Deseret News Archives,
Sunday, December 9, 2001

Edition: All
Section: Money
Page: M01
Length: 71 lines

It's still wise to make plans

We are told, "If you fail to plan you plan to fail." And, "Planning is the lifeblood of a successful company." Business students are instructed in writing detailed business plans, and we hold business plan competitions too numerous to mention all around the country each year.

The dot-com dizziness brought business planning to a whole new level. Capital was available to anyone with a half-baked idea. Business plans began to appear in torrents. The typical plan during the height of the mania showed an Internet idea with little or no current revenue suddenly raking in rivers of cash. The scenario was so ubiquitous that such plans got their own moniker -- "hockey-stick plans" -- for the revenue line that hugged the base line for a time and then shot up off the top of the chart.

In the subsequent crash, however, business planning has received a black eye. It's time now to return planning to its rightful place as a useful tool.

Why plan? A plan is a set of goals that helps you reach your objectives. A good plan takes long-term strategic goals (product line, market share, growth rate, etc.) and constructs short-term tactical steps (budget, headcount, marketing, etc.) to reach them.

Who is the plan for? There are two audiences: internal and external. The business plan is traditionally prepared by a planning team. But since all employees must eventually "buy-in" to the plan for it to be successful, they should have input into the planning process. Managers should be assigned to manage to the plan, and compensation -- especially bonuses -- tied to the plan.

The business plan is also prepared for an external audience that includes lenders, investors and potential buyers. It is tempting to have two plans, but this should be avoided. While the external plan may be cleaner, it should not differ greatly from your internal plan.

The best plans I have seen have two sets of projections. The first, the base plan, is the minimum expectation. This is what the business should generate easily if everything remains normal. The second, the stretch plan, is the one to work for and to be rewarded for if reached.

How far out should you plan? Traditionally, long-range planning has been done for five-year periods. Given the pace of change, a five-year plan is often a waste of time. Five-year planning may be appropriate for new-product introductions and capital investment scheduling, but little else.

Three-year plans have little worth, too, although many banks and investors require a three-year plan and most companies maintain one.

However, it is critical to have a one-year plan. Prepare and maintain a rolling 12-month plan. Create a detailed revenue and expense plan for the next 12 months, and then update it regularly (once a quarter is probably sufficient, but I do it once a month). It's easy to do once you make it part of your schedule.

First, put the plan on paper (for me, that means in a spreadsheet). At the end of the month replace the target numbers with the actual numbers and let the

spreadsheet re-project to the end of the year. Include lines that calculate the deviation from the plan for revenue, expenses and net income. Look at those closely and understand where you are high or low. Make decisions to fix any problems. Don't change the plan -- manage to the plan.

After a year or two, you will be able to predict with precision your business results 12 months out. That is "effective planning" -- one of the key ingredients to a successful business.

Craig Earnshaw is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.

© 2001 Deseret News Publishing Co.