Business Opportunities: On-Line Articles - Planning Is Essential, In Good Times and Bad

Planning Is Essential, In Good Times and Bad

With the economy continuing to perform well in many parts of the country, many small business owners have been living high on the hog the last few years. Some newer business owners may never even have experienced a significant downturn in their local economy. But it can happen, and history suggests that it's not a question of "if" but "when."

As Cal Denton, a partner in a Texas-based construction firm, observes, "We are an oil-based economy, and that goes up and down, no matter what. If you don't put something away now, while times are good, eventually you'll get caught with your pants down."

Planning and budgeting are a business's main lines of defense against future downturns in the economy, and they are just as important when the economic future is predicted to be rosy.

"We use planning to help us understand what is going right and wrong with our business at all times," says Carly Sandstrom, president and owner of This 'N That, a popular shop for beading enthusiasts in Somerville, NJ. "Planning helps me create a roadmap to follow, not only to protect my business against potential pitfalls, but also to make sure I identify and capitalize on emerging opportunities."

Experts at the University of Houston Small Business Development Center advise that good annual planning and budgeting is an important risk management exercise, too. In the context of business, risk management involves identifying risks and developing methods to deal with them so that your business can focus on the rewards of profits and growth.

Businesses mitigate risks by periodically reviewing their operations and policies, comparing current and projected circumstances to what they have experienced in the past, and charting a path that minimizes potentially negative fallout from risks without eliminating potential rewards.

Good annual planning and budgeting is an important risk management exercise.

Test-marketing is a good example of risk mitigation in action. By first introducing a new product or service on a limited basis, a business can gauge its potential for success in the broader market. The risk of a costly failure is minimized, with little or no negative impact on the new product's upside potential.

Businesses can also purchase insurance, such as a general liability policy, to protect against risks that they can not effectively eliminate or mitigate. Together, these three tactics comprise the basics of risk management.

For most companies, budgeting is an important part of the annual planning process, but it is important to avoid a myopic focus on the numbers. The budgeting process should take into account all relevant variables, such as accounts receivable, credit terms and policies, inventory, accounts payable, cash flow, etc.

TREND WATCHING

It should also look at recent sales trends, changes in the level of performance of various parts of the business relative to other parts and broader economic trends.

Before jumping into the nitty-gritty budgetary aspects of your annual plan, it makes sense to step back and look at the big picture. Review the company's business strategy, with an eye out for changes that might have an impact on its continued effectiveness.

Some areas to watch out for include changing market conditions and/or demographics, emerging technologies, access to financing, shifts in consumer behavior and changes in local conditions due to such factors as road construction, new residential development, changes in local laws or ordinances, etc.

This is also the time to set goals for the coming year. They can be economic in nature (grow sales by 12% or boost profit margins by eight basis points, for example), marketing-based (attract more customers on a daily basis, boost average cash register rings) or both.

James Farmer, president and owner of Shoreline Windows in Alabama, gets focused on the marketing aspect of planning for the coming year around the end of the previous year's third quarter, but he already has his budgeting strategy nailed down at that point. "I may or may not have to implement some changes on the budget side to accommodate elements of the marketing plan, but they're generally minor adjustments," he says.

Two elements, quality and service, remain the focal points of planning and budgeting at Shoreline Windows throughout the process. "I spend whatever I need to around those two items because they are the foundation on which I've built and grown this business for 25 years," Farmer says.

It is important to avoid a myopic focus on the numbers during the planning process.

He also sets an annual sales growth target, typically in the neighborhood of 15%, as part of the process, and the company has done consistently well at reaching it. "We've had years where we've grown 8% and years where we've grown 25%, but I do hit that 15% on average," he says. Over the past five years, annual growth has stayed in the 12%-18% range, a beneficiary of the strong local economy.

Planning is a dynamic process at Shoreline Windows. Farmer revisits strategies and tactics on at least a monthly basis as the year progresses, making adjustments as needed.

Farmer believes it is "absolutely critical" for companies to plan in boom times for when things might not be so good. "The economy here has been great for 14 years, and it could be great for another 10," he says. "I hope it is, but I just don't know. Neither good times nor bad times last forever, so you always have to put something away for a rainy day."

PLANNING PROCESS

At Denton's construction firm, he and his partner start the process of planning and budgeting for the upcoming year around October. They generally get together early in the morning, an hour or so before anyone else gets in, and talk their way through the process over a period of two weeks or so.

"We look at our workload at the time, what our distributors see coming up for the next year, what kind of projects our big contract customers are planning over the coming year," Denton explains. "They are all on a calendar year, as we are, so that part of it lines up nicely."

Material cost is one area where it is difficult for the company to make estimates a year out, so it plans to make pricing adjustments on the fly as the year unfolds. For example, it builds a lot of horse stalls made of galvanized steel, a material subject to big price swings. "Zinc is at an all time high right now," Denton says. "We have to constantly monitor that market and jump in to make price adjustments based on costs when necessary."

Another planning challenge the company faces is its reliance on two-inch square tubing made from 14-gauge steel for many of its stalls and barn components. "No U.S. company makes 14-gauge steel anymore, so we are dependent on foreign suppliers," he says.

Denton and his partner learned the importance of planning and budgeting for lean times during the boom times 25 years ago, and it's a lesson they take seriously.

"The fact is, we have been through the lean times, back in '82," Denton says. "You have to plan to do your modernizing and pay for improvements when times are good so you don't have a big debt service hanging over your head when they're not so good. We made it through '82. We came out a lot smaller company, but we survived."

For Sandstrom, a major objective of planning and budgeting is to prevent capital exhaust and reserve maximum resources to reinvest in her business. "A focus of my annual planning is trying to find ways to do things more efficiently," she says. "I don't spend on unnecessary items. If it's not a legitimate cost required to keep the business running and growing, I'm not spending money on it."

Cost of materials and reliability of suppliers are items that should be considered.

That approach provides additional capital that Sandstrom invests back into the business, especially for advertising, which she describes as "expensive but necessary."

The strategy also made it possible for This 'N That to purchase a high-tech point-of-sale system this year. "That was an important investment in the business," she says. "The computerized information and graphs it generates are helping me do a better job of determining which merchandise is selling well and which items need to be cycled out."