The time not to become a father is 18 years before a World War.
E.B. White
There is nothing so useless as doing efficiently that which should not be done at all.
Peter Drucker
FOOD FOR THOUGHT
Some critics state that creating a business plan is a waste of time because no one reads it. Others say that it’s a waste of time because the author doesn’t use it. Of course, if the author doesn’t follow his or her own plan, it’s certainly a waste of time. There are all sorts of reasons for the owner of a small business to avoid planning. " It takes too much time away from running the business," or " No one knows what’s going to happen in the future, so planning is no more than looking into a crystal ball."
Planning takes time and even more, it takes thinking time. Good planning requires time that is set aside to actually think about the business and to establish a direction. Although it’s true that no one really knows what’s going to happen in the future, it’s for this very reason that the business owner needs to spend quality time thinking about and committing to writing what it is they wish to achieve in the future. The choice is between having the events of the future control the direction of the business or having the direction of the business controlled by you, the owner.
HERE'S THE STORY
Business planning can be compared to planning a family trip to Europe. There are several approaches to planning that trip. One is to "just get-up and go." Another is to work out a detailed hour-by-hour list of every move you wish to make. More than likely, the best approach is somewhere in the middle. The very first thing to do is to write the objective. To be of value, any objective, whether a business objective or a family vacation, requires three components: First, it must be understandable; second, it must be realistic and attainable; third, it must be measurable.
An example of a business objective might be: We will increase sales from $150,000 in 1996 to $900,000 in 1997 and increase profits from three percent of sales to thirty-three percent of sales during this same period.
The parallel trip objective might be: our family of two adults and two teenage children will visit 22 cities in western Europe and the British Isles during a two week period at a cost of $35 a day and we want to leave next week.
Anyone reading either of these objectives would understand them and be able to measure the results, but would doubt that they were realistic and attainable. Although the character of both objectives in this example is greatly exaggerated in order to make a point, it is this sort of "wishing" that gives planning a bad name. Unfortunately, wishing instead of planning is often what happens.
The effective planning process has four major components. The first is to establish an objective which is understandable, realistic and attainable, and measurable. The second is to develop the program steps, which are all of steps that need to be taken in order to achieve the objective. The third component is to allocate resources, that is, to budget the time, the people, and the money needed to negotiate all of the steps. The fourth component is control. This is the component that answers the question; "What can go wrong and what are we going to do if and when something does go wrong."
PUT YOURSELF IN THIS PICTURE
One important key in developing an objective is to focus on the aspect of realism and attainment. Rather than increasing sales from $150,000 to a whooping $900,000 as stated in the business objective example above, what information do you need in order to establish a more realistic objective?
For the sake of continuing the illustration, let’s say you’re the owner of a retail book store. Your annual sales rate historically has been 15% in the first quarter, 20% in the second, 25% in the third, and the balance of 40% in the fourth quarter; this pattern is consistent with the industry averages. The date is October 31st, and you’re starting to plan for the calendar year that begins January 1st. Your sales through September 30th were $90,000. What can you expect for your annual sales for this year?
All things being equal, you can expect sales of $150,000 for this year. How did I get that number? If 60% of your annual sales is $90,000, then 100% can be calculated by dividing $90,000 by .60 which is $150,000, an amount that will be 15% higher than last year’s sales. Because this is your third full year in this market, you feel you can increase the business at a rate greater than 15% in 1997. You’re not certain exactly how much more you can increase sales, but you think that you can sell more than another increase of 15%, and feel that a number between $225,000 to $250,000 for next year is realistic. Your before-tax profit of 5% gives you only $7,500, and you need more than this to live on. So you then add to the objective an increase of company profits to 10% of sales, or from $22,500 to $25,000.
As a result of this thinking and calculation, your business objective for 1997 becomes: Our company sales for 1997 will range from $225,000 to $250,000 and profits will range from $22,500 to $25,000. Isn’t that easy? Anyone can put down numbers on a piece of paper, file it away, and continue to do business as usual. But when that happens, nothing changes and next year you feel that this process has all been a waste of time. Which will be true! The second component of developing program steps takes the objective and forces you to determine just exactly what you must do in order to achieve the objective. It’s just never gonna happen all by itself.
One of the questions you’ll need to answer is, "How much inventory will I need and when will I need it?" Sticking with our example, your product costs average 60% of sales, which means in order to sell $225,000 during the coming year, you’ll have to buy $135,000 worth of product. You’ll need $54,000 of this inventory by October 1st. Do you have enough space? How will you finance these purchases? Many of the gift purchases for Christmas are historically "best sellers," but how will you know when to buy those best sellers and be current for the holidays? One of the answers to the best seller timeliness might be to expand your children’s line by bringing back some of the old favorites, such as Aesop’s Fables, some of the Mark Twain books, and the classics by Robert Louis Stevenson earlier in the year. The most important aspect of this component of developing program steps is that the process requires you to identify potential problems and obstacles far in advance, and to develop solutions when you have control, rather than when the circumstances have you under control. The need to react under pressure will never go away for the owner of a small business, but by planning you’ll be able to reduce the number of crises because you’ll be able to predict a crisis and work to keep it from happening.
REFLECTIONS
This is the time to start your small business planning for calendar year 1997. Your planning does not need to be exotic or complex, but it does need some in-depth thought. Buy a notebook and use it only for your business planning ideas. Jot down every idea. Keep this book as a record of how you developed your business objective. Don’t use this notebook for anything else except your plans. When you start working on your program steps, list every question that you can think of, and ask your employees or spouse for their ideas. This notebook will provide you lots of answers in the future.
A successful person spends time thinking. Thought doesn’t require a college degree, it only requires that you can and do think and invest the time in doing it. Thinking is not easy, it is hard work and requires commitment, which is why most people don’t do it. Increase your chances of small business success by becoming a business thinker. Don’t let your competition win by default. Start today and keep it up.
The next issue of The Small Business Advocate will be a continuation of the Secrets of Planning, a Small Business Factor of Success.
To read past issues of The Small Business Advocate visit the Advocate Archives.
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