Whether recording prior periods’ transactions or preparing clients’ tax returns, accountants’ lives consist mainly of looking back at historical transactions, though simply recording those is not going to make a business more profitable. The key to real profitability lies in proper planning followed by effective execution.
Every business needs an operating plan, which is different from a budget or business plan. A good working definition of one comes from Businessdictionary.com: a short-term, highly detailed plan formulated by management to achieve tactical objectives.
An operating plan focuses on the short-term, generally one year or less. It is important to distinguish between short and longer- term objectives. A short-term focus might be “The business will gross $500,000 this year” or “XYZ Company will increase its market share in 2011 using a combination of print and television advertising.” When writing an operational plan, you are not projecting where your company will be in 5 or 10 years or establishing the ideals that will guide you there. The long-term strategic goals and company philosophy willimpact short-term operations, but are not the daily activities on which the plan is built.
The plan will tell you and your employees how the business will function in the time frame it governs. A high degree of detail will be required – for everything from the acquisition of raw inputs (materials, labor and other items required to create your product) through their processing as finished goods ready to be sold to customers. In addition to the details of product design and delivery, the plan will govern the manner in which all phases of the business are accounted for, including interactions between management and employees. Think of it as the ‘how to’ manual describing how your business operates - and the results expected.
Finally, it is a battle plan designed to help you accomplish certain tactical objectives – those that will support the achievement of your business’ long-term strategic goals. To illustrate, let’s view just one part of the plan and see how it helps you achieve them.
You are a candy maker, have been making Supertaffy for friends and colleagues for years and, at their urging, decide to form Supertaffy Co., LLC. Your intention is to become the world’s largest taffy maker within twenty years of starting your company. To do this, you will need to acquire a location to install a new Taffycreator XL taffy-making machine (affectionately known as TXL). Assuming you do not need outside financial support, your first operational task is to locate and purchase the building that will serve as the manufacturing facility. While a significant task to accomplish, it is only a small first step, albeit a critical one - if you have no building, you have nowhere to install your TXL. Without TXL, you can’t make the taffy, the sales of which will provide the funds to pay for the building and the equipment and also cover labor, materials, utilities, advertising and administrative costs associated with the company. Without all of these, you will not have the funds to expand your capacity and can never grow the business to become the world’s largest taffy maker.
What areas of the business should be included in the plan? That’s easy - all of them. Remember, it is the ‘how-to’ manual for your company; therefore, it should cover all aspects of the business. These include:
- Providing products to the customer – which includes everything from acquisition of the raw materials, supplies, labor and the machinery you need through placing the product in the customer’s hands. Every business, whether it is a service, retailer, wholesaler or manufacturer has a product to sell. Even informational websites provide a product – information. In order to make your business as profitable as possible, you need to minimize your input costs while maximizing value to the customer. This leads us to:
- Marketing your product – the end result is a sale that involves putting the product in a customer’s hands at a price both you and they feel is acceptable - marketing is geared toward getting customers through the door. You must convince them of your product’s value to them. How are you going to do that? Will you advertise locally, regionally or nationally? What advertising medium(s) will you use? How will you educate the consumer on the value of your product and what will you do to make it easy for them to purchase it? How will you handle customer complaints? All of these questions must be answered for you to market your product and have people feel good about buying it from you. You must also:
- Account for the results – ask an accountant and they will tell you their job is critical to the success of the company. A CEO who recognizes the need for good information will likely support that view, but some executives who came up through the ranks from operations or marketing may not. The fact is that all facets of the business are critical, including accounting. Without accounting, you don’t know how well you are operating - and information like gross profit on sales tells you whether you are pricing your product to make the company profitable. Sales trends, cost trends and a host of other analytical data also originate in the accounting department. In this context, accounting includes receipt of funds from customers and payments to vendors. Controlling cash while also keeping vendors happy can be a tricky tightrope walk sometimes, especially in a recession. It is the responsibility of the accounting department to handle this function, as well as to oversee payroll and print the weekly paychecks.
To cover every detail of an operating plan, this article could go on for hundreds of pages, but that is not its purpose. Rather it is to give you a flavor of what it takes to properly construct one. If you don’t currently have a workable plan, we suggest you take steps to establish one. If you need help, give us a call. We are here to assist you in making the most of your business.
Have a terrific May.