Budget or Plan? Which One Do You Use?

In our last post, we discussed the annual planning ritual, and a three step process for more effective and useful planning.  After thinking further about this issue, we thought it would be helpful to define the difference between Planning and Budgeting, as the terms tend to be used interchangeably in many organizations.

As defined by Webster’s, there is a very clear difference between these terms:

  • A Budget is a plan for the amount of money that can be spent, and how it will be spent.
  • A Plan is a detailed formulation of a program of action to achieve something.

Most budgets are simple plans that are generally prepared by businesses that have not yet developed a formal Vision and Strategy for their future.  While budgets are generally relatively easy to prepare, most do not necessarily consider longer term strategic objectives or actions, or the full extent of potential changes in the business environment.

The basic Budget is developed using the current year’s results to date, which are then projected for the year, and applying a percentage increase to each line item, to calculate projected revenues and expenses for the new year.  Monthly financial projections may then be calculated for use in reporting and evaluating the operating results during the year.

An Annual Operating Plan, on the other hand, will utilize the results of the Vision and Strategy process, to develop a comprehensive plan (read chart or map) to help the business execute the actions required to achieve the strategic objectives, and navigate through the year.  These plans are generally very detailed, and typically include the following:

  • Monthly financial projections
  • Specific tactical programs, actions, and milestones required to meet/exceed those projections
  • Key metrics to evaluate and measure performance to keep the business on track.

Which would you prefer, a spending plan, or a detailed chart to navigate and guide the business for the year?

Regardless of what process you choose, it is critical to have a plan to manage the business.


“A goal without a plan is just a wish.” ― Antoine de Saint-Exupéry

“By failing to prepare, you are preparing to fail.” ― Benjamin Franklin

“We have to build the framework in which we will execute the tasks.” ― LTG Christianson

It’s Back – The Annual Planning Ritual!

If you look at the calendar, there are now less than 12 work weeks until the beginning of 2015.  If your business is similar to those that I’ve worked for, we’re now in the Annual Business Planning Cycle, where the business performance so far this year is evaluated and projected, in order to peer into the future to identify objectives and potential changes that may be required, not only for 2015, but also several years out.

In my former lives, I’ve participated in, and led, this annual ritual in different roles, from Staff Accountant to President and CEO.  However, the prescribed process and schedule was always the same;  Review and evaluate the results so far this year, consider and set objectives for the next three years, and define the changes that may be required to achieve those objectives.  Once this is done, update the current Strategic Plan, and develop the Operating Plan to match Year 1 of the “new” Strategic Plan.   In many instances, however, this process doesn’t include an objective, critical review, or discussion of the Vision for the business in the future, and how it will be achieved.  Generally, it’s just a rehash of last year’s plan, updated for new conditions and goals, with a new Year 3, and placed on the shelf until next year.

Over the years of using this process, I noticed that most businesses very rarely, if ever, get to Years 2 and 3 of the Strategic Plan.  Most of the management effort, and reviews, focus on next year (Year 1), and then on Year 3, assuming if the right things are done in Years 1 and 2, Year 3 will be the culmination of all of those efforts, and won’t it be great when we get there!  However, Year 3 never comes – it’s always pushed out another year.

This year, I’ll challenge you to develop a clear Vision, and prepare Strategic and Operating Plans that will actually be used to manage, control, and guide the direction and decision making of the business over the next three years, with the ultimate goal of achieving Year 3, with only minor adjustments.  Yes, I know it’s three years out, and conditions change.  However, if you’ve done this properly, and have the right Vision and Plans, shouldn’t you be able to get there?

I recommend the following three step process for effective, and useful planning:

1. Define the Vision  

What will the business achieve, and look like in the future, say three years out?  This step is the most critical part of the process, providing clarity about the objectives for the future, and the framework for the rest of the planning process.  The Vision should be clear, written, and communicated to all stakeholders, before proceeding further, to ensure that the entire organization understands the objectives for the future.

If the business doesn’t currently have a Vision, it should take the time to develop one as the first step.  Size doesn’t matter, every business should have a Vision of its future.  If there is already a Vision in place, is it still relevant, or should it be revised and updated?

2. Develop the Long Term Strategy and Plan 

The Strategy and related Plan will provide the course and direction that the business must follow to make the Vision a reality.  The strategy and high level plan will clearly define specific actions and programs, including resource requirements, performance goals, organizational structure, and any other actions necessary to achieve the Vision.  It will be the framework to guide decision making over this period, and keep the business moving in the right direction.

3. Prepare the Operating Plan

This will be the detailed plan to execute the Strategy for Year 1, including specific tactical actions and programs, and monthly operational targets to measure progress throughout the year.  The Operating Plan is used to manage and control the business, and guide decision making in the short term, and to allow for regular reporting, performance evaluation, and identify potential course corrections, during the year, to achieve the strategic objectives.

This process, done properly, does take a great deal of time and thought to be useful, and in my experience, is well worth the effort it.  By the end of the process, the business and organization know the course and direction, and have the “charts” necessary to control and manage the business, make the right decisions, and measure progress to achieve the Vision, and that elusive Year Three!


The winds and the waves are always on the side of the ablest navigators.” – Edward Gibbon

“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.” – Jack Welch

What Is Your Sales Strategy?

In a recent Inc. post, Geoffrey James quoted a statement by Gerhard Gschwandtner, publisher of Selling Power magazine, “that within 10 years, as much as 80 percent of the sales situations, currently handled by salespeople, will be handled automatically”. However, he also believes that there will continue to be a need for salespeople in specific situations, where the customer may not be able to identify his own problem, a solution, or an ROI for a purchase.

This means that for the remaining 20%, customers will be looking to their suppliers and sales representatives as resources to assist in providing solutions to help their business vs. just showing up to peddle their wares.  This will require salespeople that can understand their customers’ business issues and objectives, have the ability to be problem solvers, and the capability to build long term, personal relationships that bring value.

While this will be bad news for stereotypical, schmoozing, glad handing salespeople, it will create opportunities for businesses to differentiate themselves in their markets, and generate more profitable revenue.

As technology continues to automate and streamline the purchasing process, and time constraints increase with the pace of business today, there is less and less time for customers interact with salespeople that are “ just visiting”.   In fact, many organizations set specific limits on sales appointments, and only those salespeople that can help solve problems and bring value to the relationship, are invited and welcomed to participate as a partner.

This environment creates the opportunity for businesses to strategically differentiate themselves from the competition.  In many industries, the table stakes of the “game” are price, service, and quality and it is assumed that the majority of competitors in a given space, all have same relative levels of each.

As a result, without differentiation and value creation, the product or service eventually becomes viewed as a commodity, and the primary focus becomes price.  When this happens, price levels and profitability deteriorate, larger competitors take advantage of their economies of scale, and smaller competitors get squeezed out of the market.  A primary example of this evolution is the commercial printing industry which is now considered a commodity, and has become dominated by larger and larger organizations.

Those businesses that are able to differentiate themselves as solution providers, and can bring value to their customer relationships, will separate themselves from the competition, and as a result, create the opportunity to maintain, and possibly increase, their prices, profitability, and market share on the basis of that value.

Is your business considered a Solution Provider you your customers?  If not, now is the time to review your sales strategy and direction, training, and market message, and make the evolution from product peddler to a valued solution provider to protect and grow your business for the future.

If you have any questions, or would like to discuss your organization’s specific issues, please call us at (727) 637-4666, or email me directly at Don@HuttlinAssociates.com.
“A strategy delineates a territory in which a company seeks to be unique.” – Michael Porter

A satisfied customer is the best business strategy of all. – Michael LeBoeuf

Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different. – Michael Porter

Trying to do what your competitors are doing but basically a little bit better is probably not going to be the winning strategy. The problem is finding what your competitors wouldn’t even consider doing. – Jamais Cascio

Are You Ready for Growth?

What would happen if your business suddenly experienced rapid and significant growth?  My guess is that many of you are thinking that this would be great news.  But – don’t be so fast to welcome it.  

  • Would you and your organization be prepared, and have a plan? 
  • Could you manage that growth effectively and profitably?
  • Do you have enough cash to support and fund it?

There are three key challenges that come with growth, including Management, Cash, and Operations.  All must be planned and managed properly, so that the business can continue to operate profitably through this period, and reap the reward.   Each area is briefly described below, including some questions that you may want to consider in planning for your next growth phase.

Management 
As a business grows, the activity levels and complexity increase significantly, and need to be managed and controlled properly.

  • How much activity and complexity can your current Management team handle effectively, without losing control of the business?
  • At what point will your organizations’ internal capabilities,capacity, and resources become overwhelmed with the increased pace, resulting in the operational issues described below?
  • Is your organization’s team, capabilities, capacity, and culture, capable of absorbing the increased activity and complexity, and to what level?

Cash
Growing businesses require more cash, especially in the early stages, to fund and support the higher business level, as receivables and inventory rise, and the cost of doing business increases over time. 

  • How much cash will be required, and will the business have the ability to generate these requirements?
  • If not, will the business be able to qualify for additional funding to meet these requirements?
    •  Note: If the business is not able to obtain additional cash, it will need to make a decision regarding how much additional growth, if any, it can take on without experiencing ongoing cash “crunches”.
  • What investments and costs will be required to support the increased business and activity, and service customers efficiently and effectively? 

Operations
 The higher activity level, and complexity, will normally require increased capacity and capabilities, and more effective, streamlined processes.  If these are not in place, the business will experience increasing customer, service and quality issues, and higher costs.

  • Can your existing systems and processes handle the increased activity?
    • Note: In many instances, these systems and processes have grown with the organization over time, and may have a number of “band-aids” in place.  As the operation is stressed, these “band aids” will start to pop off, one by one, leading to further breakdowns in service and quality.
  • Will you need more staff?  How many, and with what capabilities and experience?  How will you train them.and how long will it take for them to become effective?
    • Note: In many situations, hiring is reactive and after the fact, leading to poor decisions, high turnover, and increased operational issues early on.

Those businesses that have planned properly, and prepared, will take the growth in stride, and continue to grow profitably.

The businesses that are unprepared will find themselves drowning in activity, out of control, and unable to cope with the requirements, demand, and complexity of the business.  As service and quality problems increase, customers will be disappointed and leave, revenues and cash flow decline, costs increase, and profitability disappears.  If corrective actions are not taken quickly, the business could enter a death spiral downward, and eventually close.

Be careful of what you wish for, and plan now for your next phase of profitable growth. 

If you have any questions, or would like to discuss your organization’s specific issues, please call us at (727) 637-4666, or email me directly at Don@HuttlinAssociates.com.

“Whatever made you successful in the past won’t in the future.”  –  Lew Platt, CEO, Hewlett-Packard
“You can’t have a better tomorrow if you are thinking about yesterday all the time.”  –  Charles Kettering
“Failing to plan is planning to fail.”  – Alan Lakein

Organizations Need Metrics

Let me ask you a few questions about the performance of your organization so far this year.

  • Is it Performing To Your Expectations?
  • Do You Know Where You Are (after 4 months of the year)?
  • Are You Making Progress Toward Your Objectives? 

If you can’t answer these questions quickly, without having to read a bunch of reports, then I’m willing to bet that you really don’t know how your organization is really performing, and if you’re on course.

As we’ve noted in the past, successful organizations have a formal business plan, and a budget to achieve that plan.  The business plan provides the overall direction and key objectives for the organization, and their budget is the chart to help plot the course, identify the current position, and measure progress toward the objectives.

There is, however, a third component that all organizations should have in place to quickly evaluate their performance – a set of Key Performance Indicators, or KPI’s.  KPI’s are specific, quantifiable targets to measure the critical factors that are essential to the organization reaching its objectives, and can provide information about its performance in those key areas. Every organization will have their own individual set of KPI’s to measure their performance and progress, and identify actions required to improve that performance over time.

In order to set effective KPI’s, an organization must establish its objectives in the business plan and related budget, and then choose those KPIs that best reflect the objectives that are essential to the organization’s success, and can be measured.  Think of them as a dashboard that will tell you the performance in key areas of the organization at a glance.

Generally, most organizations will have up to five primary KPI’s, although each department may have a separate set of KPI’s that support to overall organization objectives.  More than five will dilute the organization’s focus, and be distracting vs. helpful.  In addition, most KPI’s are usually are long-term, so the definition of what they are, and how they are measured, should not change often, unless the organization’s objectives change, or it gets closer to achieving a particular objective.

Effective Key Performance Indicators will:

  • Reflect The Objectives of the Organization
  • Be Specific Factors That Are Critical to the Organization’s Success
  • Be Measurable, and Include Specific Performance Targets

Once you have the set of Key Performance Indicators that define your organization’s goals, and can be measured, use them as a performance management tool.  Effective KPIs will give your entire organization a clear picture of what is important, what actions are required, and insure that all activities are focused on meeting or exceeding them.

While it may be possible to manage without a plan, budget, and KPI’s in the short-term, I can guarantee that your organization will survive, and be much more successful, with all of these elements in place.

If you would like to discuss your organization’s particular issues, please give us a call at (727) 637-4666, or email me directly at Don@HuttlinAssociates.com.

“It is an immutable law in business that words are words, explanations are explanations, promises are promises but only performance is reality.” – Harold S Geneen

“Manage your destiny, or someone else will.” –  Jack Welch

“What’s measured improves.”Peter F. Drucker

“If you don’t drive your business, you will be driven out of business.”B. C. Forbes

 

Are You On Course?

Many organizations have just completed their First Quarter, and should be asking themselves several key questions:

  • What Were Our Actual Results?
  • How Do They Compare to Last Year and Our Budget?
  • Did We Make Money?
  • What Was Our Cash Flow?
  • Are We On Course?
  • Are We Making Progress on Our Objectives?

If these questions can’t be answered accurately, your organization may be off course, and drifting.

To determine your position, progress to date, and course, you must have accurate and timely reports including, at a minimum, an Income Statement, Cash Flow Statement, and Balance Sheet.  These reports will provide most of the information necessary to answer these questions, and should be carefully reviewed to identify where your organization is presently, and any changes in conditions that may be affecting your performance and course.

Other, related reports will also be of benefit, including Sales by Customer, Productivity Measures, and Accounts Receivable and Inventory aging, among others.  The key is to get as much detail as possible to identify significant variances from either the prior year, or budget, and the root cause(s) of the variation so that appropriate action can be taken to get back on course.  At the same time, these reports will also help to identify trends, and potential issues that may require action in the future.

Finally, assuming that specific objectives have been set for the year, the progress on each one should be reviewed, in detail, to insure that determine if you are on course.

Successful organizations also prepare forecasts of their results for the next quarter.  This will help identify potential operating and cash flow issues, in advance, so timely action can be taken, if necessary, to keep that organization on course, and under control.

The bottom line is that organizations must have accurate, timely information and a regular review process in place, to properly manage and control operations, identify position, progress, and course deviations that may require action, as needed, to keep the organization sailing toward its destination.

“Keep your hand on the helm.” – Matthew Goldman

Sailing requires the management of all the systems on the boat, plus all the controls on the boat, while assessing the weather and navigation. It’s planning everything to a fine level of detail and making the required adjustments all at the same time things are changing” – Unknown

 

Sail or Drift?

As discussed in our recent post, all successful businesses have a plan that will guide them to their destination.  The leaders of these businesses have defined their destination, set the course, have an accurate chart to help them navigate, and control the business to achieve their goals.

As a  sailor, I believe that the most important skills for success are the ability to chart a course, navigate that course accurately, identify and adjust to weather conditions, and to control the vessel in all conditions in order to reach port safely.  The most successful sailors have a clear destination and course, an accurate chart, and can adapt to changing conditions, as they occur.

Successfully navigating a business requires these same attributes.  If we look at this from a business standpoint, you must do the following:

  • Define your destination (Port)
  • Have an accurate chart (Plan)
  • Plot a course to reach the destination (Objectives)
  • Adjust that course, as necessary, based on conditions encountered along the way
  • Control the business in these different conditions

Every business a choice to make.  We can decide to take these actions and guide the business to our destination and future success. Or, we can also choose not to take action, and drift through the year, letting conditions have their way, and take the chance of not reaching port.

While we may have little control over many conditions that will affect our business in today’s economy, we do have control of our course and business, if we know where we are going.  So we must identify changes in those conditions, and make the necessary adjustments, throughout the year, to reach our destination.

This is why we need to have a reporting system that will provide regular feedback on conditions and progress to help us decide what adjustments are required to maintain control, and keep the business moving forward.

So, identify your destination, get an accurate chart, plot your course, adjust to conditions, and take control of your business to keep it on course and moving forward.

Let me finish with several quotes to put these comments into perspective.

“To reach a port we must sail, sometimes with the wind, and sometimes against it. But we must not drift or lie at anchor.” – Oliver Wendell Holmes

“The wind and the waves are always on the side of the ablest navigator.” – Edmund Gibbon

It is not the ship so much as the skillful sailing that assures the prosperous voyage.” – George William Curtis

Questions or comments?  Call us at (727) 637-4666, or reply through our blog.

Are You Ready for 2013?

As the new year begins, business leaders should ask themselves several questions:

  • Did the business perform as well as I had expected or wanted?
  • What did we learn last year?
  • What will I do differently in 2013 to improve my business?

Most of us look at the new year as a time for reflection and resolution, and a fresh start that holds the promise of success and achievement.  We begin the year with the standard resolutions of working harder, improving the business, and doing things better.   But, without a plan and commitment, most of these resolutions will be lost in the daily activities of running a business.

Every successful business has a plan to guide them toward their destination.  This plan sets the course for the business, and provides leaders with a map to help them manage and achieve their goals for the year.

The most important part of this process is to identify, specifically, what you want the business to accomplish and improve on this year.  As you think about your goals, consider the following:

  • What did we learn and what were the results of the past year?
  • What are the anticipated changes in my market and customer base?
  • Are there any organizational changes that I need to make?
  • What potential problems may encounter during the year?

These goals can range from increasing sales, reducing costs, improving cash flow, training, etc.  The key is to focus on those areas that will have the most positive impact on your business performance this year, and for the future.

It is critical that you limit the number of goals to be accomplished.  Too many goals will dilute your efforts, and result in not making the progress that you want and need for your business.  Ideally, you should have five major goals for the year.  Each goal should be written down and meet the SMART criteria – Specific; Measurable; Attainable; Realistic; and Timely.  If the goal does not meet ALL of these criteria, chances are that it will not be achieved during the year.

After you have completed this process and identified your goals, the next step is to develop specific action plans for achieving each goal. The major steps are as follows:

  1. Identify the requirements for each goal, including resources required, responsibility,     timing, and your desired outcome.
  2. Develop the specific steps required to accomplish each goal, and set milestones for each step to measure your progress through the year.
  3. Develop a reporting system to measure your progress on a regular basis throughout the year.
  4. Review your progress monthly to stay on course.

Once your action plans are complete, an annual budget, and monthly budgets should then be prepared for the business.  These budgets will help you monitor business results, identify trends (good and bad), and measure your progress and improvement throughout the year.  There are a number of very good budget templates available on the internet that can guide you through this process.

After setting your objectives and preparing your budget, use them during the year to manage the  business, guide decision-making, and chart progress.  Regular reporting and reviews will also help to identify issues and problems early to keep you on course.

If you have any question or comments, or would like more information about the planning process, please contact us through this blog, or call us directly at (727) 637-4666.