The Building Blocks for Business Planning
Data and dashboard and scorecards are building blocks that support valuable business planning practices. The execution of business strategy is often hampered by a lack of reliable information. In a 2013 report on business planning practices KPMG determined that “seven out of ten executives do not get the right information to make business decisions.”
Data provides a common business language, a set of definitions and agreed standards. Data organized through the use of corporate data models ranging from corporate to individual systems should adhere to a common set of standards. There should be robust controls of the master data and clear ownership demonstrated throughout the organization around data requirements. A system of controls and governance should be in place to ensure the quality, consistency and completeness of information resulting in data that is consistent where applicable across multiple business units.
Dashboards and Scorecards
A dashboard measurement system provides a simple, clear message about the strategy that all employees can understand and internalize in their everyday operations. Design an efficient system that includes automated dashboards and scorecards. Build alerts and early warnings into the system by setting limits so that material variances get flagged when you hit that limit. This eliminates the need for someone to sit down and sift through a monthly report that has 200 variances and try to determine which ones are important. You also get agreement among company leaders as to what are the most important measures.
A well-constructed dashboard provides the roadmap for achieving the company’s strategy. It decomposes high-level stretch targets into ambitious targets for the linked objective and measures on the dashboard. The organization can then define the strategic initiatives designed to close the planning gap between the stretch targets and the organization’s current performance. In this way, the organization provides the knowledge, tools and means to achieve the stretch targets. The dashboard helps the organization mobilize by focusing and aligning all of its resources and activities on the strategy for breakthrough performance. Employees are more willing to sign up to the stretch targets because they can see the linkages, integration and initiatives that make achievement possible.
The most important criterion for initiating the dashboard is that the initiating unit has a senior leader whose leadership and management style emphasizes communication, participation and employee initiative and innovation.
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Dynamic Business Planning
The plan must be dynamic to respond to changes in the industry, the economy, the competition, key commodities and other planning assumptions. A dynamic plan enables the organization to adapt and grow to meet changing competitive conditions.
Analytic Tools and Predictive Models
Analytic tools and predictive models are excellent methods for enabling organizations to adjust to changing conditions. They require fewer inputs than traditional planning and help to automate and shorten the annual budget cycle. Analytic tools incorporated into the business planning process enable finance to generate scenarios needed to question old assumptions. They also stimulate new thinking by churning through internal and external data. Analytic tools challenge the idea that professional experience and intuition are reliable substitutes for fact-based decision making – it takes all three.
Predictive models enable organizations to design models that focus on leading versus lagging indicators and provide much greater insight into what’s happening in the organization. In addition, predictive models enable planners to evaluate alternative scenarios based on driver fluctuations.
Predictive models should be designed and implemented using a driver-based planning model. The models should incorporate critical operational data or drivers that influence financial outcomes. Over time they increase the predictive accuracy of plans. A driver-based planning model is not purely financial in nature; the model captures the inter-dependencies of the business and provides a better-rounded picture for the future of the business.
Value drivers include market share; service and products – existing, new, mix; customer channels – channels, segments, service; and market growth – contract life cycle. These value drivers are owned by business managers to drive the focus across the organization. Clearly defined value drivers measure progress against targets that are linked to the organizational strategy.
If you’re new to designing predictive models, start small, use model-based forecasting to support target setting and build your experience using data to create meaningful scenarios.
Retain Best Practices
In the end, when it comes to designing your planning blueprint, determine what works for your company and confirm with stakeholders. Retain practices that add value and eliminate the rest.
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When should you start your exit planning? The time to be thinking about the sale of your company is when you start it. Everything you do from Day 1 should be focused on driving enterprise value upon sale.
Startup entrepreneurs typically fail to consider when and how they will prepare for an eventual exit. Thinking with the end in mind, companies manage their businesses better and that helps prepare them to sell.
How do I prepare my business for my eventual exit?
The core strategy to improve your business and achieve your periodic and long-term financial metrics is to use key performance indicators (KPIs).
KPIs are the metrics that judge your business’s performance based on the success you would like to achieve. They serve as your scorecard.
By incorporating key financial ratios and metrics into your regular internal financial reporting and understanding how these measurements impact value, it will allow you to be more proactive and strategic in your decision-making.
Many buyers appreciate this type of reporting as it suggests not only that you are managing your business strategically and with an eye toward key operating metrics, but it also help them understand your business better, which can reduce perceived risk.
Most small to mid-sized businesses are lacking in financial and operating information that is readily available to help managers make decisions. By having this information ready and in a format where buyers can quickly understand trends and indicators, you will likely increase the perceived value of your company and will be in a better and more informed position to make important decisions along the way.
Key Performance Indicators (KPIs)
Sales / revenues
Amount and percentage of cost of goods sold
Amount and percentage of marketing costs
Amount of inventory levels
Amount of accounts receivable
Amount and percentage of net income
Number of key financial / operating ratios (examples – current ratio, quick ratio, debt ratio, asset turnover ratio, sales/working capital ratio, etc.)
Most important for a startup – Amount of cash / cash flow
Number of customer leads
Customer conversion rates
Number of new customers
Number of subscribers
Percentage of customer satisfaction
Number of products manufactured
Number and percentage of product defects
Percentage of employee turnover
Number of new employee hires
Amount of payroll
Number of PR mentions
Number of website visitors
Other metrics that are specific to your business and industry
Metrics for a technology startup might include:
Intellectual property – patents
Quality and depth of your development team