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Analyze Plan Implement

Preparing an Annual Operating Plan. Analyze Plan Implement Bob Anderson June 25, 2013. 65+ Successful and experienced executive volunteers Serving Southeastern Wisconsin Area Low cost workshops Free Mentoring Face to Face E-mail

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Analyze Plan Implement

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  1. Preparing an Annual Operating Plan Analyze Plan Implement Bob Anderson June 25, 2013

  2. 65+ Successful and experienced executive volunteers Serving Southeastern Wisconsin Area Low cost workshops Free Mentoring Face to Face E-mail Location 310 Wisconsin Ave. Suite 425 Milwaukee, WI. 53202 www.scoresewisconsin.org www.score.org About SCORE Resources for Small Business Business Proposition: You get an experienced, successful business person(s) on your team for unlimited advice, and it is free! 2

  3. Workshop Objective: The workshop objective is to prepare you to write an effective annual business operating plan designed to drive business results…. Understand • What is an annual operating plan? • Major elements of an operating plan. • How to target growth. • The need for and how to cut costs. • Development of annual business objectives. • How to set spending “trigger points”.

  4. Briefly tell us a bit about you: Your name? Your Business? What you want to get out of today’s workshop? Nice to meet you!

  5. Questions and Discussion Welcome • Ask questions as they come up • Share your experiences with the group

  6. Business Plan You always win! Always!!!!!!!!!!!!!!!!!! • A good operating plan allows you to: • Think through your business. • Set realistic goals. • Reduce risk substantially. • Measure progress. • Understand your business • Manage your business effectively

  7. Coopers & Lybrand Surveyed 44 fast growing product and service companies Companies with a Formal Business Plan reported Sales growth increased69% faster during the past five years than companies without a business plan !!!!!!

  8. Annual Operating Business Plan Consists of: • Business analysis – • Customers, products, markets, services, facilities, etc. • Financial/Marketing Plan • Organic growth – growth if we do nothing, i.e. inflationary growth. • Planned growth – marketing actions I will take to grow the business. • Financial health – improving financial performance, i.e. reducing receivables, reducing inventory, etc. • Cost reductions – every business needs cost reductions every year. • Formal written objectives for each planned item • Trigger points for spending or contingency

  9. Growth • Necessary for survival, every year. • If you don’t grow, you slide backwards! • Supplies costs go up • Salaries go up • Transportation costs goes up • Everything goes up • Can you plan your way to growth? Absolutely!

  10. Growth costs money! • Different for every type of business. • Heavy manufacturing – estimate cost $1 (one time) for every $1 growth • Eventually will need to expand, add machines, etc. • Goes in square waves • Distribution industry – estimated costs $.25-.50 (one time) for every $1 growth • All businesses have to spend money to grow. • Where do you get your growth money?

  11. Cost reductions • Necessary for survival, every year, you will never run out of cost reduction ideas. • If you don’t reduce your costs, your competitors will reduce their cost! • Can cost reductions alone improve your business? • You cannot cut your way to prosperity • Combined with growth they make a healthy company. • Help fund your growth. • Is it always reducing headcount? No but that is where the big money is.

  12. Bob’s Photography A small made-up company. – lets’ build an Annual Operating Plan (AOP) • Targets and serves upscale customers • $200,000 in sales. • Does photo shoots in-house and at customers homes. • Sells mainly family portraits, some weddings, but will do most anything on request. • Has a store with a limited amount of merchandise, like frames, etc.

  13. Bob’s Photography 2012 Overview Summary - A poor year: • Sales down 20% • Margins held • Profit dismal • Good gross profit • High fixed expenses • Everyone familiar with an income statement? • Sales – COGS = Gross Profit or Margin – Expenses = Profit

  14. Analyzing your business - Try 80/20 • Great book, provides a great process for analyzing your business • Premise: 80% of the results come from 20% of something, for example: • 80% of the worlds energy is consumed by 15% of the people • 80% of the worlds wealth is possessed by 25% of the worlds population. • In health care, 20% of the customers will consume 80% of the resources • And a lot of this works for your business! $12.81 Amazon Quickly focuses on what is important, i.e. the 80%

  15. Analyzing your business • Many businesses have found things like: • 80% of your profit comes from 20% of your products/services. • 20% of your customers make up 80% of your revenue. • It does not have to add up to 100, and it does not have to be 80 and 20, but you will be surprised at how close it is!

  16. Analyzing your business • So look at your business to see: • Where does 80% of your • Profit? • Products? • Inventory? • Customers? • Cost? • Expenses? • Time spent? • Come from? You might be very surprised!

  17. Analyzing your business –How to use the information? • For example: If you find that 90% of your profit comes from 10% of your products or servicesyou might want to: • Cut your product or service line down. • Develop more products/services like the 10% type products. • Change prices on some of the 90% products/services.

  18. Analyzing your business– Where does my business and profit come from? • Analyze your customers 80/20 rule • What customers provide 80% of our business? • How many are there? • How much time do we spend with them? 80% of our time? • How do we find more customers like them? • Have we lost any? Why? • What customers provide 20% of our business? • How much time do they require? 20% of our time? • What if I did not do business with them? • How many customers do I gain each year? • How many customers do I lose each year? What might it take to keep them?

  19. Analyzing your business– Where does my business and profit come from? • Analyze your products/services with 80/20 rule • What products/services make up 80% of our business? • What is the margin? • Can we come up with more products/services like them? • Why do they make up 80%? • What products/services make up 20% of our business? • What is the margin? • Why do they make up only 20%? • Can we do without these products/services? And so on………………………………

  20. Analyzing Bob’s Photography First. lets look at the product/service margins and volume. • What products or services make up 80% of Bob’s volume? • Portraits • What is the (gross) profit margin on these products? • 35% of the volume are studio portraits which have a 50% GM • 65% of the volume are in-home portraits, which have a 75% GM • Why the difference? • People buy more when the background is their home. • What objectives come to mind after this discovery? • Increase the in-home portrait business? • Increase the in-home volume, more photos per visit? • Therefore I need to market the in-home business.

  21. Analyzing Bob’s Photography- Next • What makes up the other 20% of my sales? • Store items like frames, prints, enlargements, etc, • What is the margin on this 20% of my sales? • 75%, but the inventory items only turn once per year, therefore not reflecting real margin • Why are the sales so low? • Cheaper at discount stores like Michaels. • Not enough volume to maintain the broad inventory that Michael’s has. • What possible objectives come to mind from this analysis? • Get out of this part of the business? • Grow this part of the business? • Anything to lose by raising prices on this segment?

  22. Organic Growth – “growth you will get without doing anything” Last three Quarters GDP averaged 1.8% growth Bob will be conservative and use 1.5% growth Picking a conservative plan will keep your spending under control

  23. Planned growth – Step 1 Price increase? • Worried it won’t stick? • How long since you have raised prices? • Worst case scenario if it doesn't stick? • Can you justify it? • Customers know what prices levels should be? • Different types of price increases • Large price increases (+5% up) – hardest to get • General “across the board” increases– hard to get • Selective price increase – easiest to get • Raise prices on low margin products or services? • Raise prices on old products or real slow movers? • Raise prices on renewal parts? They are expected to be expensive! Generally price increases of 2.5% and under don’t get too much scrutiny by customers unless it is on a huge volume.

  24. Planned growth – Bob’s photography • Price increase • In-home portraits 2.5% • Studio portraits 2.5% • Store products 5% (not real competitive now, see what an extra 5% will do) • Net result of total price increase is 2.8% • If you have to discount, give products or services. It maintains your prices and costs you less!

  25. Planned growth – Bob’s photography • Planned growth • In-studio portrait growth 0% • In home portrait growth 5% due to promotions and packages. • So planned growth increases 5% of 65% of 80% of my business or 2.6% overall (65%X.05X.08)= 2.6%

  26. Planned Growth ObjectivesHow to reach goal? Goal - Increase home photo business by 5% Develop home customer programs and incentives. • Develop packages that encourage more volume per customer • Package 1 includes • One 24X36 framed family portrait • Five 8X10 framed • Twenty 5X7 prints • Package 2 includes • Two 16X24 framed family portraits • Three 8X10 framed • Ten 5X7 prints

  27. Planned Growth Objectives Goal - Increase home photo business by 5% Develop home customer programs and incentives. • Referral bonus for existing customers • One customer = free 16X24 unframed print • Two customers = free 24X36 unframed print • Customer guarantee program • Not satisfied, no fee for sitting • Web site update, social media and email marketing programs.

  28. Promotion: How will you get the word out? Mass media; Newspapers, radio, TV, yellow pages • Reaches a mass of people • Very expensive Targeted Media • Social Media (LinkedIn, Face Book) • Email marketing • Google - pay for clicks • You Tube Required Media • Web site • Google Places

  29. Targeted Media • Web site – necessity • Pay for clicks? • Email effective – collect email addresses • Social Networks – • LinkedIn – B2B • Face Book – B2C • Buy ads for only target customers! • You Tube • Instructions, manuals, show the process, explain the product features, customer testimonies, etc. • “Power Partners” complimentary businesses, with common channel/target customer.

  30. Start Out With Google Places Free Provides customer reviews, links and directions • 97% of consumers now search for local businesses online. • Need Gmail account, but free and don’t have to use. • You can: • Link web site • Add Photos/videos • Specials/menu • Coupons Use Google Places smart phone APP to find Businesses while driving

  31. Email Marketing Email Marketing • Low cost, easy to do, professional looking, effective. • Constant Contact: • Maintains mailing lists • Email design tools • Schedules future blasts • Sends out email blast • Manages unsubscribe service

  32. Cost Reduction Culture Businesses need to develop a cost reduction culture • Businesses without cost reduction culture tolerate waste. • Businesses with a cost reduction culture, everyone is always looking for ways to save money. How do you get a cost reduction culture? • First, you need to believe in it! • You need “to walk the talk”, that is, if you see waste, you deal with it. • Engage your employees • Discuss with them, they know where the “waste” is. • Encourage them • Reward them

  33. Cost Reduction Culture Adopt “Lean” • There are organizations to help you. • MSOE has a Lean consortium called “Business Excellence Consortium”. Businesses helping other businesses. • There are other quality or lean organizations that can help you. • WMEP – part of MATC • How do they help? • Teach you Lean techniques • Organize and implement Kaizen blitzes • Work as your quality and lean team.

  34. Cost Reduction Culture Other programs……… • Safety program • Right thing to do for your employees. • Safety is good business, it always saves money. • Quality program? • Quality is good business, saves money. • Good for your marketing and selling effort.

  35. Cost Reductions How to identify? Observe and ask your employees– what do you do that really doesn’t need to be done? Don’t look at everything, but “waste thrives on complexity”! Bob’s Photography • Deliver first set of proofs to clients? Keep. Chance to increase the order size, a real sales opportunity. • Deliver finished prints to clients? Minimal benefit, use UPS or mail. • Store open until 9 on 3 nights a week, can we go to 6 every night? Minimal sales effect, but saves 9 hours wages each week. • Limit credit cards to Visa and MasterCard, eliminate expensive American Express? Minimal sales effect. • Yellow pages ads, worth it anymore? Most word of mouth and website. 97% of people use the web for local business searches.

  36. Cost Reductions How to identify? Bob’s Photography • Print receipt for every in-store transaction? • Lower our inventory by 10%? • Need present square footage? • Buy supplies on-line? Better prices, no sales tax. • Ask vendors for fixed price contracts for 2-3 years • Health care, is plan too rich, are employees paying their share? When health care costs go up do you pass at least a portion of the increase on to your employees? Set a percentage that employee pays? • Can we get a better phone deal, do we need two lines? • Are all of my employees good performers? Now might be the time to do something?

  37. Cost reduction goals Bob’s Photography Target $11,748 • Change hours of operation – save $7200. • Presently open 6 days or 55 hours • Reduce 9 hours to 44 hours – eliminate one part-time poor performer. • $40K salary X 1.025 (raise) X 44/55 = $32800 • Eliminate Yellow Pages ad, but keep listing - save $2000. • Eliminate American Express – save $500. • Buy 80% of supplies on line, save 6% or $90. • Reduce office space by 20% - save $4,416. • $24,000 rent X 1.02 (increase) X 0.8 = $19584.

  38. Cost Increases? Bob’s Photography • Salary increases? 2.5% • No raise last year. • However, need something to keep people interested. • Target 2.5% (+ $1000 salaries + $200 payroll tax) • Good performers 5%, poor performers 0% • COGS increases? .08% • Photo supplies 2% • Photo processing, enter into contract providing no increase • Merchandise 3.5%. • Expense/Capital expenditure increases • Upgrade computers + $2500 • Website rework, email & social network marketing + $3000 • Rent 2% increase +$480 • Camera equipment additions +$1500

  39. Planned Growth Summary Bob’s Photography • Organic growth ………………………..1.5% • Price increases ………………………..2.8% • Planned growth ………………………..2.6% • Total growth…………………………….7.01% • COGS up………………………….……0.08% • Gross Profit up………………………….8.95%

  40. Annual Plan Summary • Sales (revenue) up 7% • COGS down 2.8% (Price increase) but (cost of material) up 0.08% • Salary reduction $7200 • Payroll taxes reduces $1440 • Supplies reduction $90 • Advertising reduction $2000 (yellow pages), but up $3000 for web site, net $1K increase • Rent down $4416. • Eliminate American Express $500 • Depreciation up $1000 for the following • Camera equipment + $150 • Computer equipment + $2500

  41. If Business should increase 10%, Even Better Results!

  42. Turn Your Objectives into Action with S.M.A.R.T. Goals • Specific - What, which, WHO, were, why? • Measurable - with Metrics • Achievable - realistic, maybe with stretch • Relevant – Important to the business • Time bound – Complete by when?

  43. S.M.A.R.T. Goals • Specific Plan of Action for Companies Success • Key Programs & Budget • Assumptions, Deliverables & Timeline (who is going to do what by when) • Marketing goals • Advertising • Sales • Email • Social Media • Financial goals • Revenue • Cost reductions (especially existing businesses) • Gross Margin • Spending (with trigger points) • Manufacturing or Service goals • Output • Quality

  44. But you are not Finished yet! Tidy up your financial systems! • Plan other metrics (goals) that can improve your business efficiency: • Accounts receivable • Reduce by 5 days • How? - call any account that has not paid in 25 days, don’t wait until past 30 days • Accounts payable- extend out as far as you can. • Reduce inventory turns • Reduce reorder points • Order every week instead of every month

  45. Timing is everything…….. • Price increase – implement immediately • Objectives – implement as soon as you can get the material and collateral ready. • Cost reductions – Implement immediately. • Spending – prioritize and delay until you think your model will work. How long is that?

  46. Spending • Prioritize spending • Web site, email & social media – because it will increase the business. • Computer system – will improve productivity • Photo equipment – just need to be up to date • Select trigger points • Website, email & social media spend immediately • Hold everything else until plan looks secure

  47. Financial Statements – • Monitor often • Income statement • Cash flow statement • Balance sheet • Other Metrics • Accounts receivable • Accounts payable • Inventory turns

  48. Financial Metrics Monitoring financial metrics Get in the habit of monitoring your financial metrics often. • Get in the habit of knowing in your head: • What the sales per day should be. • $214K sales, open 6 days per week (52X6=312), less 6 national holidays or 306 days or $700/day. • Get your monthly income statements ASAP, always compare them to plan. Look at and compare to plan: • Sales- should be around $17,800 per month • Gross Profit – should be 70.6% • Expenses – should be around $10,500 per month • Are your cost reductions coming through? Are you getting more or less from them? Is something else wrong?

  49. Spending -Selecting trigger points • Are you aggressive, conservative, or middle of the road? • “Aggressive” - 1 or 2 months of meeting plan and go ahead with spending • “Middle of the road” – after plan for 1st quarter, let 1st priority go, after meeting plan for 6 months let the balance go. • “Conservative” –”pay as you go” out of increased profits • Bob picks “Middle of the road” trigger points • If economy holds and we meet our sales and profit goals for 1st quarter (thru March 31st) release the web site, social media ads and the computer equipment purchases for April. • If economy holds and we meet our 6 month goals release the balance of the purchases and pay raises for August.

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