“The business has been on a wild ride recently and I”™m not at all confident that I can predict what”™s going to happen. I find myself adjusting to what”™s happened already instead of driving toward the future I want to have.”
Thoughts of the Day: Build a plan, then adjust and learn. Define where you want to go; that helps everyone follow your lead. Build up BOLR funds (more on this below) to give you room to maneuver when things don”™t go according to plan. Track key performance indicators (KPI) so that you know what needs work. Your job is to lead: get out of the day-to-day of the business so you can do just that.
Rarely do things go according to plan. That doesn”™t mean you stop planning. Most entrepreneurs struggle because they don”™t spend enough time looking at what might happen.
Build a plan and use it to play out “what if” scenarios ”“ if things go according to plan or not. Get a clearer understanding of how well prepared the business is to handle a variety of situations. Use the “what if”™s” to think about how the business is likely to behave under a variety of conditions.
Define what you want, and what you think it will take to get there. Lay out the year-by-year parts of the plan, looking five years into the future. Estimate annual revenue, cost of goods sold and gross profit, overhead expenses, net income, balance sheet impact including changes in assets, liabilities and equity, and cash flow.
Test the plan. What happens if revenue comes in above or below plan? Same for cost of goods sold and gross profit. What overhead expenses might the business expand or cut if things do or don”™t go according to plan? What would net income be used for? Where would funds come from to fill in any shortfall? What would that do to critical ratios on the balance sheet?
A clearer understanding of what might happen under a variety of conditions helps you to explain to those around you what needs to happen and why. When people understand the details of your vision, they are more likely to support and engage with your plan. They may ask challenging questions, which will help clarify the plan and identify holes and opportunities you may not have thought of.
So, how do BOLR funds come into play? BOLR stands for bank of last resort. That”™s what every entrepreneur is. When the bank will no longer provide loans, when the business takes a loss, when things go wrong, the owner takes the hit in the form of decreased income, or even worse, having to put money back into the business.
Have at least three to six months of overhead in cash on hand. That”™s the minimum. Keep it readily accessible, even if it means using low-interest accounts like money markets and CDs. When things go wrong, BOLR funds need to be there to back up the plan.
Having laid out a year-by-year forecast, identify KPIs that will help you know if things are on track, or not. A few might include: year-over-year growth rate, cogs and gross profit percentages, average overhead dollars and annual overhead increase percentages, and year over year increase in net income percentage. There are also critical balance sheet ratios of current assets to current liabilities, debt to equity, and productivity measures such as revenue / FTE (full time equivalent employee) and inventory turns.
When things go wrong, it”™s usually not the whole plan that”™s off. Use KPIs to quickly identify what needs attention. Then focus everyone around you on finding the root causes so you can fix the real problems.
Building a plan and tracking results help an entrepreneur make the transition from working in-the-business to working on-the-business, which is where every business owner needs to be.
Looking for a good book? Try “The Ernst & Young Business Plan Guide” by Brian R. Ford, Jay M. Bornstein, Patrick T. Pruitt.
