Do I Really Need a Business Plan?

Dear Jayme,

Business plans sound like a theoretical project without much use in the real world. I’m a small guy doing under a million a year. Do I really need to bother with a business plan?

Jan

Dear Jan,

You already use business plans every day because you couldn’t operate without them. They may be small-scale, like a schedule to order materials and a budget to get the Jones job done, but they’re no different than a more comprehensive, long-range plan. At the end of one day, you see where things stand against your plan and reset your micro-plan for the next day. The question is how to make a one, two or ten-year plan equally useful.

A good plan must have:

• Relevance to daily operations-If you want to gross $2 million next year, what does that mean in monthly revenue? How will you produce that-with new accounts, more employees and/or bigger equipment? You won’t know everything, but you can get close.
• Realistic goals-If you’re doing $300,000 now, a $5 million target for next year is probably meaningless. Long-range targets should be aggressive but doable.
• All the pieces are covered-Revenue, expenses, manpower and capital spending are interdependent, and you need to really know the relationships between them.
• Solid data as its foundation-If your systems can’t provide solid historical and ongoing financial and operating information, you’re running in the dark. Getting your systems in place and having good data is your first priority, whether you’re building a plan or not.

Follow these Guidelines:

• Structure the plan the same way you think about your business-Include revenue, expenses and any other Key Performance Indicators.
• Engage your employees-They’ll provide valuable input, and you need their buy-in to make the plan a genuine roadmap.
• Track actual results against the plan-Do this at least every month and weekly if you can-the tighter the better.
• Identify and fix the causes of the variances-Understand variances from the plan, and make adjustments to keep things on track. The longer you wait, the bigger the variance will become.
• Adjust the plan if absolutely necessary-Sometimes things drop out of the sky and drastically change the plan assumptions. If that happens, bite the bullet and reset the plan to the new reality.

The planning process is far more than a way to set targets. The process forces you to think about your business and how its pieces work together and support your assumptions with data instead of hunches. Many owners know very little about how their business really works except for the daily technical operations. Creating a detailed plan and religiously tracking actual performance each month will fix that.

Does all this really provide any value? Absolutely. Simply put, businesses that use plans/forecasts/budgets as their guidelines always get better results-whether they’re big companies or small companies. Make no mistake-you won’t hit your targets every time, but you’ll make far more progress toward them than if your horizon is only a day, week or month away.

Cheers!

Jayme

Construction Business Owner, January 2010