One of the Most Beneficial Activities for Business Operations, Yet all too Often Overlooked.
Annual planning is critical to the sustainability and overall success of any business. It sets the direction, aligns all resources and provides a gauge to measure performance. Its what makes the difference between proactive and reactive management.
I grew up working in my family's business, the last day of 7th grade was the first day of my servitude. Luckily, I chose a different path for my future and went to college, the first in my family to do so. To this day, I am grateful for the lessons learned, both the good and the bad, in the family business.
The most valuable lesson I learned was the importance of planning. We ran our business without planning, just winging it, and we survived. Once I implemented long-term and annual planning, we grew to a multi-state franchise. It wasn't easy in the beginning, but after a couple of years, and some successes, planning became mandatory.
The Benefits of Annual Planning
Many small and mid-size business leaders fail to appreciate the importance of an annual plan. Some feel that annual planning is nothing more than taking a stab in the dark, a guess at best. Others, get overwhelmed by trying to predict reliably what the year will look like.
What they fail to realize is that an annual plan does not have to be perfect. It does not have to be exact, especially not the first few attempts. After developing a couple of annual plans, it surprisingly becomes much easier to develop and achieves greater accuracy.
Although the annual plans are not exact, they provide tremendous benefits to any organization.
Sustainability -Shifts an organization from reactive to proactive
Direction - Align all resources and provides guidance to attain objectives
Efficiency - Manages resources and expenses with greater accuracy
Growth - Increases predictability of revenues and drives growth
It has been my experience that once a plan is in place, momentum will build up as all parties have a greater understanding of goals, budgets, and resources. Confidence will increase and some level of certainty will be achieved. Operations will run much smoother, potentially improving all aspects of the organization.
Annual Planning Best Practices
How the experts do it!
We've compiled these tips and tricks to simplify the development of a truly effective annual plan. We are are not cutting corners, just providing guidance that will help overcome the common hurdles that deter many from creating a viable annual plan.
Identify Key Performance Indicators (KPI's)
What gets measured, gets improved. In today's data driven world, it is easy to measure just about anything, the challenge is knowing if it is worth measuring. Don't get lost in the data, stay focused on what really improves your business. Of course, revenue is critical along with expenses. It is fair to assume that expenses will increase as revenues increase, it is important that the increases are proportionate.
Here are some common KPI's to focus on
Customer Acquisition Cost
Customer Lifetime Value
Number of new accounts/clients
Ratio of revenue generated from new clients vs existing
There are many more KPI's, many are specific to your industry, such as inventory turns for the retail industry. We can help identify your KPI's specifically for your business and industry.
Use Historical Data to Set Standards
I recommend reviewing data from two or three years prior to establishing goals and objectives. While there are various factors that can manipulate the consistency of the data, it still provides a strong foundation for planning. Comparing figures for three years will establish benchmarks that will guide forecasting.
Break it Down and Build it Up
A plan can be developed by using the annual totals to identify the annual total for the plan. However, identifying performance by months and comparing performance from a few years prior will help identify any trends or rare occurrences.
Managing goals in smaller portions greatly increase the probability of achieving the ultimate goal. It also reduces surprises and enables greater depth in planning. Anything from promotions to production can be adjusted to compensate for foreseeable variations.
Push the Limits, Realistically
Einstein said, “The definition of insanity is doing the same thing over and over again, but expecting different results.” To achieve greater results, we must change how we think and act. Therefore, plans should include some new and innovative (if possible) ways of achieving goals. While goals should be a little higher than the year before if there are no external factors that would interfere.
At this point, the importance of annual planning should be clear. While the exact goals for your plan may not be clear, get started with an educated guess using historical data and adjust along the way. Just having a plan in place will generate a snowball effect of benefits, but you must start somewhere.