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‘Tis the Season

‘Tis the Season

It’s that time of year again. Yes, I know the kids are back in school and soon the leaves will begin to change color.  The esoterics are something I’ll deal with another time perhaps, but today I want to discuss that time honored corporate rite, the creation of the business plan for next year.  Many companies are somewhere along the completion spectrum right about now.

Let’s start with the premise, whether you are a middle manager or a CEO, that everyone has a boss; meaning that somewhere along the road your business plan submission will be reviewed by someone who will think you’ve presented a compelling case based on a cogent thought process.  Or, and this happens all too frequently, that someone will think you are all wet and send you back to the drawing board.

If you are the CEO of a publicly held company, you and your investor relations team have spent lots of time during the year in a push / pull dance with sell side analysts on Wall Street.  Half of the effort is devoted to convincing them that your strategy is sound and growth prospects bright, while at the same time trying to finesse a dumbed down earnings projection so that The Street doesn’t set the bar so high that it can’t be jumped over.  Eventually, a consensus earnings and revenue forecast is achieved.  It’s at that point that the CEO turns to his or her planning team and says something like, “go forth into the organization and bring me back some numbers that are X% higher than The Street’s consensus.  We need wiggle room.”

Even in a privately held company there are likely expectations emanating from external sources that need to be met.  It may be a company funded by venture capital.  Or, the company may be a horse in some private equity firm’s stable.  Or, the lenders may be demanding certain performance ratios.  If it’s a fairly small company, it could be just uncle Bob who is expecting a better than savings account return.

Personally, I’m a big believer in setting expectations at the very beginning of the process.  For example, our team knows that barring some sort of game changing initiative that we have all decided will have significant longer term benefit, expense growth must come in at slightly less than half of the revenue growth number.  Or, another example; I look for X% profitability growth from Y% revenue growth, around here we call that “the drop.”  If those numbers are out of proportion, there’s an assumptions problem somewhere along the way.

A good business planning process will include a session to pressure test assumptions.  Just as the publicly held company CEO noted above wants numbers well in excess of the Wall Street consensus, many other in leadership positions would like to get a plan approved that they can deliver from a rocking chair… you certainly don’t want that if you’re in the reviewing role and that’s when the pressure testing tends to amp up a bit or maybe a lot.  “Your run rate is what?”

However, it’s a fine line that must be walked between too conservative and overly stretch.  Too much stretch and you run the risk your people will raise the white flag before the year kicks off.  Too conservative usually means the organization is failing to fulfill its potential.

Let the fun begin!