Financial Planning: A Context in Which to Measure Performance

Planning is about thinking of what you would like to have happen and then making an educated guess about what is likely to happen in the marketplace and what you would reasonably need to do to achieve your goals given that marketplace.

At the risk of sounding like someone's bossy Aunt Lucy, in this column we're going to talk about just why your store should participate in regular financial planning: because it's good for you.

Here's why:

1) A formal financial plan makes the goals and objectives of the enterprise explicit.

We all have goals and objectives, whether we state them on paper or not. Even if all we want is for everything to stay exactly the same, that desire has implicit in it certain goals and objectives. The problem comes when different people involved with the co-op have different ideas about where the store should be going. Other problems arise when people have the same objectives but no idea of how to get there. Talking it out and putting everything on paper in an annual budget and regularly reviewed five-year plan helps make sure everyone is rowing in the same direction.

2) A formal financial plan holds management accountable and protects a manager from capricious shifts in the co-op's strategic direction.

Writing it down protects everyone. A formal financial plan tells the manager what is expected of him or her for the next one to five years and provides a means for a board to measure that manager's successes and failures in carrying out that plan. A formal written plan also provides some protection for the manager from being held to an ever changing set of expectations.

3) A formal financial plan provides a means to test assumptions about the marketplace and store operations and to monitor those assumptions' validity over time.

Every business is affected by changes in both the macro and micro economic environment. Shifting demographic patterns, local wage rates, a new bulk section in the local grocery store, changing store hours, major road construction, or dozens of other things can all have major effects on a co-op. Anticipating these changes and testing their likely effects on your store's performance allows you to make a few more mistakes on paper (the cheapest and easiest place to do it) and to monitor the accuracy of your assumptions over time. By comparing your assumptions day by day, month by month, and year by year, not only do you find out what you need to know. You also get the information when you need to know it that is, when the information can actually do you some good.

If now you are convinced that you're going to do financial planning, what exactly is it? At a minimum, adequate financial planning includes an annual income statement budget with all important categories of sales, margins and expenses, margins detailed and compared with actual figures month by month and year to date. A more complete exercise includes projecting cash flow, balance sheets, and capital needs as well.

You can then use these planning exercises to help you with actual financial management by tracking things like daily sales, purchases, and hours worked to see if they are in line with your estimates. Your written plan also provides you with a means to formally monitor performance by comparing actual to budget in your monthly financial statements. In essence, the plan provides a context in which to measure performance. The data you draw from your actual performance will then in turn help you do a better job of planning in the future. Adequate financial planning must always include some long range thought. Every enterprise should be looking ahead at least several years, trying to anticipate where they are going and where they want to be.

But if you don't even know what your sales are going to be next week, how can you know three, four, or five years down the road? You can't. Planning is never about knowing what's going to happen. If you knew, you wouldn't have to plan. It's about thinking of what you would like to happen and then making an educated guess about what is likely to happen in the marketplace and what you would reasonably need to do to achieve your goals given that marketplace. Financial planning is nothing more than an educated guess, based on past performance and anticipated future parameters.

As with all guessing, you could be wrong. That's okay. The only way to learn about errors in your assumptions is to try them out. Even if you guess wrong, at least you will be better at it the next time. The important thing about things on paper and making your assumptions explicit is that it doesn't allow you to kid yourself. Writing down your assumptions doesn't make them static, but at least it makes them stated.

Beginning to put these things down on paper is the beginning of doing them better. And when you're putting together your annual budget, it wouldn't hurt to follow another piece ofAunt Lucy's advice: save a little bit for a rainy day.

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