Business Planning - Creating Plans
Ask Bob

Ask Bob About Creating Plans

?How much equity will I have to give up to equity investors?

This primarily depends on what development stage your firm is at and how much money you are seeking relative to how much capital you have already raised. If your firm is up and running and showing profitable sales, and you are looking for additional capital to finance your expansion, you will probably need to give up only a small portion of equity. On the other hand, if your firm is only at the idea stage and the outside investors are going to contribute over 90 percent of the funding, then you will probably have to give up at least half, if not more, of the equity.

?Should I hire an expert to prepare the financials for my business plan?

It’s better to prepare them yourself. A potential lender or equity investor wants to see not only that the numbers look good, but also that you understand them inside and out. If you can’t answer highly detailed or thorny questions about how you arrived at your numbers, you aren’t going to get your funding.

?How far in advance should we start our annual planning process?

As a rule of thumb, I would suggest that you begin the annual planning process four to six months before the beginning of the next calendar year.

Many large corporations begin planning several years in advance, and this is why larger firms have a well-deserved reputation for moving as slow as dinosaurs. For a smaller, growing firm, it is a waste of time to do any detailed planning more than a year in advance; the company, your markets, and your competitor’s plans will have changed too much to make such long-term planning valuable. The closer you are to the upcoming year when you plan, the more relevant your plans will be.

On the other hand, though, if you wait until the last minute to start annual planning, then you will have to rush through the process to get it done. The emphasis then will be on getting the plan done, not making it as good as possible. You and everyone working on a plan need to have enough time not only to get the plan done, but to do it well. You should also have time to weigh major alternatives and reconsider how well each function contributes to the overall plan after you’ve completed it.

?Should all parts of the annual plan be given equal attention?

No. If some parts of your business will change little during the next year, there is no reason to summarize these areas in great depth.

Remember that the role of the owner or CEO is to be sure that the planning efforts focus primarily on the areas that will really matter to the success of your business. Often planning can become focused on rivalries between different functions or lost in debates about factors that are relatively insignificant or not within your control. The CEO needs to see that plenty of attention is given to larger issues, such as

? How many new products should we launch next year?

? Why is our marketing budget so high as a percentage of sales?

? What are the risks of increasing prices on our core products or services?

?What level of detail should budgets contain?

Budgets in business plans to raise money should have little detail beyond breaking expenses out by departments or functions. You should, however, have supporting details available on request.

Similarly, when creating annual plans, even for a very small, one-person business, I suggest that you have two levels of detail. One should be a budget summary that has just one entry for projected sales of each major product or service line, and just one entry for projected costs in each functional area such as marketing, cost of goods sold, etc. A budget summary is very important in helping you get a handle on the cost structure of your business and its major trends.

Then have a separate, more detailed budget for each functional area. But don’t get buried in detail. I would suggest a maximum of ten to twenty entries for projected expense categories if your business is small.

?How hard should I try to stay within budgeted expenses?

You should be more concerned in seeing that each function stays within its entire budget. For example, if the marketing department spends much more than projected on publicity, but makes up for it by spending that much less on advertising that’s fine.

Don’t be terribly concerned about staying within budget if sales are above budget. But more than once I have let expenses soar above budget because sales were above budget. Then, later in the year, I discovered that expenses rose more quickly than sales. So if sales are increasing, make sure expenses increase only by a like percentage.

?Is it worthwhile to completely redo the budget in the middle of the year?

Generally, no. It just takes too long and too much effort to make it worthwhile.

If your sales are running way above budget, try to be sure that expenses are not rising disproportionately. Watch out particularly for new, discretionary expenses that were not on the budget—they can always be added to the budget for the following year.

If your sales are running a little below budget, try to cut expenses in a few limited areas.

However, if your sales are running way below budget, I strongly recommend reworking the entire plan and carefully re-examining each and every item of the budget.

?What should I watch out for in the annual planning process?

Most of all, you want to keep the emphasis on considering major alternatives and new initiatives and re-examining the ways the firm is currently doing its business. You want to be sure you and the other managers (if there are any) don’t spend all of your time just making sales and expense projections—that’s just forecasting the future, not managing the business. For example, if you are currently shipping your product to local customers with your local delivery truck, you don’t want to just project how much it will cost to run the truck next year. Instead you may want to consider selling the truck and contracting out the work to an outside delivery service.

?Do salespeople tend to be overly optimistic in forecasting?

Yes. But there are some who try to be very conservative so they have less pressure during the year or so they can look better when they deliver sales that are way over budget. After you work with different people you will find how people in every functional area tend to approach the budgeting process, and you can work with each one to be as realistic as possible. Also, I’m a big believer in frank and open discussions about budgets, and I think that people from other functional areas can often offer constructive suggestions and serve as a reality check for one another.

?Why do I need a budget? Can’t I just try to be really frugal on every expense?

Believe me—I’ve tried this approach, and it never worked. Running a business of any size is too complex to do by the seat of your pants. I’ve found that even if I try to be cheap as dirt on every expense, without a concrete plan, costs can still mushroom out of control and wipe out profitability.

?How can I tell what costs for different parts of my operation and net profit and goals should be?

You need to get data for firms in your industry—perhaps from an industry association. Sometimes trade magazines and newsletters publish statistics for their industries. Compare your numbers with firms of similar size in the same industry.