter, you'll probably have a feel for how you're doing because of your involvement with the day-to-day activities of your business. If you make the bank deposits each night, if you pay the bills each month, if you balance the books at the end of the month, then you already know a lot about how your business is doing. But it's worthwhile to supplement this familiarity with some hard and fast milestones.
Using milestones is simply a decision to take a look at a specific performance measure at a particular point in time. Select milestones to best accommodate two competing considerations. On the one hand, milestones should be infrequent enough so that there is a meaningful amount of information available to analyze. On the other hand, milestones must occur frequently enough so that you can take appropriate action if you see that interim goals aren't being reached. With luck, you'll be able to schedule these periodic business check-ups to coincide with activities you would do anyway, such as balancing your checking account.
Many people think of performance milestones in the context of an annual performance review. If you have ever been an employee at a company that gives annual raises/reviews, you're familiar with the concept. But a good business doesn't wait a year before providing employee feedback. For example, many salespeople have quotas throughout the year to meet.
If a particular salesperson's goal is to sell 120 pieces of equipment in a year, your business plan might have projected that the salesperson would sell 25 to 30 units in the first quarter. If only 12 were sold in the first three months, it's a good idea to take some action, even if it is only to find out why sales are lagging. The only way you can know that sales are lagging, however, is to take the time to look.
Acting on the Information Provided by Your Business Plan
Once you begin operations according to your business plan, there are two possible outcomes--your projections and assumptions prove to be relatively accurate, or things aren't going exactly as projected. These departures from your plan may be small and not a source of concern, or they may be substantial and require immediate action on your part.
Let's consider the first outcome--you did a good job of planning and, basically, your business is operating the way you'd like. Your performance measurement system is generating data showing that the goals and objectives set forth in your business plan are being met. Congratulations! As many race car drivers say, "I'd rather be lucky than good any day." If you've written a plan and your business developed just as you projected, you're definitely one or the other. So, what's next?
- First, make an effort to extend your planning horizon. Begin to "firm up" the numbers for periods beyond the initial planning window. Fine tune the plan to get an even better picture of where you're heading. For you, keeping the plan current is easy.
- Second, and more important, begin looking for ways to improve on what you've done so far. You've begun to build a track record of success and you want to keep on building. Your basic business idea was, most likely, sound (never completely discount the luck factor), and you now have an opportunity to expand, refine, and innovate. If you haven't considered the long-term future of your business, start thinking. If you've set aggressive goals (and most business owners do), consider what you'll have if your business stays on track for three years, or five.
Having everything go exactly according to plan is the exception, not the rule. Therefore, you might want to consider what might happen when things don't go according to plan. Fortunately, a good plan will prepare you to deal with this situation. Hopefully, the contingency plans that you developed while writing your business plan dealt with the cause of the deviation. Once again, there are two possibilities--things are working out better than you hoped, or things aren't going as well as planned.
If the projections contained in your business plan were a little understated or pessimistic, you might find yourself in the enviable position of exceeding your planned goals and objectives. Perhaps you'll achieve profitability months sooner than you expected, or maybe revenues are exceeding expectations. Fortunately, if you've prepared your plan according to our suggestions, you already have a document that will help you determine why you're enjoying greater than anticipated success. When you developed your action plans, you engaged in some contingency planning to prepare yourself to react quickly and appropriately if something doesn't go as you hoped. Those contingency plans identify the factors that are likely to be causing the deviation.
It's a great feeling to succeed better than you had even planned, but success beyond what you reasonably anticipated means two additional jobs for you. First, you need to examine your original assumptions and projections and find out why you're doing better than expected. Second, you need to assess the impact this unexpected success has had on your business. To do this, consider these issues:
- Operational impact. Can you meet the unexpected demand and maintain service levels? Can your vendors and everyone "upstream" of your business handle the added demand that additional business means? Just as important, can your business handle the burden? Will you need more production capability, more help, or a larger establishment?
- Marketing plan changes. Does the better-than-expected business require you to adjust your marketing plan by changing your price structure, your promotional or advertising plans, or sales force? Or does the good business permit you to revisit those factors and optimize them for the unexpected business results?
- New opportunities. Are there new opportunities open to you that weren't available before? If sales are better than expected, can you be more aggressive in setting your goals? Can you expand into new markets quicker than planned or otherwise accelerate your plans? If you're in manufacturing, does the increased business justify equipment acquisitions that weren't worthwhile at lower sales volumes?
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