Top Management Story

Writen by Adrian Pepper

Among the small businesses that I coach, I find that the more effective entrepreneurs recognise that planning and managing success has three parts:

• They depend on measuring the past accurately.
• They strive to follow their plans in the present.
• They build flexible plans for the future.

Looking back

You need numbers to count what you have achieved over the last business cycle. Clearly performance is not numbers alone: their meaning needs to be interpreted before you can decide how to respond to them. Examining your business goals and market conditions will determine the right measures for your business: (some examples in random order)

• Return on Investment (RoI) - this ignores the contribution that individual sales make when used too narrowly.
• Employee productivity - this is effective when 90% cost is wages, it is less good when your infrastructure costs predominate.
• Customer satisfaction - the 'golden glow' is subjective, fickle and fashion-ridden.
• "Gross margin = Revenue – Costs" - this can be distorted where the overheads are apportioned inappropriately and some goods are carrying an unfair amount of shared costs.
• Employee Turnover - this can be useful when skills are critical to the business.
• Market share - this measure is good in stable conditions but the past is a poor guide to the future when your competitors are active.
• Inventory Turnover - this is used to control working funds and to reduce dwell times for retail stock.
• Burn Rate - this was used by Dot.Coms to estimate how soon all their capital might be spent. It was effective in warning people how soon they needed to find a new job.
• Customer Loyalty (retention, repeat sales) - this measures sales effectiveness.
• Cost of Sales (CoS) - this tends to become distorted as manual effort is automated.
• Median credit time - this useful when your profit margin is achieved by living on your creditors' stock.
• Return on Capital Employed (RoCE) - this is similar to RoI but devalues any 'unemployed' capital that you own.

Shaping the future

With care, you can find a couple of measures that suit your company and help you understand how your business works. Then you need to set your goals: "Where do I want to go and how do I plan to get there?"

Please remember that good plans are regularly re-drafted. If your current results are worse than you expected, face reality, get past your defensiveness and ask: "Why did I get that result and what do I need to change in the future?"

Running in the present

In the present, you need to follow your plans as far as possible. However if you need to re-plan, drop your old ideas and make new assumptions. Remember that all your costs to date are sunk and can rarely be recovered. You can only plan forward from today.

You need to ask yourself: "How well am I sticking to my plan and how closely do current market conditions relate to my planning assumptions?"

Building options for the future

As you build combinations of new and old ideas into your plans, you can estimate where you think you will be by the end of your next trading cycle. This is where the value of the plan is clear: if you work out your options and preferences beforehand, when unplanned events impact your business, you will be able to respond quickly and keep your delivery on course.

You need to ask yourself: "What changes in my assumptions would invalidate my plans and how can I easily create new options in order to get back on track?"

Putting the three parts together

Big companies have managers who are dedicated to delivery; smaller companies have owners and entrepreneurs who try to combine technical, production, marketing and sales roles.

Managers in all companies can become locked into the present and to forget to work through all three parts equally: past, present and future. Then they need to step back, stop working in the business and work on the business.

I encourage my clients to review their plans at least annually, possibly with external and independent help. Then they can to assess their business against the results, tune up their plans, and work for the results they want to achieve.