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Business planning: Why conduct a multiyear strategic financial plan


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Why should businesses go through a planning exercise? How much effort should be put into it? These are questions many business leaders ask as they try to improve their company performance and value. If a company is already successful, what benefit is there to take time and effort to conduct a planning effort?

Rob Daly, senior advisor with Business Transition Advisory Services group, and a business planning professional who has designed and led business planning processes for numerous firms, recently discussed why and how to conduct a multiyear financial and strategic planning process. Excerpts from their conversation follow below.

What does a good business plan look like and what is included?

A business plan should go beyond one year. This forces a company to define a longer-term objective and determine how to accomplish defined goals. Companies have a significantly greater chance for success if they define what success looks like and what it takes to achieve it.

The ideal length for a business plan is three years. Anything less is too short and anything longer is too far into the future where it is difficult to predict. The first two years of a financial plan should be at least on a quarterly basis and ideally monthly. Progress can then be quickly analyzed.  Beyond that, in the third year, it’s normally acceptable to plan on an annual basis.

An effective business plan includes a financial plan with income statement, balance sheet and cashflow. A financial plan needs to be supported by details such as people plans, investment plans, marketing and sales plans and, of course, connected to operations.

The most costly and important component of almost every business is people. A people plan defines the future organization structure, including positions to add and eliminate from the organization, when to add and eliminate, and how much each position costs in terms of salary, benefits, office space and other costs. In the short-term, the people plan should address actual people. For example, do we promote from within or recruit from the outside?

The investment plan should include normal ongoing investments needed to support the business, such as technology. Also important is to include any strategic investments necessary to achieve the financial plan.  All organizations, large and small, have limited resources and companies often have more strategic investment options than they can fund. If done right, the planning process increases financial outcomes as the organization chooses the investments that provide the maximum benefit and does not, therefore, waste resources on projects with little chance of success.

The final, and arguably most important, part of the business plan is a strategic plan. A plan that includes only future financials is not nearly as valuable as one that includes both financials and strategies. It is the strategic component that really adds value and helps firms take their businesses to the next level.

Many business owners operate over a period of several years and very successfully without a formalized business plan. Why should they go to the effort to develop a business plan?

Many times, as a business gets to an inflection point, they find that a business plan is essential. For example, if a company wants to raise debt or equity funding, leadership finds that a multiyear business plan is a requirement.

Banks almost always require a business plan for all but routine lines of credit. Any serious equity investor, whether it be venture, private equity or an individual investor, will always require a robust business plan. Similarly, if a business owner gets to a point where they want to exit or sell the business, a business plan will always be needed. Not only is a business plan essential for exit, but if it is done well, it will help demonstrate the value of the firm and have a significant upward effect on the selling price. Almost all companies get to some inflection point eventually and end up needing a business plan. Once at that point, if you do not already have a business plan in place, it is extremely difficult and time-consuming to develop one. And frankly, it is nearly impossible to develop a plan that is meaningful on a tight timeframe.  Also, with current spreadsheet technology, tedious historical, manual business relationships can be easily modeled.  “What-if” scenarios can be developed, understood and easily changed.

If a business is operating successfully and does not have the need for financing or exit anytime soon, then why go to the trouble to develop a business plan?

A good business plan is essential for any serious business that wants to get to the next level. Putting together a well-thought out plan helps the company hit big financial goals by turning the journey into a step-by-step process. The business plan process uncovers issues and opportunities; and results in identifying strategies to take advantage of market opportunities and overcome market and or operational issues.

A business plan also helps achieve alignment amongst members of the leadership team so that all are moving in the same direction. This human result is one of the most important outcomes of a business planning process. Through the process, it is often discovered that the management team members are moving in very different directions. The planning process fosters communication, and forces leadership to make choices and decide on a common direction, which obviously can have a powerfully positive impact on the company’s future.

What should be included in a strategic plan?

A strategic plan includes establishing business objectives. Meaning, what objectives do you want to achieve and how can you achieve them. Objectives should be aggressive but achievable as the organization needs to set goals that really push the business ahead. For most companies, the best strategic plans are focused.

Companies that are really good at planning determine a small number of the most powerful strategies that will move the business forward. An error that I see with some companies is adopting too many strategies, and not focusing on anything. Focusing on what is most important and aligning the entire organization around that can be a very powerful recipe for success. Another flaw that I see in the way companies conduct planning is that their strategic plan is not specifically linked with the financial plan. The best plans have specific linkage between the two.

For example, if a company’s strategy is to grow sales by adding sales people, then the financial plan should contain the dollars and timing of both the costs of the new sales people as well as the added revenue they will be expected to deliver. While this seems obvious, many do not make this type of specific connection between their strategic and financial plans.

While the best strategic plans are focused, they also get down to a lower, more detailed level, especially in the short-term. Good strategic plans get to a tactical level in the short-term, including what tactics, timing for each tactic, and who will be responsible for meeting tactical timing. Taking the above example a step further, a tactic to achieve the strategy to grow sales by expanding the sales force might be for the vice president of sales to recruit and hire a certain number and type of sales people at a specific cost and over a specific time period. Getting to a tactical level with timing and ownership assignments is obviously a way to actually achieve the strategies.

Who should participate in the planning process?

In most cases, the leadership team should work on the planning process together. It is essential that they conduct group meetings to decide on where they want to go; how they want to get there; and what the financial ramifications are. Depending on the organization and how it operates, it’s helpful to include management one step lower in order to get a fuller range of ideas, participation and eventually alignment. Leadership team members will want to work directly with individuals in their organization to flesh out the strategies and financial plans for their specific area. Once the plan is done, it is helpful to communicate the plan throughout the organization. This helps get everyone aligned, understand what their part in the plan is, and understand how other organizations are dependent on them in order to complete assigned tasks.

Are there any other aspects to the planning process that we have not talked about, yet?

It’s important to stress, a business plan helps company leadership have a read on cash flow in both the short-term and out into the future. They may be forced to make choices and decide which strategies, programs, or new hires they can afford to invest in and which ones they just can’t afford. In many cases, it may be determined that they need more funding or a different capital structure. A plan that goes out beyond a year provides early warning on issues with cash flow and funding needs.

An effective business plan supporting the strategic objectives can be endorsed by creating company dashboards that monitor the assumptions and the “big” financial goals. A dashboard with the key information helps management stay on the road to success.

A good planning process also evaluates and considers the company’s industry and competitors. When developing strategies, evaluating competitive advantages and disadvantages should result in strategies to overcome weaknesses and capitalize on strengths. Determining what makes the company different, what its competitive advantages are, and how best to capitalize on those advantages can arguably be the most impactful outcome of a planning process.

So, what overall advice do you have for companies that want to conduct a robust multiyear planning process?

First of all, the company needs to pick someone to lead and coordinate the process. It should be someone who has experience and is equipped to coordinate a planning process. If the person is part of the company leadership team, then he or she should also be comfortable facilitating the process while participating in it.

The first thing the leader needs to do is create a well thought out participative process for the organization to follow to pull the plan together. The plan should be multiyear, ideally three years; it should include financials and strategies which should be linked together; and it should include more detailed tactics in the short-term. One of the most important outcomes of the planning process is alignment amongst the leadership, so the process needs to be designed so that there is opportunity for the leadership team to work together and agree upon the key objectives and strategies of the organization.

RSM’s Center for Business Transition advisors provide impartial, strategic guidance to help you make the best choices for you and your business. Learn more about our business transition process.



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