How to Use Your Business Plan to Track Performance By regularly referencing your plan, you can gauge your company's health and make necessary adjustments.
- Using your business plan to monitor performance
- Business plans help you spot trouble, understand pressure points, and monitor cash flow.
This is part 10 / 10 of Write Your Business Plan: Section 2: Putting Your Business Plan to Work series.
A business plan doesn't have to end up on the shelf once you start your company. You can use it to track your company's performance regularly. 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.
"When you review your actual results against your plan, look for problems and opportunities. If sales aren't meeting expectations, think about your marketing and sales strategies and if you should refine those. Maybe you should adjust your spending and refine your expense budget moving forward," says Noah Parsons, COO at Palo Alto Software.
"On the other hand, maybe part of your business is doing better than expected. You might want to consider focusing more on that part of the business or using excess revenue in one area to fund development or marketing in another area."
Here are some ways your business plan can help give insights into your company's health.
Spotting Trouble Early
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 a meaningful concept or number describing some expected future event that may hint at future trouble if it turns out to be diverging from reality.
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 act now to fix the problem. You may need to add a new, higher-margin product, eliminate an old one, or begin stressing marketing to a more profitable clientele. All these moves, and many more you could take, have a good chance of working if your careful comparison of plan projections with actual results warns you of impending danger. Use the projections in your business plan as guideposts as you move forward.
Understanding Pressure Points
Not all tips that come from comparing plans with results have to do with avoiding danger. Some help you to 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 will vary 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 not be a 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. But added paperwork comes at a very high cost for this single professional—time.
Somehow, in projections of steadily rising sales volume, the business owner had neglected to note that more business meant more invoices to be sent out, more account statements to be mailed or emailed, 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 time.
As a part of checking the plan against results, they noticed this unexpected increase in transactions and figured out what it meant. They calculated that, when taking all paperwork into account, they spent roughly an hour on each transaction, no matter how large or small. They realized that one of the most critical 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, they would reduce the time spent on otherwise unproductive paperwork and increase the time they could spend completing client requirements.
Ultimately, they could trim 100 annual transactions down to 75 while increasing the amount of 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.
Related: 12 Reasons You Need a Business Plan
Few things 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.
"Don't beat yourself up if you aren't meeting or beating your plan. The goal of tracking your performance is not to "stay on plan" but to make adjustments if things aren't going "to" plan," says Parsons.
Reviewing Your Cash Flow
As a business owner, you must sell your products and services at a profit to sustain the business long-term. You'll also have to have a financial structure, including payables-and-receivables systems and financing, that will keep you from running out of cash even once. If you have investors who want to sell the company someday, you may need a plan with a big number in the field for shareholders' equity on the projected balance sheet.
"It's important to review your cash position and cash flow. From an accounting standpoint, your business may look profitable, says Parsons. "However, without knowing how much cash you have on hand, tracking outstanding expenses, and other risk factors, that profitability can quickly disappear. That's why reviewing your cash flow statement is so crucial, as it's meant to help you understand the health of your business."