The Facts of Business Life (28 page)

Few owners have the same definition of success, the same market, the same available capital, the same opportunities, and so on. And just as every owner's situation is different, every business plan is different. However, all effective plans do have commonalities of structure and framework, including the following:

• Destination or vision
  . Where the business is going, what it will look like when it gets there, and how long it's expected to take.
  
• Mission statement (company culture/DNA)
  . What the business's purpose is and the kind of conduct that's expected of the employees in their interactions with each other and with the company's customers—that is, the atmosphere of the company in regard to expectations, accountability, and professionalism.
  
• Goals
  . What the company is expected to achieve, which in turn determines the kind of objectives and strategies that must be developed.
  
• Analysis
  . What the company's status is, both externally and internally, including the size of the market, trends, competition, and market share for the former, and financial strength, employee processes, and management strength for the latter.
  
• Strategies
  . The best way to exploit and protect the business based on the external and internal analyses, including the positive and negative consequences of the strategies and the extent to which they align with the company's goals.
  
• Objectives
  . Based on the goals and strategies, practical plans for the company's future that are exact, easily measurable, have a short timeline, and provide for individual accountability.
  
• Summary and communication
  . Sharing the plans with those who will be responsible for implementing it.
  
• Implementation
  . The orderly execution of the strategy.
  
• Review
  . The constant review and revision of strategies and objectives, while never losing sight of the goals.
  

In order to plan successfully, all of these elements must move and work in unison with each other. Hard work, patience, and an understanding of the other pertinent Facts of Business Life will also help you in reaching your owner's overall goals.

Planning is important at every level, but perhaps nowhere more important than at this one. If you get planning wrong at Level 1, the result is likely to be, at best, an unpleasant surprise, if not a series of them. Proper planning will show, among other things, if the market niche is too small, if there are too many competitors, if the industry is shrinking or growing, and if the profits are likely to be slim or very good. In other words, planning enables you to make intelligent, well-thought-out risk and investment decisions.

At this level, though, there is a step you must take even before beginning to develop a plan. That step is to ask yourself a series of questions that will enable you to determine whether you should even be thinking about going into business for yourself, specifically:

• Do I like this business?
  
• Am I good at doing what has to be done to make the company successful?
  
• Do I understand the industry and the marketplace sufficiently to competently analyze it?
  
• Is ownership really what I want?
  
• Do I have the talent, the discipline, and the experience to make this opportunity work?
  
• What would happen, personally and professionally, if the business failed?
  
• Do I have access to enough capital to enter this market, and is the potential net profit sufficient to make this a good investment?
  

If you can't answer “yes” to all these questions, it would be advisable for you to give some more thought to whether owning a business or taking this opportunity is something you are really ready to do.

The Benefits of Planning at Level 1

• Planning shows how much profit you are expecting and provides a timeline for that profit.
  
• Planning shows how much cash and credit you will need to operate the business successfully.
  
• Planning provides banks and other business lenders with a blueprint by which they can analyze the opportunity you are presenting and determine how much money they will lend you, their pricing structure, and the conditions under which they will make the loan.
  
• Planning forces you to analyze your own ability, the level of skill you need to lead and operate the business, and the policies, procedures, and processes you will have to implement to reach your objectives and goals.
  
• Planning makes you focus on the type of talent you will have to recruit.
  
• Planning enables you to show your mentors or advisers what you expect to happen and test the reality of these expectations with them.
  

As it is at every level, at Level 1, collecting information is an essential part of the planning process. At this level, the most important area in which you need to gather information is the financial one. This is because fundamental financial questions should be answered before too much time and money is spent on an opportunity that may actually have very little profit potential. You must determine how much personal investment will be required, how profitable the venture can become, and how long it will take to repay the investment. And it's not only important for you to know this yourself—these are questions that bankers and investors will want answered as well. The specific areas in which information must be gathered at this level include:

• The size of the market, market demographics, competitors' strengths and weaknesses, and so on.
  
• The stability of the overall market, potential for growth, possible threats and opportunities, and how you can exploit them.
  
• Hard facts that will prove or disprove market assumptions and help you to make better decisions.
  
• Industry financials that show composite revenues, average industry gross profit margins, net profit, cash flow, and the like.
  
• How the income statement and balance sheet work, their importance, and how to interpret them.
  

As noted earlier, planning means gathering facts (science) and forming an opinion based on these facts (art) in order to determine what steps must be taken to get the company to where you want it to be. Once you have done a financial analysis at this level, you will be able to understand the profit potential, opportunities, threats, investment needed, and potential return on that investment, and make appropriate plans. Let's say, for example, the results of your financial analysis indicate that, based on previous profit history, your investment could be paid back in three years from profits, and there is also considerable new business available. You might then develop a short-term plan that would enable you to pay off the debt sooner than expected by bringing sales up, expanding gross profit margins, and increasing the business's internal efficiency. The long-term plan might then be for you to borrow additional money (after the initial debt was paid off) to buy equipment and inventory, and hire new employees to take advantage of the additional business that the market study showed was available. Once the initial debt was paid off, the long-term plan would become the short-term one, and the new long-term plan might be one of expanding the company's facilities to handle the increase in employees and customers.

If, however, the analysis suggests that the market is strong but the business is not as well run as it might be, your short-term plan could be designed to make the company more profitable by improving sales. You might do this by developing processes to capture and retain new business, and by training and educating your employees on the importance of the customer, future expectations, and accountability. The long-term plan might then be one of market domination through conquest sales and buying some of the competitors' weakened businesses.

Of course, creating a plan is only part of the process. The real issue is whether you can do what you thought you could—that is, implement the plan. That's why it's necessary to develop objectives that will lead to the goals you've established. For example, in the preceding scenario, the company's internal efficiency could be improved by establishing objectives such as reducing some expenses, training employees, creating incentive pay plans, refocusing the marketing plan, and buying products more competitively—all of which would help pay off the debt faster. Then, as the short-term plans are being implemented, you could focus on the long-term plan, deciding which market niche has the greatest opportunity, what new equipment you would need to increase business, how many new employees would be needed to service the extra customers, and what your strategy should be to attract new customers.

Planning isn't easy, but even though it may not seem like it, that's actually good news. If it were easy, all your competitors would do it, so if you do it and they don't, you have an advantage. In addition, simply because they've never done it before, new owners tend to be surprised by events—both good and bad. But for those who plan at Level 1 and do the due diligence required, the surprises tend to be much more pleasant than for those who don't.

At Level 1, planning is about developing a plan that has reasonable expectations and will deliver profits. At Level 2, planning is about designing processes that will help you achieve the planned-for results. These processes are essentially the DNA that will run your company, and it's the company's DNA, or culture, that turns strategies into reality. Such processes include things like determining how cash sales are handled and accounted for, how inventory is replaced after a sale, and how customers are treated. They are in turn supported by job performance, job accountability, the expectation of results, and employees' attitudes.

Developing these processes is an extremely important step toward success, but, unfortunately, many businesspeople aren't aware of its importance until it's too late. The fact is, as I mentioned earlier, processes operate the business, and employees operate the processes. This is the owner's reality, and the sooner you understand this, the better off you will be. Planning and DNA creation are each other's yin and yang—they need each other. You can create a great plan for your company, but you can't implement it without the help of your employees. And your employees can't implement a plan without workable processes showing them how to do their jobs. It's as simple as that.

The Benefits of Planning at Level 2

• Planning provides your employees with a “playbook” on how to interact with each other and with customers, and what is expected of them.
  
• Planning makes it possible to enforce expectations and disciplines company-wide.
  
• Planning enables your employees to understand what success is—and isn't.
  
• Planning shows your employees what processes they have to follow, what their jobs are, and what has to be managed.
  
• Planning enables your employees to understand the ethics and style of the company they work for.
  
• Planning guarantees that you define responsibility and accountability and clarify their boundaries.
  
• Planning provides you with parameters around which you can lead, manage, and communicate.
  
• Planning enables you and your employees to more easily determine and solve problems.
  

At this level, there are two types of information that must be gathered. The first is external information that will be used to determine management strategies to succeed in the marketplace. The second is internal information that will enable you to devise processes to achieve that success. The type of internal information needed varies by industry and by customer type, but there are some commonalities. Virtually every owner has to ask him- or herself the following questions regarding the company's interactions with customers:

• Was the customer satisfied? Will he or she return? How will we know if he or she does or does not?
  
• Were the employees knowledgeable and professional?
  
• Did we have the required services or inventory available for immediate sale? Did we lose a sale? Did we save a sale by postponing the transaction until we were ready for that customer? How could we have been more responsive to the customer?
  

It's also important, though, for every owner to ask him- or herself questions that deal with the larger issues than go beyond individual customers. Among such questions are:

• Was this a profitable activity for us? Do we want to expand this activity?
  
• What services or products give the company the best profits? Can we expand our market share in these profitable segments? Can we do something new or different to improve our sales and profits?
  
• Did we reach our objectives and goals? Why or why not?
  
• Can we improve our processes to create efficiency internally and at the same time improve our customer loyalty? (Note that improvement of efficiency must always be considered at the same time as increased customer satisfaction, and vice versa.)
  

In other words, the purpose of DNA analysis is to enable an owner to understand what is working well, what isn't, what can use improvement, and why. And the only way to do that right is to dissect the internal operations of the company and focus on processes and personnel.

The creation of your company's DNA at this level is the foundation on which you can build a successful business. At Level 1, you determined what the sales and gross profit levels must be to break even, the sales potential of the opportunity, the profit those sales will bring in, and so on. The big question now is “How will the company and its employees do what I think can be done?” The second, although seldom-asked, question is “How can I be sure that my employees will look after my customers and my assets the same way I would every time?”