The Facts of Business Life

by Bill McBean

  Although asset protection is rarely discussed as an important element in business, to the entrepreneur or owner who has suffered through continued asset write-downs it is not only a major concern but an effort that pays dividends when selling. Focusing on assets and their performance through management accountability and improved processes may not make asset write-downs completely disappear, but it can severely limit them. As this fact makes clear, owners have to focus on and gain control over their products or services, the business’s tangible and intangible assets, and the customer–employee–owner dynamic if true asset protection is to be achieved.

  Asset protection is not easy, and even after you feel you have it under control you have to not only continually work on it yourself but also challenge your employees to focus on and improve it. However, once asset protection becomes part of your business’s DNA, it is a strong market weapon because it enables you and your employees to get the maximum out of every asset the business owns or controls, which in turn focuses the business on the opportunity the asset was bought or created for in the first place. And all of this adds up to a stronger market presence, more success, and more profits, and it does it by using a valuable weapon that only the most successful owners use.

  Chapter 6

  Fact 4: Planning Is About Preparing for the Future, Not Predicting It

  Imagine that you’re standing in the middle of an intersection with cars coming at you from every direction. It’s obvious that you’re in danger and that moving from the intersection is your only option. The problem, though, is that the landscape looks the same no matter which way you turn, so it’s impossible to tell which road will take you where you want to go. That’s what planning is about—it points the owner and the business in the right direction.

  Every owner stands at this dangerous intersection, not once but many times. Some of them never make a choice, stay at the intersection, and watch their businesses die. Some guess which road to take and only find out they are on the wrong one when it’s too late. And some guess right, have some initial success, and then lose their way. But there are still others who anticipate the intersection and determine beforehand which road to take, what to expect along the way, how to avoid the dangers and capitalize on the opportunities, and how to recognize and correct errors. This last group is the planners, the ones who realize that planning is one of ownership’s best tools, as well as one of the best ways to put the odds of success in their favor.

  Of course, most businesspeople realize that they should plan. However, the majority of owners don’t do it, primarily because it’s hard to do, because they don’t want to put themselves in a position in which they are accountable, or because they don’t want to have to force others to be accountable. These owners discount planning’s importance by telling themselves there is little point in planning because, since they can’t predict the future, there’s no reason to plan for it. But this is a trap—and a costly one—because it puts the owner in the middle of that intersection. It’s true, of course, that you can’t predict the future, but you can prepare for it, and that’s what planning is about.

  Planning is both a science and an art. The “science” is in determining what information is needed in order to build a strong factual foundation for analysis and decision making. Such information might include, for example, what’s happening in the market today, what the historical trends have been, how large the market is, who has the largest shares of it, and which businesses have been winners and losers. Gathering this kind of data will enable you to better understand the market and determine not only why the best companies are where they are but also what the less successful companies are doing, or not doing. Planning, then, is about facts and realities, not assumptions, and that means that the questions you ask are as important as the answers.

  The “art” of planning is in how an owner sees the facts the “science” has uncovered and uses them to develop a plan. But that’s easier said than done. And it’s an effort in which experience counts. We know, for example, that economists and scientists can look at the same facts and reach conclusions that are diametrically opposed to each other. The difference in conclusions occurs because of personal bias, because some facts are ignored to prove a point, or because of a narrow focus that impacts on how the facts are interpreted. But, as an owner, you can’t afford to fall into this trap because incorrect decisions have costly personal consequences. In fact, one of the main reasons businesses have boards of directors or mentors is to tap into the experience of those who have mastered the “art” of planning. Further complicating this art is the fact that the goal of planning is not to find the correct answer but rather to choose the best answer for your circumstances and your tolerance for risk.

  Of course, the first step in planning is always to determine where the business is headed and what it will look like when it gets there. Once that determination has been made, planning is essentially about getting the business from where it is today to where you want it to be. Planning can be immediate, short-term, or long-term. Immediate plans are for today, this week, this month, or this quarter. Short-term plans, which are very specific, define what needs to be accomplished in anywhere between six months and three years, depending on the industry and what needs to be done. Long-term plans are less specific, and more flexible, than short-term ones. The key to planning, though, whether it’s immediate or short- or long-term, is that the sum of all the parts has to add up to the long-term destination you have set.

  The Benefits of Planning

  Planning forces you to choose a destination and a direction for your company, without which it is impossible to establish criteria for success and, accordingly, determine whether the activities the staff is involved in are productive or efficient.

  Planning helps you optimize the company’s future. Because profit is the lifeblood of business, when planning focuses on profit, efficiencies are created, as is a scorecard for success and failure.

  Planning gives your company a purpose and directs its focus toward customers and the revenue/profit they generate.

  Planning generates factual information you can use to evaluate immediate and short- and long-term plans. It also exposes both the immediate realities of the market and possible future market trends.

  Planning gives you a marketplace advantage over your competitors who don’t plan at all or don’t plan well because you can use the strategic and tactical ideas that are developed to expand or protect your company’s market position in both the short and the long term.

  The Realities of Planning

  Planning relies on the other Facts of Business Life for support and implementation. Even if, for example, your company has the best-developed plan, it won’t work if you don’t provide leadership (Fact 1) or understand the importance of accountability and control (Fact 2). More than any other management discipline, planning exemplifies the reality that to succeed you have to be proficient in numerous leadership and management disciplines.

  Planning is one of the things that successful owners have in common, and the way to become successful is to do what they do.

  Planning means keeping up with marketplace changes, which may lead to internal changes and the employee resistance that usually goes with it.

  Planning can be successful only if your company has accountability and internal discipline. If you aren’t prepared to captain your own ship, you may not have what it takes to be an owner.

  Planning, especially in the beginning, is always hard because every step is a new adventure, but it becomes easier with experience.

  Planning is about eliminating excuses and creating an atmosphere in which employees and the business can succeed.

  Planning is less about developing a plan than it is about implementing the plan and reaching the goal. The real battle doesn’t start until after the plans have been made, and it’s a battle that has to be fought—and won—if ownership success is to be achieved.

  Planning is not just something that ta
kes place once a month, once a quarter, or once a year. Making plans and implementing them is an everyday blocking and tackling event. In other words, when it comes to planning, every day is game day.

  The Elements of a Proper Business Plan

  Few owners have the same definition of success, the same market, the same available capital, the same opportunities, and so on. And just as every owner’s situation is different, every business plan is different. However, all effective plans do have commonalities of structure and framework, including the following:

  Destination or vision. Where the business is going, what it will look like when it gets there, and how long it’s expected to take.

  Mission statement (company culture/DNA). What the business’s purpose is and the kind of conduct that’s expected of the employees in their interactions with each other and with the company’s customers—that is, the atmosphere of the company in regard to expectations, accountability, and professionalism.

  Goals. What the company is expected to achieve, which in turn determines the kind of objectives and strategies that must be developed.

  Analysis. What the company’s status is, both externally and internally, including the size of the market, trends, competition, and market share for the former, and financial strength, employee processes, and management strength for the latter.

  Strategies. The best way to exploit and protect the business based on the external and internal analyses, including the positive and negative consequences of the strategies and the extent to which they align with the company’s goals.

  Objectives. Based on the goals and strategies, practical plans for the company’s future that are exact, easily measurable, have a short timeline, and provide for individual accountability.

  Summary and communication. Sharing the plans with those who will be responsible for implementing it.

  Implementation. The orderly execution of the strategy.

  Review. The constant review and revision of strategies and objectives, while never losing sight of the goals.

  In order to plan successfully, all of these elements must move and work in unison with each other. Hard work, patience, and an understanding of the other pertinent Facts of Business Life will also help you in reaching your owner’s overall goals.

  Level 1: Ownership and Opportunity

  Planning is important at every level, but perhaps nowhere more important than at this one. If you get planning wrong at Level 1, the result is likely to be, at best, an unpleasant surprise, if not a series of them. Proper planning will show, among other things, if the market niche is too small, if there are too many competitors, if the industry is shrinking or growing, and if the profits are likely to be slim or very good. In other words, planning enables you to make intelligent, well-thought-out risk and investment decisions.

  At this level, though, there is a step you must take even before beginning to develop a plan. That step is to ask yourself a series of questions that will enable you to determine whether you should even be thinking about going into business for yourself, specifically:

  Do I like this business?

  Am I good at doing what has to be done to make the company successful?

  Do I understand the industry and the marketplace sufficiently to competently analyze it?

  Is ownership really what I want?

  Do I have the talent, the discipline, and the experience to make this opportunity work?

  What would happen, personally and professionally, if the business failed?

  Do I have access to enough capital to enter this market, and is the potential net profit sufficient to make this a good investment?

  If you can’t answer “yes” to all these questions, it would be advisable for you to give some more thought to whether owning a business or taking this opportunity is something you are really ready to do.

  The Benefits of Planning at Level 1

  Planning shows how much profit you are expecting and provides a timeline for that profit.

  Planning shows how much cash and credit you will need to operate the business successfully.

  Planning provides banks and other business lenders with a blueprint by which they can analyze the opportunity you are presenting and determine how much money they will lend you, their pricing structure, and the conditions under which they will make the loan.

  Planning forces you to analyze your own ability, the level of skill you need to lead and operate the business, and the policies, procedures, and processes you will have to implement to reach your objectives and goals.

  Planning makes you focus on the type of talent you will have to recruit.

  Planning enables you to show your mentors or advisers what you expect to happen and test the reality of these expectations with them.

  Gathering Information at Level 1

  As it is at every level, at Level 1, collecting information is an essential part of the planning process. At this level, the most important area in which you need to gather information is the financial one. This is because fundamental financial questions should be answered before too much time and money is spent on an opportunity that may actually have very little profit potential. You must determine how much personal investment will be required, how profitable the venture can become, and how long it will take to repay the investment. And it’s not only important for you to know this yourself—these are questions that bankers and investors will want answered as well. The specific areas in which information must be gathered at this level include:

  The size of the market, market demographics, competitors’ strengths and weaknesses, and so on.

  The stability of the overall market, potential for growth, possible threats and opportunities, and how you can exploit them.

  Hard facts that will prove or disprove market assumptions and help you to make better decisions.

  Industry financials that show composite revenues, average industry gross profit margins, net profit, cash flow, and the like.

  How the income statement and balance sheet work, their importance, and how to interpret them.

  Analysis, Planning, and Implementation at Level 1

  As noted earlier, planning means gathering facts (science) and forming an opinion based on these facts (art) in order to determine what steps must be taken to get the company to where you want it to be. Once you have done a financial analysis at this level, you will be able to understand the profit potential, opportunities, threats, investment needed, and potential return on that investment, and make appropriate plans. Let’s say, for example, the results of your financial analysis indicate that, based on previous profit history, your investment could be paid back in three years from profits, and there is also considerable new business available. You might then develop a short-term plan that would enable you to pay off the debt sooner than expected by bringing sales up, expanding gross profit margins, and increasing the business’s internal efficiency. The long-term plan might then be for you to borrow additional money (after the initial debt was paid off) to buy equipment and inventory, and hire new employees to take advantage of the additional business that the market study showed was available. Once the initial debt was paid off, the long-term plan would become the short-term one, and the new long-term plan might be one of expanding the company’s facilities to handle the increase in employees and customers.

  If, however, the analysis suggests that the market is strong but the business is not as well run as it might be, your short-term plan could be designed to make the company more profitable by improving sales. You might do this by developing processes to capture and retain new business, and by training and educating your employees on the importance of the customer, future expectations, and accountability. The long-term plan might then be one of market domination through conquest sales and buying some of the competitors’ weakened businesses.

  Of course, creating a plan is only part of the process. The real issue is whether you can do what you thought you could—that is, implement the plan. That’s why it’s nec
essary to develop objectives that will lead to the goals you’ve established. For example, in the preceding scenario, the company’s internal efficiency could be improved by establishing objectives such as reducing some expenses, training employees, creating incentive pay plans, refocusing the marketing plan, and buying products more competitively—all of which would help pay off the debt faster. Then, as the short-term plans are being implemented, you could focus on the long-term plan, deciding which market niche has the greatest opportunity, what new equipment you would need to increase business, how many new employees would be needed to service the extra customers, and what your strategy should be to attract new customers.

  Planning isn’t easy, but even though it may not seem like it, that’s actually good news. If it were easy, all your competitors would do it, so if you do it and they don’t, you have an advantage. In addition, simply because they’ve never done it before, new owners tend to be surprised by events—both good and bad. But for those who plan at Level 1 and do the due diligence required, the surprises tend to be much more pleasant than for those who don’t.

  Level 2: Creating Your Company’s DNA

  At Level 1, planning is about developing a plan that has reasonable expectations and will deliver profits. At Level 2, planning is about designing processes that will help you achieve the planned-for results. These processes are essentially the DNA that will run your company, and it’s the company’s DNA, or culture, that turns strategies into reality. Such processes include things like determining how cash sales are handled and accounted for, how inventory is replaced after a sale, and how customers are treated. They are in turn supported by job performance, job accountability, the expectation of results, and employees’ attitudes.