THE ENTERPRISE--FAILING TO PLAN IS PLANNING TO FAIL, (COMMUNICATING THE PLAN IS AS CRITICAL AS HAVING ONE)
START AT THE BEGINNING—WITH A PLAN—AND DON’T FORGET WORKING CAPITAL NEEDS
This sounds so obvious, you might wonder why I’m just raising this issue now. I’m raising this issue because many people, many organizations, and far too many companies “start in the middle.” Someone has a good idea, translates it into a product or service, and discovers that idea “will sell.” Off they go, to sell it to whoever seems inclined to buy it.
This idea grows and expands into related similar ideas. Before they know it, they have built a company around a single idea and all of its off-shoots. Inevitably, things get complicated, and finally, (you hope) someone decides to figure out what it was that made that product or idea attractive to which kind of customers. During this time, no one actually sat down and prepared a plan for the company: What is its purpose, and how can it be "most successful" (remember, it was “successful" to start with, but usually no one thought hard enough to figure out why!
This is the point where lacking a plan can become a very big problem. Theodore Levitt, in his great book The Marketing Imagination wrote, “The purpose of a business is to create and keep a customer…” Many companies did that but stopped reading the rest of what he said. To paraphrase in the interest of brevity, Levitt pointed out the necessity of financial viability—selling the product for more than it cost to acquiire or produce and deliver it—and doing that over and over. At that point financing rears its ugly head.
The bigger a company gets, the more it needs working capital to bridge the time gap from ideation and creation, through procurement/production, marketing/sales and then delivery—until the time comes to get paid (collect from those who bought). Until then, all the money goes out and none comes in! That time can span months. Unless the company has made a plan to determine how much financing it will need to bridge that gap, it will predictably underestimate its working capital needs.
If or when a plan is made, then communicating it to the people who must execute it is essential. (How can anyone execute a plan if they have no idea what it contains, consists of or contemplates?) By now, I think you get it. Pasted below is a very simple article that was first written 20+ years ago, then evolved for decades (note ©dates). On the subject of financing and working capital needs, the next column explains the “ins & outs” of capital...
Failing to plan is planning to fail.
Sharing the plan is as critical as having it.
©john Mariotti 1998, 2002, 2007
Most people agree that a company should have a strategic plan. After all, as Satchel Paige the famous baseball pitcher said, "If you don't know where you're going, any road will take you there." Yet, amazingly, many large, sophisticated companies have complex, incomprehensible plans that fill binders and are never shared with the people who are responsible for implementing those plans. (After all, this stuff is "sensitive, and confidential information.”)
The key to a good strategic plan is not bulk--it is clarity and focus. The best plans are short, concise, and written in simple language. Some plans are not "plans" at all; they are compilations of industry or competitive background information. Sure, it is necessary to understand the history, market analyses, demographics, etc. But having all of that does not assure either a good, clear, concise, or a well-communicated plan. In fact, just the opposite often occurs. The real essence of the plan is buried in reams of data, often self-serving in nature, usually far too internally focused, and frequently tucked away on a shelf of a locked cabinet (remember--it is "confidential stuff”). There it resides, untouched, from the time one plan is done until another must be started.
Business changes too fast these days for that archaic approach. If the plan can't be shared with those who must execute it, how do they know what to do? If the plan document is so thick, detailed and complex that only the most tenacious reader can wade thorough it, what good is it? Only a short, well-focused, and clearly understood plan, which is revised regularly, can keep up with the constantly shifting business environment. The "shape" of the business situation is constantly shifting like a ship in a stormy sea. The plan is the chart that tells us whether we are on the course we have chosen.
Nobody has enough time these days. Broad, effective communications of a strategic plan that fills an inch thick binder (or larger) is impossible. It can't be done. But a really focused strategic plan can be communicated clearly on about 5-6 pages, and understood by everyone from hourly workers to the board of directors.
The plan must contain:
- What business are you in? How big is the market, how fast is it growing, and where; what is the scope of the part you hope to carve out for yourselves?
- What is the competitive situation? In those target markets, who owns how much of them now, and what do they do that permits them to hold that share--and where are they most vulnerable (or strongest)?
- What is your strategy? List 5-6 one or two line, specific strategy statements that tell what you plan to do--and what you plan to get done.
- How are you going to do that? For each of the 5-6 strategic points above, list 1-2 terse one liners about how you are going to do that, by when.
- What are the critical assumptions? Invariably you made assumptions that underlie this plan, and which, if wrong, blow the whole plan to pieces. What are they?
- What are the critical unresolved issues? Certain events, some beyond your control, can make this plan sink or swim, and can only be identified now--list them!
- What are the next five years high level financial projections? Only 5-6 lines: Sales, Operating Profit, ($ and %), Return on assets, capital required, and cash flow are the essential ones. 1-2 others may be uniquely needed for each business.
If written concisely, this will all fit on 5-6 pages. If the language is not understandable by a tenth grader, it is too jargon filled or stilted. Making a brief, concise plan like this will take the senior management of a company as long to do as the binder sized one. That's because this one requires real thought, clear focus and careful wording.
Little of the actual development of the plan can be "delegated," but it must be a product of extensive listening to input from all levels of the company. Then the final outcome must be shared with all levels, in varying detail according to their responsibilities. Without these two steps, there will be insufficient "buy-in" by large groups of people in the company. No buy-in, no success. It's that simple.
As the old saying goes, "failing to plan may be planning to fail."
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Watch the “goesintos” and the “goesoutas”.
© John Mariotti 1990, 2005
One of my former associates was a financial executive and his favorite phrases was the title of this column. Watch the “goesintos” and the “goesoutas”. The “goesintos” are where money “goes into” the company—revenue and profits—from customers mostly. The “goesoutas” are the many places where money “goes out of” the company—expense items, payroll, materials purchases, interest costs, etc.
During tough times, it is critically important to monitor the flow of money in and out of the company. When lenders get tight and interest rates go up, just getting the necessary funding is hard enough, but using it poorly is doubly wasteful. There is the waste of squandering valuable financing on things with poor returns, and the lost opportunity of good returning uses going unfunded.
At times like this, it is essential to understand where you make your profit and where you don’t—and then get rid of the losers—that goes for products AND customers. What you sell, to whom, and how is a critical decision. You know that there are those low profit items that consume a lot of time and money, and go to a customer that is slow to pay, but fast to take a deduction for the slightest slip-up—real or imagined.
Now is the time to streamline the product line. Trim the marginal items and the loss leaders. Sort the sales by product; list in descending order of annual volume and trim the bottom 1/3 of it. Do the same thing with the gross margin by product. Of course you must consider the long-term competitive implications of these moves too, but many of those products “we need to fill out the line” are losers.
Sort your customer-sales and margin lists in descending order of annual volume too. Then find some other way to serve the bottom 1/4 of the customers without necessarily handing all that volume to a competitor. Maybe you divert them to a “master distributor” or service them via the Internet. For the few with the absolute worst profitability, the best thing you might do is to pass them on to the competitor.
In tough times, more than ever, you must know your costs and where they come from. Old-fashioned direct-labor based cost systems will lead you down the wrong decision path more often than not. It is also critical to know your breakeven point—the level of volume at a given customer and profit mix where you do not lost money at the bottom line.
It is also critical to know which expenses are “fixed” and which are “variable”. Fixed costs are usually incurred because of some management decision at a higher level or in a longer time frame. Thus, the top management must review these fixed costs carefully and reverse or undo some of those decisions. Only if you reduce the fixed costs can you get your breakeven down where you will make money even in a down market.
Finally, watching the “goesintos” and the “goesoutas” is really about watching your cash flow. In many cases this is also about watching asset utilization—are you collecting Accounts Receivable effectively; is there bad debt exposure (downturns usually worsen this problem); is your inventory in line, or is it loaded with “slow movers?”
Lack of profits will eventually kill you, but running out of cash kills you right away! (Ask any dot-com.) That is why you MUST make cash flow projections for the next few quarters and monitor cash flow very carefully. Cash is like oxygen, without it you die. Profit is like food and water—necessary, but useless if there is no cash!
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IF YOU GOT ALL OF THIS, YOU WILL BE AHEAD OF MOST COMPETITORS… “FOLLOW THE MONEY” AND PLAN WHERE IT NEEDS TO BE MOVING…
JOHN
PS: A colleague recently pointed out the competitive back and forth over technology capability, between China & the USA. China is gaining fast on the USA. Why? China has a plan. The USA, not so much/\. It just has a bunch of political proclamations with nothing much behind them. The same could be said if comparing thte USA to Russia (include Ukraine) or even the USA to the middle East (Iran & Syria are the biggies.) We both suspect that the US is so fractured, divided and polarized that any plan it has is now broken apart. I spoke with him about Technology, but we could as easily have been discussing Energy policy/plan—or several others. No plan yields no success. The plan alone is not the secret sauce. It’s the thought that went into the plan—the planning process. Now re-read the first article. Failing to plan is indeed, planning to fail.
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