How to Use Your Business Plan as a Benchmark for Performance
In their book Write Your Business Plan, the staff of Entrepreneur Media offer an in-depth understanding of what’s essential to any business plan, what’s appropriate for your venture, and what it takes to ensure success. In this edited excerpt, the authors explain how to use the projections in your business plan as guideposts as you move forward.
Using a business plan to monitor your company's performance has many benefits. If your cash flow is running much shorter than projected, even though you’re not currently in trouble, that information may help you spot disaster before it occurs. By comparing plan projections with actual results, you gain a deeper understanding of your business’s pressure points or the components of your operation that have the most effect on results.
You don’t have to be a wizard to get some solid hints about the future beyond tomorrow, especially when it comes to the operations of your own business. You can look at virtually any page of your business plan and find an important concept or number describing some expected future event that, if it turns out to be diverging from reality, may hint at future trouble.
For instance, say your profit margins are shrinking slowly but steadily, and the trend seems irreversible. If you notice that, within a few months, your declining margins will push your break-even point too high to live with, you can take action now to fix the problem by adding a new, higher-margin product, getting rid of an old one, or beginning to stress marketing to a more profitable clientele. All these moves, and many more, have a good chance of working if your careful comparison of plan projections with actual results warns you of impending danger.
Not all tips that come from comparing plans with results have to do with avoiding danger. Some help you identify profit opportunities. Others may show how seemingly minor tweaks can produce outsized improvements in sales or profitability. For example, the plan for a one-person professional service business indicated that rising sales were not, in general, accompanied by rising costs. Fixed items such as office rent and insurance stayed the same, and even semivariable costs such as electric bills varied only slightly. The bulk of any extra business went straight to the bottom line, showing up as profit improvement. But one cost that didn’t seem especially variable went up sharply as business volume climbed: That was the number of transactions.
Ordinarily this would be a given and not necessarily a matter of grave concern. A large enterprise would simply hire a few more modestly paid customer service reps, credit department staff members or bookkeepers to handle the added orders, invoices and the like. For this single professional, however, added paperwork came at a very high cost—her own time.
Somehow in her projections of steadily rising sales volume, she'd neglected to note that more business meant more account statements and invoices to be sent out, more customers to be reminded to pay, more time spent on banking needs, and so on. All this work, while not necessarily unpleasant, was taking up more and more of her time.
As a part of checking her plan against results, this business owner noticed this unexpected increase in transactions and figured out what it meant. She calculated that, when taking all paperwork into account, she spent roughly an hour on each transaction no matter how large or small. She realized that one of the most important pressure points in her business was related to the size of a transaction. By refusing small engagements and seeking clients who could offer big jobs, she would be able to reduce the amount of time spent on otherwise unproductive paperwork and increase the time she could spend completing client requirements.
Ultimately, she was able to trim what had been 100 annual transactions down to 75, while increasing the amount of her dollar revenue. The result was a free 25 hours to spend working on more business or even vacationing. If you can see and relieve a pressure point like that, you can really keep your business from boiling over.
There are few things to equal the sensation of filling in all the numbers on a cash-flow projection, hitting the recalculate button, and scrolling to the bottom of your spreadsheet to see what the future holds. If the news is good and you see a steady string of positive cash balances across the bottom row, you know that, assuming your data is good and your assumptions reasonable, your business has a good chance of making it.