This installment of The Common Sense Manager begins Chapter 9, which deals with Benchmark 6,
PLAN, ACT, REVIEW, CORRECT
“Are you going to do that? Then why aren’t you
writing it down?” Bob Starski
Never leave a meeting without deciding and recording “who will do what by when.” The management team that fails to decide on actions, assign responsibilities, set target dates, and check results regularly is the management team that ends the year wondering why they missed revenue, share of market, net profit and return on equity. Teams like that don’t last long.
In this chapter we’ll examine how successful management teams use the “Plan, Act, Review, Correct” fundamental to manage for results as well as for individual employee development. We’ll review the benefits of the Operations Review format, which helps managers develop the habit of evaluating their own plans and programs, and taking corrective actions when necessary (not waiting for the boss to react). The Operations Review handles this in a team context, so that managers are informing their peers about results, what plans worked and what plans didn’t work, and what changes are in the works to insure that managers meet the commitments they made to their fellow team members.
In “Know Where You Want to Go” we saw that objectives are the key elements of an annual marketing or business plan, and we examined the criteria for a good objective. We then saw that the “good people (you’ve asked) to help you get there” need to have individual performance objectives that mesh with those of the overall company. In this chapter we’ll see how successful companies set objectives and match them with resources, action steps and deadlines. Finally, we’ll see how this approach leads to the perennial use of a significant management tool: saving the tools and techniques that work, finding out what’s wrong with those that don’t, and either fixing or discarding them.
Successful companies that have adopted the Management Fundamental “Plan, Act, Review, Correct” have several characteristics that serve as benchmarks:
- The company’s budget is based on an operating plan.
- That budget and plan can be defended and explained under rigorous questioning by a board, a banker, or an investor.
- Progress vs. objectives is assessed on a regular basis. Executives and managers are able to report on whether they did what they said they would do, whether it achieved the expected results, and, if not, what they’re going to do to get back on track.
- Executives and managers at all levels acknowledge their accountability for their parts of the plan and budget.
- Executives and managers who are not successful are given opportunities to improve, including training, coaching, etc. If they remain unsuccessful, they are replaced.
BENCHMARK: The company’s budget is based on an operating plan.
When Dr. Michael Schiff was head of accounting at New York University’s Graduate Business School, he used to tell his students: “The basic accounting system has three parts. You have products, you have customers, and you have a little tin box to keep your money in. When a customer buys your product, you take the money and put it in the little tin box. When you have to buy more products from your supplier, you take the money out of the tin box and pay for them. And when you have to pay for heat, light, and somebody to sweep the store at night, you take more money out of the tin box.”
There may be some people with tin boxes who don’t worry about budgets, but not very many. Sooner or later, even the tin box accounting system will force you to make some predictions about how much you’re going to sell, what price you’re going to get, what the product costs you to buy or make, and what your other expenses will be. Either that, or you’ll take your empty tin box and go home.
But doesn’t every company have a budget? Most likely. The question is where the numbers came from. They can either come from a comparison with last year, or they can be zero-based.
Most often the budget is based on last year’s performance, with an increase in revenue and a decrease in expense. This is, after all, the mantra of a stock-market driven corporate community: compounded annual increases in earnings per share. It’s enough to make someone think the answer to “what business are we in?” is “beating last year.”
Zero-based budgets force people to look at what they want to accomplish, and how much it will cost. Some such budgets use percentages, others (the kind we want) are based on action plans.
In the percentages method, you forecast your sales, figure your gross margins at 25 to 35% of sales, and allocate 6% of sales for selling expense, 13% for general and administrative expense, maybe something for R&D. What’s left is profit.
Where do you get numbers like this? Some come from historical data, or your experience with actions like this in the past. (Or somebody else’s experience). Some come from standard data, which may be published by trade groups, or result from studies conducted by researchers at universities or companies.
Chief financial officers like to work with percentages that are average, usual, or acceptable. They usually disagree with the manufacturing, sales and administrative people, mainly because those line managers don’t have as much data as the CFO would like, and can’t demonstrate a cause and effect relationship between expenditures and revenue generation.
Needless to say, the budget should reflect what you expect to do. When it’s based on factors other than planned actions and the results they are expected to achieve, the budget will probably create false hopes.
According to a partner in a firm that helps arrange financing, the problem with many small company business plans is that they don’t actually meet their projections. This, he says, is because they build “unrealistic expectations into a plan’s financial projections and try to inspire excessive optimism in prospective bankers and investors.
To be continued.
Posted on December 22, 2011
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