All businesses need business plans. They are not only for start-ups but established businesses too. Business plans help you define your strategic goals that will enable you to hit or surpass your financial and non-financial business goals. However, a business plan is not a budget. It is an annual plan on how you will reach your financial and business goals based on strategic information such as competitors, target customers, geographic expansion and so on. A budget is a management tool that breaks down in detail by month how you will achieve the plan. The budget is used to compare actual performance against budgeted performance so that you can take immediate action when things go off track.
Annual plans are usually used by managers of the business and focus on specific goals that the company wants to achieve by the end of their fiscal year to take the business in the right direction for profits, growth or both. These goals can range from hitting certain profit targets to improving productivity. It is up to senior management to decide what are the most important drivers of the company that will enable growth or profits.
Once the total organization goals are set then each department should create its goals that will help achieve the overall company goals. Here’s an example:
ABC Labs has set the following annual goals:
Increase profits by 10% over last year
Increase market share for its testing products by 5%
Improve customer service ranking by 2
As a result of the company goals each department has created the following goals:
Sales Department – Increase sales by 20%
Manufacturing Plan – Increase productivity by 15%
Marketing Department – Reallocate current marketing budget to focus more on testing products than other product lines
Service Department – Hire 3 more customer service representatives
As you can see, each department goal fits into achieving the overall company annual goals. Now that the goals have been set, the next step is to create a set of pro forma financial statements by department that rolls up to the total organization. The purpose of this is to break out the goals by month so that progress toward goals can be tracked monthly and individual departments can be held accountable so that your annual goal is met.
The budget and the annual plan should correlate to one another and both should be used as key management tools.
As President of Loftis Consulting, Kimberly Loftis provides hourly, interim, and part-time CFO and business plan services to businesses. Loftis Consulting can help you grow by helping you manage your business both financially and strategically.