Planning is an important tool in the hands of management, which is commonly deployed for achieving Organizational Objectives. Is there a comprehensive plan which can address all performance issues and achieve results? Is it possible to take plans close to the situation on the ground? Is it possible to compare results with plans for performance evaluation and course correction? Answers to these questions are attempted in this article.
Planning needs to be in stages, with each stage focusing on certain specific aspects. Plans need to be closely followed by a Performance Review process to monitor performance for achieving planned results.
Based on time horizon, we could classify plans into 3 categories. They are:
- a Business Plan with a plan period of about 3 years, setting the directional path
- an Annual plan which takes the Business Plan to the next level of detail, with supported financials, and
- a Quarterly Plan, for each quarter, drawn from the Annual Plan, with emphasis on operations, which when achieved consistently quarter on quarter, ensures financial results.
Business Plan
Usually Business Plan is over a 3 year period, and focuses on environment, industry segments, macro level opportunities and risks, KPI (Key Performance Indicator) related targets that can be set, with good focus on organization and capability building activities, along with an analysis of past 2 or 3 years performance including any exceptional events that impacted company performance are important components of a Business Plan.
No detailed Financial Statements are recommended, but drawing up from market availability, macro-level targets on activity, need to scale up, using benchmark indicators for resource building (turnover targets converted into resource based on turnover per employee, number of seats converted into Office space requirement based on area per seat, cost of construction or rent per sqft, Capital Expenditure or Rent expenditure to factored, and so on). Turnover, Existing Contribution, and desired Contribution level, Overhead structure, profitability and Tax strategies, ROI (Return On Investment) Working Capital Magnitude and Capex requirement, Funding requirements, sources of funding figure in the financial aspects, as an integral part of Business Plan, for achieving the planned goals.
Prompting top management to think in terms of KPIs at the macro level, and focusing on important developmental efforts is an important objective of the Business Plan.
Clarity on what could be key drivers of business, like technology including scope for disruptive technological risks, innovation, external economic indicators, markets, people skill sets, handling large volumes or operating in wide geographical area, financial investments, organizational skills, distribution and channel partners, outsourcing partners, and the need to build the required strength in the stated areas should get adequately addressed in a Business Plan. Capacity building, economic methods of executing business, and vision of the promoters in all these areas needs to be captured while giving shape to a Business Plan.
Annual Plan (Annual Budget)
Drawn from the KPIs as set in the Business Plan, relevant for the next one year, Annual Plan, also usually called the Annual Budget, gets more specific, in terms of Products, geography, business segments, and draws up activity levels, and quantifiable targets, expressed in convenient units of measurement. They also get translated into detailed financial statements. Number of units, realizations, raw material and other direct costs, prevailing price situations, assumptions relating to procurement costs, inventory holding, capacity utilization levels, important overheads, departmental budgets, employee recruitment plans, marketing costs, receivables monitoring, item level Capex requirements and cash flows figure prominently in the Annual Budget. I like to recommend two types of milestones to be recognized in the Annual Budget, to help in setting suitable targets for the stakeholders. They are:
- Outcome-based milestones, which are quantifiable targets like turnover, volumes and so on, and
- Effort based milestones like adding new Office Facilities, or recruiting some skilled resources, to achieve planned outcomes.
The second category of milestones gets further translated into resources required, and gets factored in as costs, in the Annual Budget.
Quarterly Plan
In any business which is in its growth phase, or in any projects business, visibility on possible future activity level, would be good in terms of customers and products, for the next 3 or 4 months, beyond which many uncertainties influence the outcomes. If we break an annual budget in to quarterly rests, based on arithmetic, or based on some assumptions relating to quarter on quarter growth, before the commencement of the annual budget period, it may be a convenient method of expression, but may not take us close to reality. After making such quarterly breaks, if we conduct a performance review, with actuals, at the end of a quarter, explanation on variances could be on the following lines:
- We projected “XX” turnover, based on “YY” orders to be received with “mm” contribution margin.
- These orders did not materialize, and we actually bagged “AA” orders with much lower “NN” contribution margin.
- Accordingly, results for the quarter are not comparable with the original budget.
Keeping such possibilities in mind, we should not break an annual budget in to 4 quarterly budgets at the beginning of the budget yea itself. Instead, we should compile a Quarterly Plan, just before the commencement of a quarter. Quarterly Plan takes into account current orders on hand, resources that can be planned, capacities available, and implementable action points to achieve results. Quarterly Plan number would be drawn from the budget, adjusted to live situations, and discussed in advance, give an opportunity to top management to set stretch targets. It is more an “Operating Plan”, with greater emphasis on activity level, and once achieved, financial results automatically follow.
Quarterly Performance Review:
Mere planning is not adequate to ensure results. After planning, we need to monitor execution through a proper review and “adapt” the organization by taking corrective steps in the form of strengthening processes, practices or people. A Quarterly Performance Review, which compares actual achievement in all parameters included in the Quarterly Plan, will enable proper actions.
Concluding Remarks
It is not adequate to implement one of the plans, for effective outcome. All the 3 plans, namely Business Plan, Annual Plan and Quarterly Plan, along with Quarterly Performance Review, implemented in organizations with which I am associated, made a significant difference. For the same reason, I have chosen to write this article, though “planning” is an age old tool deployed by many organizations, world over, and is too well known to all.
For more articles from me, and to know about my book “Translating Operations into Money - Cases in Business Management” please visit www.operationstomoney.com.
CAclubindia
