How to Develop an Annual Operating Plan - and Its Importance
By: Steve Grudzinski, Senior VP - Finance and Administration
Anyone who has ever started a business or helps run a business today has probably heard the phrase “nobody ever planned to fail, they just failed to plan.” At Chromascape, planning has always been an integral part of how we run our businesses. Our planning process begins with management’s annual development of a Strategic Business Plan (SBP). The SBP is our bird’s eye view of where we want our business to be in the next three to five years. This is accomplished by reviewing our Vision and Mission statements, our internal strengths and weaknesses, and our wins and losses of the past, to allow us to reaffirm what we do as a company and more important to identify any changes that need to be made to accomplish long term performance goals. The process includes a lot of “brain storming”, “what-ifs”, and questioning and discussions of anything and everything, with a focus on potential changes to the markets we serve, customers, and competitors. With the completion of the SBP, work on the Annual Operating Plan (AOP) begins.
The AOP is the quantification of the first year of the SBP. Because it covers only a 12 month period, it contains more detailed information. The AOP, more often referred to as the budget, is a plan that calls for a series of actions to produce certain outcomes, with controls incorporated into the execution of the actions that maximize the chance of achieving the desired result. Control is the main focus. The work put into building your AOP will have measurable results by allowing you to know what’s happening as you compare actual performance to your budget.
You should begin building your AOP by asking these questions:
· What are the projected sales for the budget period?
· What are the direct costs of sales – ie. cost of materials, components or subcontractors to make the product or supply the service?
· What are the variable and fixed costs or overheads that need to be covered?
These include but are not limited to: cost of premises - rent or mortgage; staff costs – payroll, benefits, taxes and insurance; utilities – heating, lighting, telephone; supplies; fuel for vehicles; repair and maintenance items; taxes – real estate, personal property, income; legal and other professional costs.
Your AOP can be summarized and presented in financial terms in the form of a balance sheet, income statement, and cashflow statement. These statements are of the greatest value if they can be prepared on a monthly basis. The cashflow statement, often overlooked by smaller operations, is often the most important as it allows you to project and analyze where there might be a cash squeeze requiring short term borrowing or the curtailment of some other expenditure.
The size of your business will dictate how much time you can devote to creating your AOP. We would encourage smaller businesses, lacking internal accounting support, to get help from their outside accounting professional, who often is engaged only in tax return preparation. These professionals welcome the opportunity to help clients prepare AOPs because they know their importance in running a successful business. The added knowledge they gain about your business can also help them assist you with tax planning and forecasting. Over the years, I have spoken with many successful mulch producers who have acknowledged that they don’t invest the time in preparing an annual budget. After further discussion, I often have found that while they may not produce a formal AOP document they indeed go through the steps, asking the same questions larger companies do to help them be successful. They understand and recognize the need and importance to plan on an on-going basis.
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