Do you feel as if you spend most of your time "putting out fires"?  Do you feel as if  you aren't in control of your business?  If so, your company and you could benefit from Business Planning.

Business planning involves charting in advance the direction, activities, and costs of your business and its relevant parts.  It can focus on specific activities, such as planning the launch of a new product line or entering a new territory; on specific facilities, branches, departments or divisions of your company; or on your company as a whole.  It can also cover a variety of time periods - the next month, the next quarter, the next year or the next five years.  It can focus on just the financial aspects (a budget), on the internal operations (an operating plan) or on the future direction of the company (a strategic plan).

A good illustration of the business planning process can be seen in examining what is involved in creating an operating budget for an entire company for the first time.  The typical budget cycle starts approximately three months before the beginning of the company's next fiscal year.  The company assembles historical information - financial operating results for the prior three to five years as well as current year-to-date information for the last nine months.  This historical information is analyzed for cost relationships (for example, cost of sales as a percentage of sales revenue) as well as for trends (for example, medical insurance costs have been increasing at a rate of 10% per year for the past three years).

Next, the company forecasts monthly unit sales by either product (if that level of detail is tracked) or product line, and applies projected unit sales prices to each product or product line to obtain monthly sales revenues.  Using both the historical cost relationships and trends identified above along with expectations of anticipated changes (for example, if a major supplier just increased the price of certain raw materials), the cost and expense elements of the budget are calculated.  This then yields a projected income statement and statement of cash flows by month.

These projected statements are further analyzed.  If the projected net income is lower than desired, either revenues must be increased or expenses reduced or some combination of the two.  If the statement of cash flows indicates that there will be insufficient cash to support operations at some point, then either arrangements must be made to obtain short-term financing or the budget must be adjusted to eliminate the negative cash flow.  Remember, however, that these adjustments must be realistic and practical  - not just arbitrary changes to the numbers.

Creating the budget, like all business planning, is an iterative process.  It takes several rounds of analysis and adjustment to reach a final budget.  However, the business planning process doesn't end there.  Actual operating results are compared to the budget on a monthly and quarterly basis, differences are analyzed, and, if necessary, the budget for the remainder of the year is modified to reflect changes in assumptions or operations (for example, the unexpected jump in energy prices this year has caused utility costs to be adjusted in operating budgets).  This entire process is repeated annually.

Having a budget or any type of business plan allows for more proactive planning for the future as opposed to reacting to the unexpected (in our example above, the budget would allow you to anticipate a future cash shortfall and plan ahead for it instead of being surprised by it). 

 This article was written by David A. Anderson, Director of Strategy and Management Services, Margolis Consulting Services- representative member of BKR International in Philadelphia.