What is the business planning cycle?
How do you go about planning, and how often should you be doing it? Answering these questions is the focus of this article.
But first I feel I need to answer another question for the unconvinced among you. Why spend time on planning cycles at all?
The answer is simple: businesses change. Sales grow and sales decline. Staff are hired and leave. Competitors can be outfought but can also rise anew. Exchange rates and other factors can drive the costs of supplies up, or down. Being in business can feel like an uphill slog, sailing on a calm ocean or trying to avoid falling off a cliff. Whatever your business feels like now – there’s one thing you can guarantee about the future – and that is change.
This is what makes planning for the future so important. Both the internal and external conditions of businesses change all the time. A plan isn’t just something you make and stick with, and it isn’t something you ‘follow’ blindly either. Generally, the aim of planning is to anticipate challenges to the business before they happen and find the best, safest route to grow the business. This is why I prefer to talk about ‘planning’ to having ‘a plan’. Planning is the important action here. While a general plan for the business might remain static in general terms (“we want to sell more apples by offering better products at lower prices than our competitors”), a more detailed plan needs to heavily lean on financial planning, a realm where continuous planning and re-evaluation is a necessity.
Business planning isn’t just for day 1, it should be a constant, iterative process which guides the business as it grows and develops.
Elements of the business planning cycle
A solid business planning cycle involves 4 stages. You should repeat this cycle every quarter:
1. Where we are now?
If you don’t have a clear picture of where you are now you can’t build on that picture effectively. The first thing you must do when planning is understand your business at this moment. Usually, and most effectively, you will also need to know how the business got to be like this. Using an analysis method like SWOT can be a great way to approach the different aspects of “Where we are now”.
You need to know the financial state of your business, ideally with at least a year’s history to see how you got to where you are. If you don’t have a system to deliver this in place already, now is as good a time as any. You should draw up a cash flow, balance sheet and profit and loss report for the business, as each will give you a different take on the performance of and risks to the business.
An important part of framing “Where are we now” is to understand how the market you are selling to looks at the moment. Who are your competitors, and what are their strengths and weaknesses compared to yours? Always check up on the competition – knowing that a major competitor has started using some of your language or advertising in a new way could be key to keeping up with them in the coming quarter.
2. Where we could be?
Making realistic scenarios for “where we could be” is the bread and butter of financial planning.
Look at several different scenarios for the future – at minimum three – a best case, average and worst case scenario will give you an indication of the levels of risk and additional demands you are putting the business under should it grow too slowly – or too quickly.
The most important rule in this part of the planning cycle is to be realistic. To make realistic predictions you need to look at real-world information. Research how much of the market you can reasonably acquire during the coming year. If you are reaching market saturation for your products or services, it could be time to look at other avenues for growth or shore up other parts of the business. It’s important to factor in the growth of your competitors too, and ensure that your business can physically deliver the products/services your market research says you can. Don’t try to conquer your market without the infrastructure to back your expansion up.
3. How do we get there?
By following steps 1 and 2 you will have an analysis of the current financial situation of the business and a good understanding of the business’ potential. Planning on how to bridging that gap is the next task. Work with the financial plan you have built, testing different scenarios to find the most sustainable ways to grow and reach your goals. What does the business need in order to scale up? What are the financial ramifications of growing larger? Again, be realistic. Don’t let anything critical to the growth of the business lie solely on inflated sales predictions.
4. Are we getting there?
Over the course the quarter keep monitoring the financials of the business to see if you are on track. Like the stock market, it’s best not to pay attention to small details but trends over periods of time.
Finally, while the financial side of the business is rightly going to take up most planning cycle work, it’s not the only way of looking at your business. Keep in mind that your best resources are the team you are working with. Are they getting the training they need to excel at their roles? Are they happy, and fulfilled? Do any of them have ideas that could help move the business forward, or are there internal issues that need to resolved sooner rather than later? While the focus of the planning cycle is often financial it’s important not to neglect people – in the end they are what make the business work.
Struggling to plan your business? Try an easier way.
Why it makes sense to have a quarterly business planning cycle
Businesses go through their own cycles of growth, boom, decline and plateau. Change is always possible in business, and it’s important to plan appropriately. Ideally, if you had all the time in the world, you would reassess your business every day but in reality, even reassessing every month isn’t feasible.
Going through the 4 steps planning process above once a quarter is a good compromise between effective planning and use of time. Looking back at the past quarter and assessing how you got to where you are now also provides you with a strong financial anchor point for your plans going forward. Tracking where you were each quarter of the previous year should provide you with a good guide to what is reasonable to expect in the coming year in terms of performance too.