By Mike Marks, Indian River Consulting Group
As the global pandemic marches on, small business owners might be looking at their 2020 business plan and wondering if it’s even worth putting a plan together for 2021. It’s tempting for business owners to want to stay light on their feet and be ready to pivot as things change. But companies that are accountable to shareholders can’t get away with that. Shareholders need to know what to expect and understand the risks they face in 2021.
Despite the uncertainty of the markets, uncertain supply chains, massive changes in customer sourcing behaviors, and teams that are stressed and stretched, executives are responsible for getting the board a clear answer to maintain confidence in their executive team.
Now is the time to return to the basics of planning:
- Allocate resources as effectively as possible toward both threats and opportunities
- Build numerical plans on resource deployments and expected returns
- Review the period-ending results to measure variance to the plan
Traditionally, planning for the year takes place annually in the fourth quarter. But making 2021 forecasts right now is as good as guessing and likelier to generate sizable variances that will only consume management attention for new action plans down the road as priorities change and the plan doesn’t.
Extraordinary times sometimes call for unusual solutions. It’s time to consider scrapping tradition and replacing it with a rolling four-quarter business planning process. Here are two ways to implement a rolling plan for 2021:
The Top-Down 12-Month Rolling Plan
The top-down plan is agreed upon in December for the next four quarters in 2021. Generated by executives by making a high-level best guess at the probable revenue and margin levels, the plan works in a couple variable scenarios by adding or subtracting value of about 20%.
This plan varies from the traditional method because at the end of March 2021, the balance of the year is re-forecast and this becomes the updated plan. The values change based on circumstances and resources are reallocated based on results and market changes. Another high-level forecast is built and added for the first quarter of 2022, the subsequent year. The high-level plan is always looking 12 months out, but should remain flexible.
The Quarterly Action Plan
Using this method, P&L managers create a plan for the upcoming quarter during the fourth quarter of 2020, rolling it up to the enterprise level. The two-part plan includes a 90-day forecast of the firm’s projected P&L results and an action plan detailing a series of measurable objectives, tasks and action items.
This differs from the top-down plan by incentivizing those working directly with customers, understanding they will have more clarity around pending activities like the short-term order flow and forecasting revenue of their top customers.
The action plan may allow up to three objectives per quarter. Objectives can last for multiple quarters and include actions such as: improving a financial metric, expanding the customer base, or launching a new product or service. Action plans with assigned tasks track small deliverables every month to mark achievement toward the objective.
In March of 2021, managers will submit second-quarter plans for executive review and based on the achievements of the objectives from the previous quarter, may be forced to a decline in revenue. This plan requires the executive team to frequently make small, difficult decisions around resource deployments, like adding or reducing staff.
Both the top-down and quarterly-action plans create frequent opportunities for a firm to cut their losses if needed. It may quadruple the planning work but will more quickly inform how to invest resources to generate returns that will pay off in competitive advantage.
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Top-Down 12-Month Rolling Plan |
Quarterly Action Plan |
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Features
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A high-level plan developed in the executive office |
Completed by P&L managers before sending up to executives |
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Makes a best guess at probable revenue and margin levels |
Makes an action plan with measurable objectives, tasks and due dates |
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Tests boundaries with multiple scenarios with revenue value varying by positive and negative 20% |
Projects a 90-day revenue forecast of expected P&L results |
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Analyzed by operating P&L managers and reviewed with owners for reasonableness tests |
Differences between managers’ and executives’ plans are reviewed and resources are shifted to offer better returns |
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Incentives for leaders aren’t based on achieving planned results |
Incentives for leaders are tied to achievement of numerical results and leadership must make difficult decisions around reducing staff and resources |
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Benefits
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Quick resource re-allocation based on quarterly results and market changes for a competitive advantage |
SMART goals measure tasks and the success of objectives for leaders make a series of small decisions every quarter around resource deployments |
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Promotes sustainable growth rates and manages cash |
Forecasts detailed revenue of top customers and suppliers by month |
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Protects covenants |
Both executives and managers collaborate in designing the plan |
Planning is everything
Now, more than ever, is a moment for strong leadership. Leveraging this nontraditional framework of planning quarterly instead of yearly often means making hard choices and acting urgently when recognizing changes must be made. But shareholders deserve to know that although no one can predict what will happen in 2021, leaders are doing all they can to double-down on the planning process, ensuring resources are being allocated responsively to emerging opportunities and threats.
Stay light on your feet but have a plan. As Dwight D. Eisenhower said, “Plans are worthless, but planning is everything.”
