A Middle Of The Year Business Plan
Jun 30, 2009
The likelihood of a large company not having an annual budget and business plan is fairly remote. In fact, companies that have annual business plans generally complete them toward the end of a year to reflect their expectations for the following fiscal year . . . and then they judge their progress against what they had originally expected.
On the other hand, many owners of small to mid-sized businesses do not routinely create a budget, let alone a business plan. Why, then, consider a mid-year plan?
First, let's understand the terminology here.
Budgets and Business Plans
A budget entails projecting for a period of time, normally one or more years, the estimated income and expenses for the business, the cash flow for that period, and other key financial information (balance sheet, capital expenditures, financing options, and so on). A company cannot prepare a budget without considering the results from the recent past, current operations, and its expectations of the future.
A business plan includes the budget, but is more comprehensive. The business plan includes more information regarding the company, the competition it faces, the markets it serves, and the basis of its assumptions and projections. But, importantly, a business plan also includes how the company will be affected if its assumptions do not actually happen, and what will be done in such cases.
Using the Business Plan to Focus the Company
In most cases, a business plan is prepared when a company is seeking financing from a bank or other lender, or is seeking to issue debt or equity. Stakeholders want to understand the company's history and its expectations, and the thinking underlying those assumptions. In fact, the assumptions and management's plans are as important as the actual financial projections, if not more so.
But, particularly in these uncertain economic times, most companies could significantly benefit by preparing a full business plan, and challenging itself to identifying things that could go wrong and how the company would react to those events. It is the process itself which helps the company and its management focus its attention on opportunities and risks.
There are fairly standard formats for a business plan. For example, they always start with an Executive Summary. But the point here is to use the model of preparing a business plan to enable a company to better understand the factors that affect the company, and to provide the rigor of identifying how the company would react to changes to its plans.
The Critical Elements of the Business Plan - The Market
One key element is a description and analysis of the market that affects the company. This needs to be an honest, critical description and analysis. It is not helpful to say that the company plans to make and sell a new type of widget in the United States, that there are 304 million people in the United States, and that the company expects to sell a widget to a certain percentage of that population. The point is that the market for a company must be very specific, and there needs to be evidence that the market does indeed need the widget. Can the company clearly define the problem-the pain-that the new widget will solve? Why does the market need the widget? If the economy continues to be soft, will people defer buying the widget, even if it does solve relieve of that pain?
Evidence is critical, and that is best obtained by interviewing intended customers, surveys, and so on. A company can hope many things, but it is most important that intended customers provide feedback and information to validate the plans. The world is littered with widgets that no one has bought.
Does the company intend to sell its existing products into a new market? What has the company done to be sure that the products meet a need in that new market? People dress differently in different regions, they eat different food, and they buy different necessities. So why should a company assume that other people in different areas or markets will actually want the product? Again, the company's assumptions need to be supported by some kind of third-party evidence.
Another Critical Element - Costs and Selling Prices
Another element relates to the cost to produce the widget. Has this widget ever been manufactured? Tested? In realistic quantities? Will the company manufacture it, or will it be produced by others? Is there real evidence that it can be manufactured at a reasonable cost? Are there realistic alternate suppliers? What if the principal supplier can no longer provide the product-for whatever reason?
How will the company price the product? Will that provide a reasonable margin? What will happen if the cost of the product is increased?
The Most Important Issue - Cash Flow
Cash flow is perhaps the most important part of a company's life, but many companies do not routinely make projections of its cash needs. What will happen if customers delay paying for the products? What if bad debts increase?
And what will happen if there are delays in the launch of the new product, or penetration into new markets? What will be the impact on cash flow if the sales occur, but more slowly-or more rapidly-than planned? Does the company have cash resources to address those situations?
So, Why Do a Business Plan? And Why in the Middle of the Year?
You might look at the above and throw up your arms. "I can't think of everything," an owner might say. And the owner is right. But it is important to think of as many of the critical items ahead of time. The point is not to create doomsday scenarios. In fact, the plan should also identify several items that will make a positive impact that will lead to the success of the existing and new products and markets.
Most companies that create annual plans and budgets do so at the beginning of the fiscal year. But, if you haven't created one, there is probably no better time than now to do so-right in the middle of your fiscal year, while the economy is as difficult as it's ever been. There's no good reason to wait six months to start.
The point is to cause management to consider the impact of negative-and positive-occurrences. And then to consider how the company could react to those situations. And to determine how that would affect the company's operations, cash needs, and the impact on the company's stakeholders (bankers, lenders, equity holders, employees, customers, and vendors).
By working through the rigors of a business plan, management will identify issues and opportunities. Putting them in writing will help to crystallize the issues and the resolutions.
And that is the key reason to create a business plan: to help the company plan how to manage its business.