Planning (and and its twin brother, measuring results) is what sets fast-growing, successful businesses apart from businesses that just mush along. But when most of us think about planning, our eyes glaze over or we suddenly develop a need to return that overdue library book. If it’s so critical, why does no one want to do it? Because most people make it too difficult.
So here is annual planning in 3 easy steps. This is not a business plan, the document you write to get people to give you money. This is an operating plan for the coming year. It’s something YOU will actually use. Instantly, it should seem more useful and relevant in that context.
- Step 1. Set realistic revenue goals.
- Step 2. Match expenses.
- Step 3. Balance revenues and expenses to get the right bottom line.
So let’s pretend you only have 8 seconds to think about this since you are so busy. (Yes, I DO like the number 8). You can still get value as the critical part is the thinking. Here is what you do:
- Step 1: Set realistic revenue goals. Think about the last 3 year’s growth history to see trends and even out boom and bust economies. Think about new products and services you are planning to offer or planning to retire. Set next year’s revenue goals in line with the past years’ trends factored up (or down) for changes in products or services.
- Step 2: Match expenses. More sales usually require more raw materials and people expense. New products mean more marketing. Start by thinking about last year’s total expenses, bump them up for inflation, then add increased expenses for making all those extra sales.
- Step 3: Balance revenues and expenses. If your revenues less expenses don’t give you the right bottom line, then tweak revenues up and expenses down until they do. Don’t rule out extra financing if you cannot make it work. Remember that this is the most important part of the exercise as it forces you to think about how your revenues and expenses fit together.
Yes, 8 seconds is really a bit short but it got your attention I bet. You can gain some insight with the 8 second exercise but 8 minutes is really better as you can start to write some things down now and get some actual numbers. This is likely to be more accurate. Here is what you do:
- Step 1: Set realistic revenue goals. Look at your final income statements for the past 3-5 years. Haul out your calculator and actually calculate the growth in revenue year over year. You will probably be surprised as memory doesn’t always match reality. You want to use 5 years if you can as that will balance out this dreadful economy. We are looking for trends. Take the average of the 5 percents and apply that to 2009 and that is your best starting point for 2010. Adjust it up or down based on new products and services, new locations, etc.
- Step 2: Match expenses. Take your final expense number for 2009 (get a projection for the year from your accountant or take January-September and divide by 9 then multiply by 12) and bump it up for inflation. It appears that most people are predicting flat pricing for 2010. Remember that the government didn’t adjust COLA up this past year. Now figure out how much additional expense you will see because of your increased sales activity. More gas to visit more prospects? More networking club fees to get out there more? More marketing and advertisting expense? More training to offer that new service? Add these on top of your total expenses.
- Step 3: Balance revenues and expenses. Subtract your new expenses from your new revenues. Is it negative? For most people it is. Now comes the fun. Think about what you can tweak to get the balance right. Hopefully your expenses are not increasing faster than your revenues. That is not the way to profitability! Can you raise prices on some premium items? Can you offer more higher-priced items? Can you stretch your sales goals more? Can you partner with someone to sell more? Are there natural ways to package your product or service so people will buy more? Will you be able to get better raw materials pricing since you are buying more? Can you use college students to do some work for your as part of a class project? Can you train someone internally to take over part of what you do to free you up? The key is to understand the tradeoffs between more revenue and more expense. This is what will set you up properly to achieve your goals in 2010.
No one has any time these days but I would ask: if you cannot spend 8 hours out of the entire year to think about 2010, then I have to wonder how serious you are about your business! There are 2,080 business or working hours in a year. 8 hours is only 0.4%! You probably spent more time than this on what kind of coffee to have in your office! Big companies spend months doing this but you don’t have to. Here is how to make the best use of your 8 hours:
- Step 1: Set realistic revenue goals. Start by thinking about what worked well in 2009 and what didn’t work so well. Make some ‘new year’s resolutions’ for your business. “Will continue to increase higher-priced offerings”, “Will not waste time on sales opportunities that don’t fit my product line”, etc. Next, make a list of initiatives you have for 2010. Things you have been thinking about for the past year. “Make a standard entry-level offering”, “expand south into Newtown”. Now take your resolutions and list of initiatives and pick 3, only 3, goals to focus on for the 2010. Sure you want to do more, and maybe you will, but if you narrow it down now, you are much more likely to succeed. NOW do the exercise to figure out the trends for the past few years from the 8-minute version. You will have much more insight into how to adjust your revenue numbers up or down. The key here is that sales just don’t materialize out of thin air. You have to do something DIFFERENT for your sales to increase. Figure out now what it will be.
- Step 2: Match expenses. Since you have more time, you can dig into your expenses line item by line item. Do the same exercise as in the 8-minute version, but now look at each line item. Some are easy–your office lease is likely to stay the same. But look carefully at marketing, training, networking, supplies, T&E and see if they truly reflect what you plan to do next year. All those new activities you must do to make your top line go up, will likely have a cost.
- Step 3: Balance revenues and expenses. Now you can really dig in. This is where the magic and the insight happens. As you try to squeeze more profit out, take a look at the suggestions in the 8-minute exercise. Those are some of the tricks to use. But now that you have more detail in front of you since you are looking at all the expenses, really take a look at what you are spending and why. Really dig into what exactly it will take to increase those revenues even if just a little here and there. Finally, the best thing to do is to break those revenue and expense numbers down by quarter. Projecting $160,000 in revenues for 2010 is abstract. Projecting $20,000 in Q1, $60,000 in Q2, $55,000 in Q3 and $25,000 in Q4 is much more concrete. If you have a busy season, you should reflect it.
So here are 3 ways to get your planning in for 2010. I hope you do at least 1 of them. I guarantee you will have a more successful year if you do.
