CFO Insight LLC
Planning – simply a promise for future delivery… a listing of accountabilities that may range from introducing a new product line, to launching a business in a new country, to a reorganization that allows for improved performance. Business plans include financial statements such as a P&L, and Balance Sheet. Annual and strategic plans often include discussion of new product developments, expanded markets and market share, pricing adjustments, organization changes and market strategies, and other major investments such as plant expansion. Forecasts may be for shorter periods, such as the quarter or remainder of the year.
Plans become particularly important when you are selling your business, since a buyer is buying future cash flow. That is, cash flow that can be predicted with a reasonable assurance of delivery. If the target Company executive team can manage the business to a predictable outcome, the Company is more valuable.
Plans can be ad hoc, without any specific scheduled timing, or a regularly scheduled process that meets business requirements. In a public company, this may be quarterly to be consistent with earnings releases… in a private company, it may be timed to meetings with banks, creditors or shareholders.
Plans should concentrate on the critical issues, which could vary by company, industry or stage of growth. In a high-growth company, issues may relate to new customers, order flow, customer service levels or working capital. In a more mature capital goods company, key measurements may be backorder position and manufacturing performance.
Basic planning will be developed using those keys to the business. Effective management will measure performance against those expectations periodically. The business metrics used should be easily monitored, and reported in an accurate, consistent, timely fashion to the correct audience. What is the right audience? On the shop floor, it may be the plant manager reviewing closed work order performance… or raw material pricing … or inventory levels. For the CEO it may be backlog, order flow, EBITDA, and working capital position. Whatever metrics you choose, these should be one basis for effective business planning.
Once the plan (forecast…) is developed, executives should understand the reasons for variance. Both positive and negative variances should be investigated, and once the root cause of the variance is identified, actions should be taken.
This planning cycle of developing expectations, measurement and corrective action will engage the entire management team, since you have established accountability. Such a planning and accountability process will provide value to potential buyers … that is credibility to any of your projections.