Is there any benefit in doing formal business plans?

Wednesday 01 January 2014

Well, that depends. If it’s to justify to the bank that you know what you are going to do and why, or the business isn’t paying you more than a wage you could get in employment then maybe yes. If however it’s going to take two weeks writing it and during that time you could have focussed on changes to how your business actually works then really don’t bother.

Peter Drucker wrote an amazing book called ‘The five most important questions you will ever ask about your organisation’, which defines how to go about the strategy of the business, and its implementation. His questions included:

1. What is our mission?

2. Who is our customer?

3. What does the customer value?

4. What are our results?

5. What is our plan?

For me, the most important question is the third one. What does the customer value? In fact, Drucker says: ‘The purpose of a company is to create a customer…the only profit centre is the customer.’

It is often easy to lose sight of that when developing a business plan as it can be easy to fall into the trap of looking internally at what ‘we’re going to do’ rather than focussing on the fact that at some point, only one person (really) is going to make a decision to buy from you or not.

Running a small business is hard work and often requires the owner and the team to do long hours just to meet the existing customers’ requirements. If it doesn’t then you’re overstaffed right? So how much time do you have to write this plan?

Especially when every business is made up of numbers and just about everything in business that matters is a number – your sales, your margins, your customer base, your costs, your profit, your cash flow, your customer satisfaction score, your repeat business rate, your conversion ratio…the list goes on.

When business owners want to grow they usually focus on things like a new website, or more advertising. Whilst these are perfectly valid ways to grow a business, if you do not understand the numbers behind these activities, and the impact they have on your business model, the results can be poor, and certainly writing them all down in a business plan is pointless.

There are mathematical models which sit behind every business, and when you understand the models you start to truly understand what drives your revenues and profits.  Imagine a really simple business which has only ten customers. Each of those customers spends £10 each time they buy, and each of those customers buys from the business ten times each year.

So, we have three turnover drivers here:

1. The number of customers

2. How much they spend on average each time; and

3. How often they spend.

When you multiply these three elements together you get total turnover. So, for this business turnover would be 10 x 10 x 10 = £1,000.

If this was your business, you could undertake some sales and marketing activities to improve any of those numbers. Let’s imagine you are able to increase the number of customers by 10%. This means you will have 11 customers rather than ten, and total sales now become… 11 x 10 x 10 = £1,100.

Increasing the number of customers by 10% increases sales by 10%. Maybe you decide to focus instead on increasing how much they spend by 10%. If you do this,11 each time they buy rather than £10. Total sales now become… 10 x 11 x 10 = £1,100.  In other words, increasing how much your customers spend by 10% increases sales by 10%.

If instead you focus your efforts on getting your customers to increase how often they buy from you by 10% – so they buy 11 times a year rather than ten – then again, your sales increase by 10%. So, if you increase any turnover driver by 10% your total increases by 10%.

So what happens if you increase all three of the sales drivers by 10% at the same time? The answer is that turnover grows from £1,000 to £1,331, which is a 33.1% improvement and you may have expected it to only be 30%?

What that shows is that you can take your existing business and focus on making minor changes to price, frequency of sale and volume of customers and drive dramatic change to your profitability.

A business plan may help you identify the actions you need to take but it does take you away from making those actions happen and takes up valuable time.

Deconstructing your business into key numbers that matter – not just what you billed or collected – but what drives profit, will help you focus on the few actions you can take in the time available to make 2014 a great year.