As a business owner or leader of business, how do you define success? How do you measure that success?
Whether you are a non-profit, not for profit, for-profit organization, start up, large, or small business, planning is a known best practice that helps visualize these answers and track results. Planning is a time tested, proof of concept that over the decades has been a constant in all good and great businesses.
Without a plan in business, much like in life, the direction that you’re heading might or might not lead to the destination you desire. Either way, wouldn’t you like to know?
Maybe planning in your business is a norm but it has become stale and possibly even a chore.
The stories of planning and its value are many. So are the people and the resources available to help. Here are some of the items needed for planning to be successful. By no means is this list exhaustive as this is intended to help kick start, rekindle, or confirm. Keep reading to learn more!
So, why do you need a business financial plan?
Most businesses are born out of necessity, a passion, desire to solve a problem, an intent to build something better, or to provide a better service. If an organization is fortunate, it lives and breathes both its purpose and passion.
For example, most non-profit organizations have an abundance of passion towards a cause. Whereas most for-profit organizations aspire to differentiate themselves in the marketplace and build or provide something better. Either way, very similar to the great people who make up these businesses, neither the business nor the people are perfect. And what each has in abundance often overshadows what is lacking.
A great business plan breathes life into the reason an organization exists, while also building guardrails to ensure focus does not wane.
What’s more difficult, starting a business or staying in business?
Answer is both.
If you own a business, lead a business or you’re starting up a business, one of the many obligations we owe to our clients, employees (work families), families, and our community is being present and performing well over the long term. Why else start the business?
Can a business function without a business plan? Of course it can. But the question is for how long and how much is it costing the business to not plan. Kind of like the question, how much does it cost to repair one’s credit history. Maybe a better question is how much did it cost to create poor credit?
A business’ KPI’s (Key Performance Indicators), goals, metrics, desired outcomes and financials are its lifeblood and each should be included in a sound business plan.
So what’s more difficult, starting a business or staying in business? What’s most difficult is attempting to operate a business YOY on the fly and expecting better results. What feels comfortable in not exerting the time and energy to plan is actually slow erosion to the bigger picture and hopes for the future.
They say the definition of insanity is doing the same thing over and over again while expecting different results. This is a bit like trying to operate a business year over year “on the fly” without a business plan while expecting better results. Dare I say the same applies to life… so let’s jump in and discuss six key items you need to have in your business plan.
6 Key Components To Include In a Business Plan
1 . What is your purpose?
Again, using our non-profit and for-profit comparison, you will most likely never see a lack of passion in a non-profit organization. In fact, most non-profit organizations exist because of their passion towards a cause that is oftentimes more important to them than anything else.
For-profit organizations, on the other hand, often lack passion but succeed because of business and financial acumen.
The ideal situation is an organization that possesses high levels of both purpose and passion. This combination ensures the continued focus on their reason for being as well as the passion that enables them to stay the course and grow.
Regardless of the business model or stage the business is in, the key is to remain extremely clear on the reason that you exist and then create a plan that provides the stamina of the tortoise and the speed of the hare. When a business plans like this, their future becomes brighter if for no other reason than the fact that it creates a shared sense of direction for the entire organization.
2. What are your business philosophies?
Business philosophies vary. One who is keen on revenue might view the business differently than another whose lens is profitability. If you want to experience a healthy debate, ask your sales organization who is most important and then ask the same question of manufacturing. But do not ask them while in the same room!
Business philosophies are the principles and beliefs that an organization is working toward in order to achieve success. They outline the manner in which business will be conducted and serve as guideposts to ensure that it stays true to its purpose.
One of the key benefits of planning is the prevention of mission loss. Think of a well-run sports organization with a shared belief that everyone from the athletes, training staff, coaches, office, and ownership is needed to win championships. Remember, one the most trusted individuals or team members in your organization is the one who has a key to every office, the Janitorial and Maintenance team.
Every organization will have its issues and philosophical differences but leader’s help keep all eyes on the prize.
As a quick reminder, everyone in your organization is a leader and influencer, whether formally or informally. One doesn’t need a title to lead planning efforts. Is the quality of planning practices in your organization demonstrating this? If planning isn’t valued and rewarded appropriately, mission loss will erode the value that the organization seeks to offer. And the results will be felt by your clients, employees, and community.
3. Gather Information About Your Expenses
Expenses constitute one of the most important components of any business financial plan. This data provides a clear indication of the money that has been spent historically and that helps to forecast future expenses, needed capital and therefore revenue.
As such, you should always begin formulating your business plan by evaluating the quality of alignment between your expenses and your purpose. Here are a few of examples:
- If you’re a startup, be sure to differentiate your start-up and operational expenses. Visualize the train leaving the station. One of its highest operational costs is getting up to speed. Once up to cruising speed, it is very efficient. And much like your start up, cost differentials change over time.
- If you’ve been in business for a while and question YOY growth, are you allowing your expenses to track alongside your growth expectations? Many organizations expect more growth but don’t allow for more marketing, promotional, hiring, training or other growth- attributed costs.
- If your culture is not creating a productive environment, it may be necessary to consider additional initiatives or incentive programs. Remember that old school doesn’t apply to all. Happy employees are productive employees.
The manner in which your business allocates revenue (money) can also indicate a great deal about its values. For example, is your business spending cash or leveraging cash? Business expenses vary by definition, type, and frequency. Know what you own and plan what you know.
4. Look at Your Revenue and Profit
What’s your annual revenue? Is it seasonal, top heavy, industry specific, increasing, decreasing, flat or non-existent? Do you have varied revenue streams? How frequently are you reviewing revenue and where it’s coming from? Do you look at revenue from more than a fiscal relationship?
We already discussed the importance of expenses, so how profitable are you? Are you within your industry average, lower or higher? How are your expenses affecting your profitability? How profitable must you be for the organization to be considered “healthy”? Are you measuring profit from only a quantitative perspective or are you also considering qualitative elements?
Your business plan, P&L, and expected outcomes should be as tight as a PB&J. Personally I like more peanut butter than jelly…
How clear is the lens that is being used to review these and is the frequency of that review correct? Is the right team or person performing the review and have they been given the autonomy to lead well?
Remember that control and the inability to relinquish it can easily become a debt instrument. Whether on the books or not, debt instruments will not improve revenue nor will they increase profitability. Your team is a profit center of knowledge and leadership’s responsibility is to provide what is needed for the team to flourish, remove obstacles as necessary, and get out of the way.
5. Monitor Cash and Cash Flow Projection
How do your cash reserves look? What are your cash flow projections?
Much like our homes, businesses should always have cash reserves. Are you frequently reviewing your cash flow and projections? Defined simply, cash flow consists of money movement in and out of your business in the form of revenue and expenses. And cash flow projections are those that you anticipate for the future.
We’ve already touched on the importance of reviewing your revenue (income to the business) and expenses monthly. Your accountant and financial team should keep careful records of how much your business is earning monthly. Your planning should include cash flow and how it ties into cash reserves and future uses of cash. Be aware of all “lazy cash” on your books. All cash should have a purpose.
6. Write the Balance Sheet
How healthy is your balance sheet? A well-written balance sheet will present data on your company, divided into three separate categories, assets, liabilities and equity.
First, your assets consist of all items of value owned by the business, including buildings, real estate, accounts, cash, vehicles, royalties, and patents to name a few examples.
Next, take a look at your liabilities, or any debt that you owe. Do you have outstanding loan payments? If so, write them down.
Finally, subtract your liabilities from your assets. This becomes your equity.
Your balance sheet should also summarize your income and cash flow projections. From a high level, this reveals your financial standing and indicates how well your organization has done.
The achievement of your financial objectives should be one of the chief goals of your business. But please don’t stop there. Your business exists for many reasons and each of these attributes are valuable. Yet, you can’t measure your progress without a business plan.
When you create your plan, you give yourself the opportunity to review your purpose and its alignment with your value proposition, client experience, culture, and finances. This affords you the opportunity to spot check, audit, seek out, delegate, and adjust any part of the organization that is not in alignment.
Do you want help reaching your goals? We can help! Our client-oriented planning enables you to grow your wealth in its many forms and manage your money in an effective manner. Contact us today!