Why your company should have an annual business plan.
Why your company should have an annual business plan.
The main purpose of writing a business plan is to raise additional capital, right? Or if not that, to develop a master strategy for running your company over the next few years. Conventional wisdom would support either of these conclusions, but in my experience as a company owner -- and as the preparer of an annual business plan -- both are off the mark.
When I acquired Battery & Tire Warehouse Inc. about six years ago, I instinctively started to develop a business plan. That was a reaction to my 30 years in the Fortune 500 world, where the annual ritual was a given. Its purpose was simple: the plan was how we communicated our business strategy up the corporate line. Besides, it was mandatory. While the plans weren't always well executed, and while management wasn't always committed to planning, we at least went through the motions.
I must confess that it is only now, after developing plans for my company over the past five years, that I understand what the planning process does for a small to midsize business. And I've come to the conclusion that its value may be greater for a smaller company than for a large corporation. Let me describe why.
* The planning process. There is a lot to be said for the mental process of putting together a formal plan and committing it to writing. Many of us who run small companies tend to do our problem solving on the fly. Writing out a strategy requires tremendous discipline, and sloppy logic is much more obvious when you see it in black and white. In fact, one could almost argue that once you've written the draft of your business plan, you could simply toss it into the wastebasket -- you've already gained 90% of the benefit the process has to offer.
* The plan as a management tool. A completed business plan is a guide that illustrates where you are, where you are going, and how you are going to get there. The operative word is guide. As the year progresses, developments will require deviating from the plan. I can almost guarantee that the decisions you make will be better, though, because they're in the context of your original plan. And you're much more likely to question any major deviations, which makes it more likely that they will not simply be reactions to a short-range event.
* The plan and internal communications. The planning process forces communications to occur in both directions: you communicate your vision and concept of the company, and in return get feedback from your key employees. Again, small businesses in particular need this dialogue, since many chief executives don't let the rest of the organization know why we're doing what we're doing.
I've found that if you solicit ideas from key employees and involve them in the planning process, they will develop a sense of ownership that is invaluable in any company. Of course, you can also accomplish this face-to-face, but having the goal of a written plan pulls it all together and ensures that the give-and-take happens.
* The plan and the outside world. There are few things that will get you greater credibility outside your company than having a reasonably well put together business plan. I acquired Battery & Tire Warehouse through a leveraged buyout that left me with a net worth of zero and about $2 million in debt. It was therefore very important for me to be able to present a solid image to my creditors. In fact, since key creditors, such as vendors and banks, rarely see a decently developed plan from smaller companies, they are particularly impressed when one does come along. Some company owners -- I'm not one of them -- are hesitant to disclose all their numbers to people other than their major creditors. If you feel that way, you can prepare two versions and easily delete some of the sensitive numbers from one of them.
Having a plan satisfies a deep need in most of us who own smaller companies: the need to be taken seriously. It is hard to take a business seriously when there is nothing down in writing about the business's structure, its future direction, or its position in the marketplace. A few years' worth of business plans can earn a small company a tremendous amount of respectability.
There are plenty of books, pamphlets, and seminars that are how-to guides to building a business plan. I admit that at best I've only scanned some of them. At the least they do suggest a structure, such as requiring a mission statement, a list of strengths and weaknesses, a statement of critical issues, and so forth.
But there is no magic formula, and your plan will not be wrong because it fails to follow some special format. It's your story to tell, after all, and you should include whatever feels right to you. And the fact is, you'll probably make changes from year to year as you gain experience. The main point is to cover those items that are significant to your own business and industry, whatever the how-to books may say.
One of the hardest parts of creating a plan is letting go of the first one you do. Frankly, it takes about three years of annual plans to begin feeling really good about the finished product, so don't expect to work wonders with your first one. I mentioned this to a fellow entrepreneur not so long ago, who is still grateful. Perfectionist that he is, he said that he would still be laboring over the tenth draft of his plan had I not suggested that he wrap it up and get the thing printed. Now, he agrees that fine-tuning wasn't the answer. The key was to get the initial plan published and distributed. It is only then that the invaluable feedback process gets started.* * *
Charles J. Bodenstab is chief executive officer of Battery & Tire Warehouse Inc., in St. Paul. Previously, he held executive positions with United States Steel, General Cable, Kearney-National, and Gould.
ONE COMPANY'S TIME
The time it takes to prepare a plan is obviously very dependent on a variety of factors, such as the size and complexity of your organization, the availability of data, and so on. Here is an approximation of what it takes Battery & Tire Warehouse Inc. -- a company of 50 people and $12 million in sales -- to prepare its plan.
Number of hours
Discussion with staff 8
Number of hours
Developing graphs & tables 10
Writing & rewriting 10
Staff Time (4 key people)
Discussions (total hours) 16
Writing drafts (total hours) 8
WHAT'S IN A PLAN
Your business plan should be tailored to your company
Battery & Tire Warehouse Inc.'s annual business plan, which is spiral-bound, runs about 20 typewritten pages. While you'll want to develop your own format, a look at our table of contents will give you an idea of the scope of our plan and the level of detail we provide.
Table of Contents
-- General Discussion
-- Sales Breakdown by Product
-- Gross Profit by Product Group
-- Cash Flow
-- Balance Sheet Items
The first section reviews the previous year, with a comprehensive discussion of the financial results and a detailed explanation of deviations from the year before and from the plan.
-- Overall Sales Strategy
-- Sales and Profit Strategy by Product
-- Gross Margins
-- Net Profit Plan
-- Capital and Personnel Plan
-- Price/Volume Sensitivity
The second section is the actual business plan for the coming year. It is loaded with hard data, tables, graphs, and a discussion of our rationale for proposed strategies and projections.
-- Nature of the Business
-- Customer Base
-- Organization Structure
-- Sales and Marketing Structure
-- Delivery and Trucking Operations
The final section is a general description of the company that explains our basic structure. Its sole purpose is to orient the reader; contents do not change significantly from year to year.