“In preparing for war I have always found that plans are useless but planning is essential.”

Dwight Eisenhower

In this chapter

• Monitoring your plan
• Evaluating your plan
• Beware these characters!

You wrote your plan, you won the backing. Great, but is that it? Best not. Monitor it for a while and try to set aside time after a few years to evaluate it properly. There will for sure be lessons to be learnt for next time.

And hopefully the evaluation won’t reveal you to have been one of those characters prone to crafting pie-in-the-sky plans!

Monitoring your plan

In Chapter 1, I counselled against the use of business planning as a managerial tool for SMEs. This is fine in large organisations – ones that are prepared to devote the required resources to researching and analysing markets, customers, competitors, resources, financial model assumptions, risk and sensitivity, and so on for a month or so each year. It is not so fine when resources are limited.

Nevertheless, if your business is an SME and you have developed a business plan for a specific purpose, typically to obtain backing, whether from your board, a bank or an investor, it is still worthwhile monitoring it. You spent many hours drawing up the plan – the least you can then do is see to what extent things have turned out as envisaged.

Indeed it may be useful to monitor performance against the plan to keep your backer informed of progress. At the very least this would consist of comparing key financial results with forecasts. Better would be to compare the underlying business drivers of those results – such as occupancy and average achieved room rate in the case of the Dart Valley Guest House – with what was forecast.

After a year or so, however, this monitoring will to a large extent be usurped by the budget process. Once the new budget is in place, results over the following year will tend to be assessed in relation to the budget, not to the old business plan, soon to be regarded as a document past its sell-by date.

By the third year, the business plan will be regarded as a historical curiosity. Monitoring will be a superfluous exercise, but evaluation will not.

Evaluating your plan

If you needed to draw up a business plan for some specific purpose – probably, as stated above, to obtain backing from your board or a financier – the chances are that you will need to do so again one day.

That may be in a couple of years’ time, if things go either badly, and there’s a need for restructuring, or extremely well, and you need further capital or you are looking to expand by acquisition or alliance.

Or it may be in five, possibly ten years’ time that you need to dust off your business plan and write another.

Whichever, you could well have to do this exercise again. So you need to know what you did right and what went wrong this time.

The way to do that is through a structured evaluation process. This is best done after three years, but can be done sooner if a new business plan is needed within that period.

The evaluation should be carried out by someone independent of the initial business planning exercise. No vested interests should be at stake. It should focus on examining the outturn of key parameters forecast in the plan.

A summary of the evaluation process might look like that in Table 10.1.

The important points in the evaluation process are as follows:

• Key parameters – you might choose to analyse the costs of rental of premises compared with forecast, but you won’t compare the costs of paperclips. Select here only those parameters that have a significant bearing on the outcome of your financial forecasts.
• Reasons – if things turned out significantly differently, why? External forces, or areas where you went right/wrong?
• Lessons – next time round, what should you do differently in the plan process? How can your forecast be made more accurate? What extra research or analysis would be beneficial?

The main point of the exercise is, of course, the final column. What lessons can be learnt for next time?

Monitoring your business plan can be regarded as an option. Evaluation should not be. It is not a time-consuming process. It can be carried out in just a few days. And the lessons may be illuminating and extremely useful for the next time you’re asked by the boss to write a business plan – by the end of the week!

Beware these characters!

We have met some of the following characters along the way, in various chapters. But it may be useful to gather them together here, at the end of the book, to remind you of what not to do.

Hopefully, when you or a colleague does an evaluation of your business plan in three years’ time, you won’t go down in your firm’s history as a dreamer, a loner, a magician, a macho or a delusionist.

The dreamer

This is the person who lays out a set of sales forecasts that bear no relation to what market demand is forecast to do and/or how the firm is positioned in the market. We met him in Chapter 7 when looking at RandomCo’s sales forecasts and assessed his forecasts as wild. He’s the kind of guy who forecasts 14% per year sales growth in a business segment even though market demand is shrinking, his firm is at best tenably positioned and he has no plans to launch new products or services or enter new markets.

He’s a dreamer. His forecasts bear no relation to the market environment in which his firm operates or to his firm’s competitive standing. He’s unbackable.

The loner

This is the person whose business plan has a sentence, not even a paragraph, let alone a chapter, on competition. Competition doesn’t matter. She identifies a market and her firm will serve it. No one else matters, no competitor exists, no new entrant will arrive. Hers will be the sole provider to this market. If others do arrive, customers will be disdainful, since the newcomers won’t have what it takes to compete. Only her firm counts.

She’s a loner. Her firm alone can serve the addressed market. Others are irrelevant. She’s unbackable.

The magician

This person is the clever guy who has forecast sales reasonably, consistent with both market demand and his firm’s competitive position, but has forecast his cost base to grow at a fraction of his sales growth rate. He believes he can use his purchasing skills to drive down direct costs and, as far as he is concerned, overhead expenses are too high at present and by forecasting them to remain flat while sales grow he is being conservative. As for capital expenditure, who needs it? The company should do fine with its ageing capital equipment for a good few years yet and, if space gets a bit tight in the plant, they can always improve the production process flow. Operating margin is thus forecast to grow dramatically year on year.

He’s a magician. He can grow sales without deploying the resources, and costs, needed to drive and serve them. Even if he has a sound market development case, he risks rejection by backers due to his unrealistic cost and margin forecasts. He may be unbackable.

The macho

This person is the turnaround guy extraordinaire. No matter that profits took a bit of a dive last year. This year profits are going to bounce back and rise exponentially thenceforth. His are the fabled ‘hockey stick’ forecasts. Everything that could go wrong went wrong last year. Everything that can go right will go right in years to come. And why? Because he has taken charge, he’s the new MD. He’ll sort everything out – he’ll get the sales staff remotivated, the production staff more efficient and the R&D staff more market-focused. The firm will have world-class leadership for the first time ever. That is he.

He is the macho. He may be right. Some hockey sticks do turn out as forecast. But the odds are not on his side and his backers will be wary indeed of his manifold claims. They will examine his track record with a toothcomb. And they will cross-examine him on every sentence and number in his business plan. If they can bear sitting alongside him for that long.

The deluded

This person has completed a rigorous, thoroughly researched and analysed assessment of the market opportunity. She has explained convincingly why it would be unlikely that more than four companies will enter the field. And she has set out in minute detail why her firm will remain at least as competitive as any other player on the assumption that others copy and follow her company’s consistently innovative policies. Her sales forecasts assume conservatively no more than a one in four market share by year five. Her expense forecasts are individually well argued and seem reasonable. And yet her forecasts show an operating margin of 40% from year five.

She is deluded. The sales volume forecasts may well prove correct, so too the cost forecasts. But what about pricing? Can she assume that competitors won’t price more competitively than her firm in order to gain share faster? Ultra high operating margins tend to get shaved back through competitive pricing either by the incumbents or a new entrant, or through escalating marketing costs, or a mixture of both. She may well win her backing, but not on the terms suggested by her business plan.

When you write your business plan, don’t be a dreaming, lonesome, macho, deluded magician. Be realistic. Gain the respect of your backer. Win that backing.

Good luck!