Chapter 21- Planning
Internal Planning for Existing Businesses & Corporations
If You Have an Existing Business
The Purpose of Internal Planning
The Evaluational Plan
The Goal-Setting Plan
The Problem-Solving Plan
Large Corporations
Bottom-Up/Top-Down
Ratio Analysis
Liquidity Ratios
Profitability Ratios
Debt Ratios
Activity Ratios
Key Customers
Touching Base with Your Plan
Chapter Summary
Planning isn’t just what you do to go into business; it’s what you have to do to stay in
business.
If You Have an Existing Business
While the entire business planning process described in this book is aimed at both new and
existing businesses, companies already in operation have the ability, and need, to examine key
marketing, operating, and financial activities more closely. This in-depth analysis particularly
benefits those companies undertaking the business planning process for internal planning
purposes rather than as a method of securing outside funding.
Ongoing internal planning is a must for any business; it enables you to stay competitive. A
thorough planning process forces you to look closely at the dynamics of the current market
situation rather than rely on old assumptions. Regular, ongoing planning enables a company to
more quickly adapt to new market forces and incorporate new technological advances.
“Business plans are critical. You can see the original business plan for Honest Tea on our
website [www.honesttea.com/mission/about/businessplan].”
Seth Goldman
Cofounder, Honest Tea
Internal planning provides you with the opportunity to examine ways to keep costs down and
increase your profitability. In the constant press of day-to-day business, taking time out to think
about what you do and in which direction your company is headed gives you more control over
your company’s future and better information on which to base crucial business decisions.
The Purpose of Internal Planning
When undertaking your internal planning process, you must first assess the goals and purpose of
the process for your company.
Generally, internal planning can take one of three forms:
■ Evaluating. To provide information on company performance.
■ Goal Setting. To establish annual or periodic objectives.
■ Problem Solving. To address a particular issue or concern.
These types of plans differ only in their objectives and scope; the process in each case is
relatively similar. All three require that you assemble or develop sufficient information to enable
you to evaluate and assess current company conditions; choose the necessary personnel to be
involved in the evaluation of the data compiled; and have the ability to bring an honest and
critical eye to the examination of your company’s situation.
The Evaluational Plan
An evaluational plan provides management with the information needed to make decisions. Data
gathering and assessment, rather than the recommendation of specific actions or the setting of
specific performance objectives, are emphasized in this type of plan.
Such a plan particularly benefits a company that has not made a close examination of its
operations or the market conditions for some time, or it may be used annually by a company that
wants to do an in-depth analysis of these factors on a regular basis. An evaluational plan might
be the most appropriate type for a company in which all decisions are made at upper levels of
management only, and where the input of middle management and staff is given relatively little
weight.
The Goal-Setting Plan
Probably the most widely used type of corporate business plan is that with the purpose of annual
or periodic goal setting.
The function of this plan is not only to evaluate current and past conditions within the company
and its environment, but to establish the specific, measurable objectives that departments and/or
individuals are expected to achieve.
Some of the areas in which specific objectives may be set are below.
OBJECTIVES
Many companies set performance objectives in these and other areas annually, based on past
performance and projections of future conditions.
Performance objectives should be:
■ Measurable. With specific numbers or dollar figures attached rather than merely subjective
qualities or quantities.
■ Reasonable. Based on a fair assessment of current and past activity and a temperate
projection of future conditions rather than on an unreachable ideal.
■ Time Specific. Delineating a clear time frame in which the objectives are to be achieved.
■ Motivational. Neither impossible to reach nor too easily accomplished, either of which will
reduce employee motivation.
Success key terms
Key Ratio
A simple calculation that assesses the performance of a certain aspect of a company. Key ratios
include liquidity ratios, profitability ratios, and debt ratios.
Liquidity
The ability to turn assets into cash quickly and easily; widely traded stocks are usually a liquid
asset.
The Problem-Solving Plan
Another option for internal planning is to narrow the planning process to a few key issues to be
addressed. This type of problem-solving process focuses on the top priorities for operational
improvement rather than on an overall evaluation of company performance. Planning for
problem solving, however, should not take the place of more-comprehensive planning; you still
need to look at your complete operations. But it offers you a method of focusing resources and
creativity on one or two areas in order to make significant gains in performance.
A problem to be solved can be assigned to a department or division, but often it is advisable
instead to assemble a task force to tackle the issue. Such a task force allows management to bring
together staff across divisional or departmental lines.
“The trials and tribulations and the fun of it all comes from getting in tough places and
then figuring out how to scramble out of them.”
Kay Koplovitz
Chair, Kate Spade
Keep in mind that to a large extent whom you choose to participate in the task force will
determine the outcome. If the task force is composed only of staff members who have been with
the company for 20 or more years, it is unlikely you will come up with fresh approaches to the
problem. If the members are too inexperienced, on the other hand, they will not have the
necessary knowledge of the realities of the business nor will their recommendations be viewed
with much authority.
The problem-solving process consists of:
■ Defining the Problem. Either management or staff may delineate the areas of concern or
challenges.
■ Assembling the Team. Limit the number of people involved and bring together only those
whose contribution will move the process forward; choose team members more for their
intelligence, attitude, and knowledge than for job title or data access.
■ Considering Solutions. Persistent problems often require creative solutions; be willing to
make changes to achieve results.
■ Recommending Specific Activities. Suggest the changes or enhancements necessary to solve
the problem.
Large Corporations
Many, if not most, larger corporations now develop business plans annually on a company-wide,
divisional, departmental, or team level. Successful Business Plan: Secrets and Strategies serves
as a guidebook for developing a plan at any of these levels, whether corporate-wide or for an
individual team. For departmental or team planning, some sections may require modification to
accommodate specific circumstances or may not be applicable at all.
As you work through the book, use the described process and worksheets but adapt the material
to your specific situation and needs. While the term “you” is used throughout the book, particular
actions might be carried out by a subordinate, research department, or other members of the
planning team. Nevertheless, the person making the final decisions should be sufficiently
informed about the planning process and have access to raw data enabling him or her to
competently evaluate the action plans recommended by others.
If yours is a particularly large or complex business, you may want to separate your business plan
into two sections, one containing the specific financial performance objectives and the other
examining more-strategic and long-term issues facing the company.
Bottom-Up/Top-Down
The business planning process in large corporations is most successful when conducted as a
cooperative effort between those on the top of the decision-making ladder and those who actually
carry out the decisions. A one-way planning process without the involvement of both
management and staff leads to a company-wide lack of commitment to the plan and inevitably
undermines its effectiveness.
“What holds a lot of small business owners back is themselves. The fear — the fear of
mistakes, of getting out of their comfort zone, of talking to someone who’s an expert.”
Bill Rancic
Serial Entrepreneur
In establishing and participating in the business planning process, management has these
responsibilities:
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Clearly communicating the specific goals and importance of the planning process.
Establishing the time frame for completion and execution.
Assembling the appropriate personnel and making time available for them to participate.
Bringing in additional outside expertise if necessary.
Making available the necessary resources for the planning process.
Being open and responsive to results and recommendations of the plan.
Likewise, staff has certain responsibilities in the process:
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Identifying areas of concern and specific problems.
Defining the resources and outside expertise required for the planning process.
Providing the necessary data and information.
Honestly and diligently evaluating the data gathered.
Viewing the planning process as necessary and beneficial.
Realizing the limitations of their roles in decision-making.
Ratio Analysis
You may be surprised by how much you can learn about your company and its profitability from
a few relatively simple calculations. Even if you think “number crunching” is only for blearyeyed accountants, you will discover that figures are vital business tools. Particularly useful are
the key ratios indicating how one activity or figure relates to another.
For instance, the key ratio of return on equity compares total net profit after taxes to the total
amount of money invested in the company. Dividing profit by the amount of equity allows you
to see exactly how much each invested dollar earned. This is a critical number for your business
as it shows how effectively you used the money you had to spend. The return-on-equity ratio is
particularly important for investors who want to know how efficiently the money they invested is
being used to create profits.
“The danger of drinking your own Kool-Aid is that no one else likes the flavor of it.”
Premal Shah
President, Kiva
When evaluating these ratios and using them as a planning tool, you want to look for ways to
increase productivity by decreasing the amount of assets necessary to generate sales, reducing
your debt, and increasing the amount of profitability made on each sale.
The principal value of computing ratios for your company is in comparing them from one time
period to another. In this way, you can assess both the progress your company is making in
controlling costs and increasing profitability and the trends you see developing in these areas.
Another important way to use this information is to compare these key ratios in your company
with the ratios of other similar companies in your industry. These figures are available in
financial publications such as the annual review by Dun & Bradstreet, the Almanac of Business
and Industrial Financial Ratios (published by Prentice-Hall), and reports from industry trade
associations. A comparison of your ratios with those of other leading companies will give you a
better sense of your company’s performance and competitive position.
The Key Ratio Analysis worksheet on pages 388–389 shows how to calculate many of the most
important measurements of your business. The ratios included on this worksheet help you better
understand the profitability of your company and specific operations, how well your company
manages the assets it has at its disposal, and your cash flow situation. A brief discussion of the
four ratios you will find on the Key Ratios Analysis worksheet is provided below.
Liquidity Ratios
Liquidity ratios show the extent of the readily available assets, indicating your company’s ability
to meet short-term debts. Generally, you want to try to increase liquidity and decrease amounts
tied up in inventory. Specific types of liquidity ratios include:
■ Current. How capable the company is to cover short-term debts with short-term assets. (Be
certain to use current rather than total assets and liabilities from balance sheets.)
■ Quick or “Acid Test.” How well the company could cover short-term debts without selling
inventory; this ratio should always be greater than one.
■ Inventory to Net Working Capital. How much of the company’s cash is tied up in
inventory.
Profitability Ratios
Profitability ratios show how much the company has earned and the profits made on sales. Your
goal is to have the percentages as high as possible. Profitability ratios include:
■ Profit to Sales. Relationship of total sales to actual profitability after all expenses.
■ Return on Equity. Profitability in comparison to the investment of stockholders.
■ Return on Assets. Profitability in comparison to both investment and loans; how productive
the company’s total assets are in producing profit.
■ Gross Profit Margin. Income after the direct costs of sales are deducted.
■ Net Profit Margin. Income after all expenses are deducted.
■ Earnings per Share. Amount of income expressed in terms of each share of common stock
held.
Debt Ratios
Debt ratios show the extent of the company’s debt and its capacity for engaging in additional
borrowing; generally, the lower the percentages, the stronger the company’s financial position.
Debt ratios include:
■ Debt to Assets. How much the company has relied on borrowing to finance its operations.
■ Debt to Equity. How much the company owes creditors in comparison to the value owned
by stockholders.
Activity Ratios
Activity ratios show how productively the company uses its assets, and how much value the
company gets for the inventory or other assets it maintains. The greater the ratio value, the
further each dollar goes (except with the Average Collection Period, which ideally is a low
figure). Activity ratios include:
■ Inventory Turnover. Dollar value of the inventory it takes the company to generate sales.
■ Inventory Utilization. Average amount of money the company has invested in inventory.
■ Inventory Units Turnover. How much inventory the company has on hand in relation to
inventory sold.
■ Fixed Asset Utilization. Amount of plant and equipment used to generate sales.
■ Total Asset Utilization. Amount of all assets required to generate the company’s sales.
■ Average Collection Period. Length of time that the company’s income is tied up in accounts
receivable.
Key Customers
In most businesses, the “80-20 rule” applies to revenues. This rule states that 80% of your
income comes from 20% of your customers. This means that a relatively small number of
customers are often crucial in determining your success.
80-20 RULE:
80% of your income comes from 20% of your customers
In most cases, this 20% is composed of actual individual customers. However, in some cases, it
may be a specific type of customer who makes up the bulk of your business.
If indeed your business is dominated by a few key customers (or types of customers), you should
take a careful look at their buying patterns and motivation. These customers are vital to your
ongoing financial well-being; you want to gain as much insight into their purchasing behavior as
possible.
Additionally, you can gain a much better understanding of your customers by examining the
significant customers you have recently gained and the important customers you have recently
lost. This type of examination of trends in your customer base gives you a sense of how the
market views your company and the future direction of your company’s sales.
The Key Customer Analysis worksheet on page 390, assists you in evaluating the activity of
your key customers.
Touching Base with Your Plan
In corporate business planning, a natural tendency exists to spend a great deal of time and energy
putting together a business or annual plan, and then, once the planning process is finished, forget
the conclusions reached and go back to business as usual. This not only wastes a great deal of
resources, it also creates a high level of cynicism about the importance and value of the planning
process.
To make your business plan a meaningful working document, schedule periodic evaluation
meetings to get back in touch with the plan. Perhaps once a month at a staff meeting, the plan
can be reviewed and progress assessed. At the very least, the plan should be reviewed quarterly
with both management and staff participating in the evaluation. Don’t let your business plan
gather dust; use it.
Chapter Summary
Existing businesses require business planning as much as start-up enterprises do. Planning is a
necessity for any company aiming to improve its operations, increase its profitability, or
maintain or enlarge its market share. Planning is a regular part of your business, not a once-in-abusiness or once-in-a-decade undertaking. Long-term success depends on proper planning: It’s
the only way to keep up with the competition.
“Milestones are critical. If we do a $1 million deal, we’ll only give them $500,000 at first,
and then once they hit their quarterly goal, we’ll look at the plan and give them 20% more,
and so on.”
Damon Doe
Managing Partner
Montage Capital
Key Ratio Analysis
Key Customer Analysis
Describe purchasing patterns and motivations of past, current, and new customers.
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