Are You Happy You Made $1 Million?

Congratulations, your business made $1 million last year; how are you feeling about it? I bet you're ecstatic if $500,000 was a dream or crushed if you imagined $2 million. The difference between those emotions? Your plan. As Yogi Berra once said, “If you don’t know where you’re going, you might wind up someplace else.”

Where is your business headed?

Whether in your personal or business life, planning sets expectations. Where do you want to go, how and when will you get there? It helps us set objectives and gets increasingly detailed. And then, life happens!

Just before Christmas, I flew to Ohio. I had a great plan for getting to the airport. Drive 90 minutes to O’Hare, park in lot F, take the tram to the terminal, grab lunch, and arrive at the gate 75 minutes early to do some work.

What happened? I got to the gate as boarding began. Traffic delays had to park in Lot G and wait for the bus to the tram, endured a TSA pat-down, and got behind someone I swear had NEVER ordered at McDonalds!

Whether we think about it or not, we humans constantly plan. It is a survival instinct, and we are hard-wired to do it! 

From Driver’s Ed to Situational Awareness

I learned IPDE at 15, but until I became a business owner I never realized it also applies to running a company. Assess what’s going on, decide, then act. When you’re driving, it looks like this:

• Identify - You scan the environment, focusing ahead for risks. Less frequently, you check the mirrors for what’s coming from behind. This time, approaching an intersection, you see another car that isn’t slowing down.

• Predict – You immediately assess what alternatives could happen. Will the car stop or speed up, should you slam the brakes or turn?

• Decide – You determine what to do next. Best solution? Try to pass behind it as it enters the intersection.

• Execute – You communicate and implement the decision. Turn on the right turn signal, blow the horn, turn the wheel, and brace for impact!

IPDE happens in a millisecond. It is a process that keeps us safe. Law enforcement trains on it but calls it Situational Awareness. The objective is to heighten an officer’s sensitivity to the environment and people’s behavior.  The more officers train and apply what they learn in the field, the safer they, and the public, will be.

In the business world, company leaders make instant, very tactical decisions every day. They observe what is happening, consider the behaviors of co-workers, customers, and others, and then make decisions.

Whereas IPDE and Situational Awareness are immediate, planning is future-focused and happens on different levels. Typically, “we” do not do it. We turn to experts with experience thinking about the objective and then the goals, strategies, and actions needed to achieve the objectives.

Let’s say your objective is to move into a new house next year.  Your experts may include a real estate agent, builder, banker, and financial advisor. They will work at different times and over different time horizons.

Planning: You Will Be Wrong 100% of the Time

Planning occurs over different times by different people doing different kinds of work. When it comes to business financial plans (which are very different than personal financial planning!), we often hear about budgets and forecasts.  Here’s how I have come to look at business financial planning: 

1.      Strategy: Created by the owner or most senior leaders, this is a longer-term plan to achieve desired business results and assess what investments in people, technology, and other resources are needed. A strategic plan designed to achieve a desired result with these resources typically includes a 3-5-year financial projection.

2.     Budget: Established by the CFO or other top financial leader for the coming year, this is typically a detailed financial revenue and spending plan for the next 12 months. When done well, includes the key assumptions that drive sales, costs, and expenses. Once established, budgets don’t often change.

3.     Forecast: Created by a financial analyst, a forecast is an updated outlook based on actual performance and the latest assumptions. An updated forecast should provide an analysis of what key variables explain the change and recommendations for future actions leaders should consider.

Smaller businesses, at a minimum, should set 2-4 broad objectives and the key activities (strategies and tactics) needed to achieve them. Even this level of planning provides direction.

Remember, life will happen.  Business results reflect the collective impact of hundreds of daily decisions made by leaders, other employees, customers, suppliers, and competitors. Even the weather! It should be no surprise that any projection will be 100% correct. 

The Real Value of Planning?

Planning clarifies where you want to go, how you will get there, and what reward you expect when you arrive. The true value of the planning is the expectation it sets. A plan built on reasonable, data-based assumptions for key variables enables you to measure performance and understand why actuals differ from expected.  Setting a goal without a plan is no more than a wish.

Planning can be hard. There is a fine line between not enough and too many details. You must understand the activities that drive revenue and costs and the relationships between them. Organizing inputs and building a model that changes with different sales levels takes experience. Don’t go it alone if you’ve never built a robust financial plan. Data2Profit can help.

I wanted to spend 75 minutes working at the gate.  How much do you want to make? 

Happy Planning!