There’s an inherent flaw in traditional business planning and business management training and this article will explain what that is.
Planning to succeed needs to take a different path when it comes to small business.
Business planning is the traditional process of spending months putting together a business plan for it to commonly end up sitting on a shelf. The value of plan comes from the process of gathering information and learning, but often the financial goals set during the planning process fail to be reached.
Starting with financial goals is like building a skyscraper by laying a concrete pad, then adding walls and structure 10 stories high, a building like that will soon turn into the leaning (or falling) Tower of Pisa.
Financial goals are never the place to start with business planning, not if you want to be realistic about the growth of your business.
Instead of business planning I’d like to talk to you about Business Growth Planning.
BGP is where you begin with building foundations for growth. The foundations are bedrock so you can build a business to any size you choose.
The foundations need to be built on numbers in a business.
To grow a business turnover and profit increases are the outcome of other numbers improving. For example if the number of inquiries coming into a business increases each week from 10 to 12 then the number of customers will increase and so the turnover and profit will also increase.
The numbers prior to turnover and profit, in the ‘Time-line of Business Events’ are what need to be identified prior to setting financial goals as the financial goals are only achieved by the foundation numbers (or Key Performance Indicators) increasing.
In any business it generates inquiries which sometimes turn into sales, which means there is a conversion rate factor. With 10 inquiries a week coming in, if 4 of them turn into paying customers the conversion rate is 40%.
The number of leads can be increased or the conversion rate in any given business and increasing either will increase turnover and profit.
To work on a Business Growth Plan (as Business Freedom does), we need to first of all measure the KPI’s to determine what the foundations for growth are.
These KPI’s are: inquiries, conversion rate, average $ sale, $ per person per hour productivity and retention rates of customers coming back again (to name a few as there are others).
The key to setting goals is to gauge the size of the opportunity relating to these KPI’s. If the conversion rate in a business was found to be 2% (as it was for a $6Million turnover client) then increasing it to 4% would mean twice as many customers spending what they spend, and a 100% increase in turnover. (The client named her increased their business’s turnover from $6Million to $36Million+ over 10 years).
Gauging the size of the opportunity for growth is a business needs an expert. One with years of experience with not only measuring KPI’s but also knowing what strategies can be applied to the KPI’s identified to determine growth projections.
This experience can be accessed through The Business Freedom Workshop Series, which gives attendees 20 “Strategy Types” to grow a business with hundreds of “Strategy Actions” that can be taken under the 20 strategy type headings.
The 20 Strategy Types contain every possible way to grow or expand all businesses. (The hard work has been done for you). When it comes to Strategy Actions there are possibly thousands of these to choose from when you have been educated around the subject.
Back to Business Growth Planning, the most reliable, effective and exciting way to set financial goals is to first of all measure your KPI’s (which can vary depending on service, retail, manufacturing industries), then look at the size of the opportunity from what the numbers state, then to set goals from there.
By setting goals – after measuring – achieving them can come quite easily. Knowing where to focus to grow a business is the hardest aspect of growing a business.
The more things you measure, the more ways you have to grow a business as the more numbers you have to improve on.
With all the KPI’s determined (by measuring) choosing strategies to apply to numbers becomes easy. You simply choose the strategies that will create the highest increase in net profit margin, NOT turnover.
Increase net profit margin (the most important KPI of all) should be your primary goal.
If your net profit margin is 8%, then increasing it to 12% increases net profit massively (50% in fact).
As the majority (90%) of businesses operate with less than 10% net profit margin, why would you want to increase turnover to increase net profit when you can do it without increasing turnover (or staff or expenses)?
This then needs to be your primary focus (and strategy choice). What strategies can you use to increase net profit margin, you might ask?
There are 16 of them (given and explained in Workshop 3 of The Business Freedom Workshop Series).
After choosing strategies to increase your net profit margin other strategies can then be chosen.
From reading this hopefully you are seeing the power of Business Growth Planning (step 4 of the 7) and why measuring (The Magic og Measuring – Step 3) needs to be focused on before planning.
Strategies like advertising only increase turnover AND profit, but not profit alone. That’s why advertising is the lowest priority strategy for attendees of The Business Freedom Workshop Series. It also costs money and may not always work. Are you happy to spend money on something that possibly won’t return a profit? No marketing expert in the world will guarantee what they teach you will return a net profit, no matter how confident they seem to be.
When you start with effective measuring planning to achieve your goals becomes almost effortless.
A client mentored by Tim Stokes – Managing Director of Business Building Mentors – set goals with the owners of a $1.8Million turnover cabinet making business a couple of years ago. This client had a -7% net profit margin, i.e. they were running at a $126,000 loss looking down the barrel of bankrupcy.
Tim set goals (based on 10+ years of experience at that time) for the business in 12 months time. The goal was to achieve a +10% net profit margin with the same or higher turnover. The turnover wasn’t really relevant as you don’t increase turnover to increase profit, you do it independently.
Tim explained it would take 2 months of measuring to identify the cause of the negative net profit and another 1-2 months for the strategies to take affect after choosing them (from the KPI data) and applying them and asked the business owner about the cash reserves. They said they could borrow money if need be from family.
This business was turned around and 16 staff didn’t lose their jobs. The business in 10 months time hit $2Million turnover (a 10% increase) but the net profit margin had increased to +10%, then 2 months later hit 12%. The net profit was $240,000, a $362,000 turnaround in 12 months.
This is the power of measuring, strategies and experience combined and the power of Business Growth Planning. This outcome isn’t uncommon, in fact we’ve seen better outcomes than this by attendees of The Business Freedom Workshop Series.
Why not look at attending a Free Business Seminar (Brisbane and Sydney only) to find out more.
Then you can first hand experience the power of of effective small business training, which gives you more time, money and most of all freedom!