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Most small businesses can benefit from carrying out operational business planning at regular intervals. By operational planning I mean planning for the nuts and bolts issues you need to be on top of in the near term. To help you get started, this article will explore what’s involved, how to plan effectively and the benefits you should obtain if you do.
There is another type of business planning that you’ve probably come across which I’ll call strategic planning. This is planning for the long term — commonly five years into the future. Businesses often need to create a long-term strategic business plan if they want to raise funding from external sources like angel investors or venture capital funds.
Creating this kind of multi-year strategic plan involves a lot of work and it’s a different discipline to the operational planning I’m going to address here. If you’d like to know more about creating a simple strategic business plan, I’ve addressed it in this separate article.
Operational business planning: What is it?
Operational business planning is the process of developing short-term plans that put your long-term strategy into action and move you towards your long-term goals. Implementing an effective planning process is usually essential if you’re going to run your small business successfully.
Your plans must always be guided by your long-term strategy and goals but they should also be informed by good tactical thinking. There may be more than one way to implement your strategy and you usually have the choice of pushing ahead more quickly or more slowly.
In other words, your plans should take account of the opportunities and constraints created by the current environment. For example:
The mood among customers – is it buoyant or more risk-averse?
The resources you have available or could acquire (staff, technology, funding etc).
Any significant threats or challenges posed by competitor actions.
What to include in your operational planning
There are no hard and fast rules about what to include in an operational business plan but here are some topics to consider:
Outlook for your market and competition. SWOT is a simple, useful framework.
Business development objectives, which should flow from your long-term strategy and goals. For example: new product launches, existing product enhancements, marketing initiatives with existing and new customer groups and so on.
Resources you need to acquire in order to execute your plans (e.g. new staff, agencies, technology).
Financial forecasts for your profit and loss, balance sheet and cash flow.
Funding – having enough cash on hand to pay your bills as they fall due.
Risks and contingency plans.
Plan quarterly and make it a quick process
An obvious question to ask yourself before starting any business planning process is: what time period will the plan cover?
Most businesses follow an annual planning process covering the whole of the coming year. For many small businesses there’s no logical reason to do this. Lots of people do annual planning because that’s what they did last year and it’s what everyone else does. Neither of these is a good reason.
Naturally there are some companies where annual planning is the right approach. An example is businesses with very seasonal revenues (e.g. around Christmas). Planning for short periods of peak sales – and peak pressure – will often start many months ahead of time. Planning for the whole year in advance can make a lot of sense if your business works like this.
But many small businesses have absolutely no need to plan in detail for what they intend to be doing 9-12 months in the future. For these businesses, it’s often easier and more effective to plan for the next three months and do it four times a year.
Here’s why:
Thinking a full year ahead and planning a whole year of activity in one go is complicated and takes a lot of time. Planning for the next three months is much simpler and quicker.
Your plans are based on assumptions about the future, but the world changes all the time. And the further into the future you plan, the less accurate your forecasts usually are. If the environment changes from what you expected when you created your plan and you need to change course mid-way through the year a lot of your planning work may go to waste.
Quarterly planning is a great discipline. The items in your plan are always due for completion very soon. This should keep you and your team working at 100% effort all year round.
Are you thinking that creating four small plans a year will take more of your time than creating one big one? It won’t if you do your planning quickly and efficiently. That doesn’t mean being sloppy. But don’t get bogged down aiming for excessive precision when turning your plans into quarterly financial projections. Accept that your forecasts won’t be fully accurate and do it quickly.
The benefits you should obtain from effective small business planning
A good business plan should bring you three big benefits.
1: Keep organised and have the cash to pay your bills
Good planning should keep your business running smoothly from week to week.
If you’ve got something important coming up, you’re more likely to be well prepared if it’s in your plans. If it’s your peak sales season, you may need to stock up on materials. If it’s an event, you’ll need to hire staff and plan a promotional campaign.
Good business planning also links your operations and your funding through a cash flow forecast. That’s important for many businesses:
Most businesses that are growing strongly need to keep reinvesting the cash flow generated by their operations into more fixed assets (computers and equipment) and working capital (stock, receivables etc.). If that applies to you, will you be able to pay for the investments you need from your existing cash reserves and your internally generated cash flow?
Slower-growing businesses with revenues that are seasonal or lumpy and unpredictable may experience peaks and troughs of cash during the year. If your business cash flows are lumpy, when do you expect your cash reserves will be lowest? Could you get caught short?
Sound business planning can highlight any risk of a cash shortfall ahead of time and enable you to put in place a solution:
Should you arrange a source of emergency funding, just in case? Could you raise the funds if you wanted to? That’s something to consider well in advance of needing the money.
Alternatively, should you adapt your plans? Do alternative courses of action exist that could keep you on track to reach your growth targets by following a different approach?
Importantly for small business owners, effective planning should also tell you how much cash you’ll be able to take out of the business by way of salary or dividends each month. That’s particularly important if you rely on this income stream to fund your living expenses.
2: Stay on the right track to reach your long-term goals
Small business owners often have to be nimble and adapt to changing circumstances. Good business planning can help make sure your short-term decisions stay consistent with your long term strategy and goals. What you do this year should be the short-term part of your long-term plan.
So don’t go off at a tangent to chase a new opportunity, however profitable it may be, if it will divert you from your bigger long-term goals. If cash is tight this year, don’t reactively cut your spending on new product development or new customer acquisition if it’s going to set back your plans for where you want to be in three years from now.
Think instead about ways you could move forward that would be compatible with your current circumstances yet still enable you to stay on track to hit your long-term targets. For example, is there a way to adapt what you do that requires less up front investment or fewer start-up costs? Would it be possible to borrow money to tide you over a temporary cash flow drought?
Without a business plan it’s easy to fall into the trap of reacting to events and improvising all the time instead of staying on the front foot and shaping your own future. Don’t take tactical decisions in a vacuum. Test them against your business plan. Work through the implications. A good planning process will help you to act tactically while thinking strategically.
3: Identify and reduce your risks
Your business planning should not just be about the good stuff – what you intend to do to build your business. It should also cover the things that might happen that you don’t want – the risks that could blow you off course.
When you’re planning, try to identify and quantify the most important risks you face:
What is the source of each major risk?
How likely is the risk to materialise?
What can you do to reduce the chances of it happening?
What can you do to make the consequences less damaging if it does?
What is your plan B if the risk becomes reality?
The difference between business planning and budgeting
Some people talk about budgeting in the same breath as business planning, as if they were the same thing. Worse still, some people create budgets and call them business plans. What’s really the difference?
When done correctly, a budget is generally a calculation of how much something should cost, with the answer feeding into your wider planning process. Here are a couple of examples:
The recurring annual cost of employing two new sales staff to increase your pace of new customer acquisition, including non-payroll costs like employer NI, training and office overheads.
The one-off cost to implement a new software solution and train everyone who needs to use it.
The operating items involved in setting budgets like these are relatively known quantities. There might be some uncertainties, but the costs are not that open to debate. It’s more a question of calculating what the different elements would add up to in order to obtain the result you want.
The correct use of budgetary analysis is often linked to yes/ no decisions. Should we go ahead or not? Would the benefits of this course of action outweigh the costs?
By contrast, business planning is about how to convert your long-term business strategy into a set of effective short-term action items, with your choices bounded by any financial and operating constraints you may face.
Unfortunately many faulty business planning processes resemble budget processes. In these cases, the planning process is dominated by financial considerations instead of strategic and operational ones. The results don’t flow from a holistic analysis of how best to develop the business.
In fact, a broken budgeting process often starts with the answer, which is a number. The operational plans are then derived by working back from this number.
A classic example is the question: how much can we afford to spend on X next year? X is usually a discretionary expenditure item which, if used wisely, generates revenue and profit. Good examples are new product development, marketing and staff training.
The correct way to plan for these cost items is to ask: what plans could we implement to do more of X that would deliver benefits far greater than their costs? And how much of those things could we do before we would run into constraints (e.g. availability of qualified staff or production capacity)?
Let’s consider the issue the other way around. If a business owner has a product with a compelling USP and they know that every £1 spent on marketing delivers £3 of profits, why would they arbitrarily limit their marketing spend? They should spend as much as they can.
Instead of that, too many businesses follow a ‘budget mentality’ whereby spending on X cannot exceed an arbitrary ceiling (e.g. a certain percentage of forecast revenues). They then set their spending budget on X at that level. The only debate is then around how to allocate this spending between competing teams.
To avoid this mistake, start by developing operational plans to implement your strategy and then use budgetary analysis to check whether or not those plans are likely to be profitable.
When you shouldn’t bother with business planning
For some businesses, there’s really no need to carry out formal business planning. Here are some business characteristics that would reduce or eliminate the need for planning:
The business operates in a stable industry and there are not expected to be any major changes in demand, regulation, economic conditions, competition and so on. The business expects to remain in a fairly steady state or grow at a modest, stable rate.
The cash flows of the business accrue evenly through the year, with no major seasonal or other factors causing lumpiness from month to month. The business has surplus cash or an adequate overdraft facility to smooth out any minor lumps in cash flow. The business has no major investment needs.
The business is not complex to direct and control. The business may be small enough for the owner to run it without a layer of executive management. They therefore know at first hand what is going on and what needs to be done.
Does this sound like your business? If you think there’s little value to be gained from going through a planning process then don’t waste time on it. Save the time and spend it working to win and impress customers instead.
Of course an absence of formal operational planning mustn’t lead to a business wandering without a sense of direction. Happily though it doesn’t need to. Business planning isn’t the only way to set a short-term agenda for action. And even if you create plans that doesn’t guarantee that you’ll execute them well.
So what’s the alternative to detailed short-term planning?
Regardless of whether or not you do short-term planning you need a formal long-term strategy. Built around that strategy you should have a set of KPI targets which focus your day to day efforts on the 5-10 operating metrics that are most crucial for driving your long-term success. You should also have an effective management reporting system to tell you whether your efforts are working.
If your business isn’t complex or dynamic enough to need detailed quarterly planning, just allow yourself to be guided by your KPIs and your reporting data. These two complementary tools should keep you on track very effectively.
Common mistakes in business planning
Here are some of the common mistakes businesses make when carrying out planning:
Plans aren’t joined up. It may seem obvious, but your plans must be consistent across the whole business. It’s vital to ensure that each team doesn’t get to set its own plans without regard to the impact on the rest of the firm. For example, you can’t plan for strong revenue growth if you haven’t allocated sufficient funds for marketing technology and sales staff.
Taking too long over your planning. If a business owner is unsure about the right way forward, planning can become an excuse for procrastination. On other occasions planners pursue an unrealistic level of precision. Remember that the purpose of planning is to generate action.
Becoming emotionally attached to your plan. This is an often overlooked reason for not spending a lot of time on your plans. Sometimes you’ll just conclude that something you’ve planned to do isn’t the right option any more. If so, that’s fine. You need to be nimble and open to changing your direction if you decide that it’s what your business needs.
But if you’ve spent weeks creating an annual plan you’ll become emotionally attached to it. You’ll be reluctant to change it even if it’s the right thing to do.
So don’t spend time creating a beautiful annual planning document full of fancy graphics that looks really smart. Instead of that, focus on creating a functional document that can guide you for 13 weeks before it gets replaced.