Even if it is not yet common practice, especially in smaller companies, to prepare a business plan, you should definitely take action here. It is true that it always involves additional effort to develop a well-founded plan. But the benefits that your company can achieve through planning usually exceed the effort by far, as the following explanations and examples show.
1. Clarity about basic goals and intentions.
The first purpose of corporate planning is to provide you with clarity about your own goals and intentions for the coming year, such as realistic sales figures and the funds required to realize sales or important investment projects. You should also formulate what you would like to achieve beyond this period in the next approx. three to five years, e.g. product developments, gaining new customers, opening up new markets, exporting, offering additional services or developing new unique selling points.
Example:You currently have 30 products in your assortment. From the past and the development in the current year, the following is known: 22 products can be sold well and yield high profits; 5 products are new products, for which it is not yet possible to see how the sales figures will develop; the remaining 3 products are slow-sellers, which are hardly sold and only yield low profits. You do not expect the magnitudes to shift significantly next year. Therefore, you formulate the goal of giving priority to manufacturing the successful products and achieving an increase in sales volumes compared to the current year. In addition, new products are to be promoted until it can be seen how they can be sold. On the other hand, no significant resources are to be budgeted for slow-moving items; they will only be manufactured if customers specifically ask for them.
Tip:Resources are fundamentally scarce, whether it's people, materials or finances. Therefore, you should always plan in such a way that especially high-yield products are further promoted in a specifically targeted manner. But new products must also be given sufficient resources until it is clear whether or not you can make money with the product. Finally, new developments in particular will ensure that you can continue to generate sufficient sales and profits in the years to come.
2. Transparency in figures and data
Only in the second step you should substantiate the targets and assumptions with concrete planning figures. These should provide answers to these questions, among others:
- What are the expected sales volumes and prices?
- What are the costs?
- What other payment-related activities are there?
- What investment volume must be planned for?
- What funds (in euros) are to be allocated for advertising and new developments?
Liquidity planning and price calculation as well as the calculation of profit margins or contribution margins for products and services are also part of planning. In the operating area, the budgeted figures are broken down into months. With this " breakdown ", special features, such as phases with higher or lower sales, can be better reflected, and it is clearly recognizable when which sales revenues, costs and other payment-relevant activities, e.g. repayments or tax instalments, are to be expected. The monthly view also has the advantage that comparisons of planned and actual figures can be made at short intervals during the year.
You are a manufacturer of swimwear and plan to have total sales of €7 million in the coming year. To have a better overview of the sales and cost distribution, break the figures down to months. This immediately shows that you will have the highest sales and costs in the months from February to June. Before and after that, sales in particular drop drastically. With this knowledge, you can better plan your liquidity during the year.
You should plan sales, material consumption and gross profit for each item individually, if possible. However, if there are dozens or hundreds of products, this is often too time-consuming. In this case, it is recommended to plan per product only for particularly profitable items and to group together and plan all other items.
Your tax advisor probably can help you identify high-yield and low-yield products and services using a simple ABC analysis.
3. Central business management tool
For you, corporate planning has the further advantage of providing you with a powerful business management control instrument in the form of planning and target/actual comparisons, which should be carried out on a monthly basis if possible,
- how things are going in your company or
- whether and, above all, where there are significant deviations from the targets and plans.
Early detection of these deviations enables you to intervene in a targeted manner at short notice and prevent negative developments.
You have prepared an annual plan with detailed sales and cost figures. You have broken down the target figures to months in order to have an accurate overview of how the values are expected to develop during the year. In March, the actual sales figures are more than 10% below plan and target. A detailed analysis of all sales figures shows that the decline is essentially attributable to one product. The investigation further reveals that three customers have cancelled or postponed their orders. Talking to these customers, you learn that they think the product is too expensive.
You offer new negotiations to the customers and can achieve that the customers renew their orders, albeit with a discount of about 8.5%. To compensate for the discount, advertising is to be intensified and focused more strongly on particularly profitable products. There are no plans to increase the budget.
Tip:The distribution of the planned figures over months has proven successful in practice. The sooner you recognize a deviation in the planned figures, i.e. the targets, the sooner it is possible to achieve the originally planned targets after all through short-term intervention. Excel planning tools can provide you with valuable assistance here.
4. Information and communication tool
Corporate planning is an important and central instrument for convincing interested third parties of the performance capability and goals of one's own company. If you need a bank loan, you needto show planning nowadays in any case, not only for the coming year, but also for the following three to five years.
But also larger companies (customers), who place orders and are interested in a longer-term cooperation, increasingly insist that a supplier can prove with what he is successful and wants to be so in the future. Precise information on how (with which measures) you want to achieve your goals (successes) should therefore also be included in a plan.
Example:You want to develop at least four new products in the coming year and expand your customer base by 5%. Overall, sales are thus expected to increase by 8% compared with this year. To achieve these goals, you plan to work with two new development labs. At the same time, the budgets for product development are to be increased by 20% and an executive with overall responsibility for the area is to be appointed. You want to expand your customer base by adding a sales representative and a web shop to your sales channels. At the same time, advertising is to be improved. To this end, it is planned to work with a new agency and also increase the advertising budget by 10%. You put together goals, assumptions, measures and figures in a planning folder. This provides you with a meaningful information instrument for internal and external addressees.
Tip:You should never plan with "bare" numbers alone. Every plan should be accompanied by documentation, which should include at least key words on how assumptions and plan values were arrived at. In case of doubt, this allows all figures to be reconstructed and substantiated to third parties. At the same time, this allows you to improve planning for the coming years, because you no longer have to search laboriously for necessary contracts or suitable studies, for example.