Power Read 1: Business Planning: Start-ups vs Large Organisation
Planning is the anchor for your business to thrive in its respective industry. When planning, the environment of your company matters, as with it comes a different set of challenges. Whether it’s a large business in a stable industry or a start-up in a fast-paced unchartered territory, Priyom shows you how to plan with proper budgeting, methods to divide and account for your costs, and an approach towards new ideas that minimises the risk of product failure.
Get Actionable Insights To:
- How do you budget for variable cost items like direct materials, utility, and shipping?
- How do you come up with short-term and long-term budgets for your company?
- What are the two approaches that you should use to plan for your company’s future?
Planning in a Stable Environment
“Mike Tyson once said, “Everyone has a plan until they get punched in the mouth.”
Entrepreneurs and modern professionals will agree with this statement. In today’s VUCA (Volatile, Uncertain, Complex, Ambiguous) world, planning won’t guarantee success but you do need suitable plans in the right business environments in order to thrive.
Are you in an unstable environment or a stable environment?
In an unstable environment, you have to be prepared for the worst by constantly iterating and experimenting with your plans and I will explain more about this in chapter 2.
In a stable environment, you need to be making well thought out plans for the next 5 years.
Preparing a Budget in a Stable Environment
In large organisations with stable environment, predictable competition, and well-understood consumers, planning consists of short-term operating plan and 5-10 years long plan. The budget numbers typically vary by a small fraction of last year’s values, unless the management is investing heavily in a new plant or acquiring a company, or any other major changes.
Overall, the outcome of the company wouldn’t fluctuate too much. But this stability shouldn’t be taken for granted and lead to complacency, especially when it comes to budgeting.
A few weeks before the start of a new financial year, various teams in large companies get together (probably for the first time in months) and go through the motions of writing something down on paper just to have the budget done with. Like most organisations, if you follow this cycle of Dr. Jekyll and Mr. Hyde behaviour towards budgeting, expect the process to end similarly – in a tragedy.
The main reason for a budgeting activity is to formulate a better plan for the future – to get a handle of what is required to achieve the revenue targets. Additionally, a budget may also aid in evaluating resourcing requirements. A sound budget is also mandatory to justify a funding request to a potential investor.
Thus unless due diligence is carried out while preparing a budget, your business may be in danger of facing cash flow risk going forward. This due diligence, along with a strong framework, should be provided by your finance team. It is vital that the finance team is involved throughout the year on planning and the strategic decision-making process to prepare the various types of budgets.
Short-term & Long-term Budget
A budget is typically of two types – a one-year detailed budget and a 3 to 5-year long-term budget. The one-year budget is used to predict monthly, weekly and sometimes even daily cash flows and expenses.
A trading company typically prepares a 15-day rolling budget and a rolling Profit & Loss (P&L) because the business is extremely dynamic and the risk management has to be timely and detailed. So if your business has a trading angle to it, I recommend that you have a rolling short interval budget and a constantly updatable one-year budget. Every business nonetheless needs to have a monthly or at least a quarterly budget that will help to plan ahead.
The 5-year (or 3-year) budget puts long term goals in perspective. Of course, the first year of such a budget has to be in sync with the one-year budget discussed above. Although a longer-term budget may not be as substantial as a one-year budget, you can still make it as detailed as possible by collating the figures based on solid references. For example, a 5-year revenue growth may be benchmarked against a 5-year industry growth, and a 5-year Selling, General, & Administrative (SG&A) percentage rise may be benchmarked against 5-year expected inflation.
In short, a budget is a dangerous animal that is tamed by a structured, well thought out approach.
Let us look at a set of steps that you can follow to do exactly that.
- Prepare a Revenue Plan
A budgetary exercise typically focuses only on costs, but from my experience that doesn’t paint the full picture because a lot of costs depend on your strategy and revenue plans. For example, if you are an Indian firm planning on serving customers in Asia, the travelling costs will differ vastly if you serve clients in USA. So, a better approach is to first prepare a revenue plan after discussing with your top leadership about the plans that they intend to roll out.
Very often in small firms, preparing a list of revenue streams can be a challenge because of the lack of information on their customers and sales locations – but the devil is in the details. As a result, their sales team will typically provide an inflated lump sum. One approach is to ask for a list of prospective customers – categorized by location, probability of conversion, and expected deal size. After agreeing on which projects to consider, add a lump sum for other unforeseen new revenue opportunities, but it should be justifiable in terms of prospects.
- Classify costs into Revenue Buckets
Your costs can be divided into Capital Expenditure (Capex) and Operational Expenditure (Opex). Capex is typically a large investment like investing in a new plant or Research & Development (R&D) whose benefit will accrue to the business for multiple periods. It will be helpful if you prepare an exhaustive list of service lines and revenue types and then identify the Capex required for each item. This will ensure that the key Capex item is not missed.
Typically for R&D projects, you can further break down details for on-going versus new investments planned, along with phase-wise commitment information. Such attention to details leads to more realistic numbers and forces the Capex to align more closely with the long-term strategy.
- Determine Multiples
When budgeting for variable cost items, you can identify multiples from either industry benchmarks or rely on your business leaders’ past experience. So if your company is in the services industry, with the multiples approach, you can calculate the number of resources required per unit size of project and the volume of respective raw materials required per unit of final product.
As for material or input acquisition expenses, you should break down as much detail as possible. For example, if a media company is acquiring content, it is helpful to identify what form of media – which language, provider, vendor, and other details you can note down.
Similarly, General & Administrative (G&A) and travel costs can be estimated from past experiences, but again there should be quantifiable assumptions behind those numbers. Let’s take travel costs as an example.
Travel Cost (separately for domestic and for foreign):
- Flight fare: No. of trips multiplied by Fare per round trip (including Visa etc.)
- Hotel Cost: No of trips multiplied by Average hotel stay * Avg. per day rate
- Local Conveyance: No. of trips multiplied by average fare per trip (normal taxi fare, etc.)
The key is to ask for details and break down any cost into its components to get more clarity and base the numbers on a strong foundation.
- Prepare Estimates for all Financial Statements
Typically, small companies will only project their P&L along with Capex on – don’t make this mistake. You should estimate both P&L and balance sheet, so that cash flows can be estimated. Also, this brings the focus to exact funding requirements including sources of funding and associated financing costs. Probably the most valuable commodity for an investee firm is cash and without a diligent mapping of both P&L and assets and liabilities, the business may find itself with insufficient or untimely funding.
Once you’ve planned your budget, it is imperative to run through them with the Sales, Procurement, HR, R&D and other department leaders, along with the top management or board to check the sanctity and to ensure that your budget make sense as a whole.
A diligent budgeting process enforces discipline in a business. This discipline is especially important for a start-up to mature and grow without hiccups. In sum, budgeting is an indispensable business activity that shouldn’t be seen as a necessary evil, but rather as an important value generating step in a young business’ growth.
Planning in Unstable Environments
For a start-up or a company that belongs to a fledgling industry or even an industry undergoing massive disruption, planning for the long-term future or maybe even short term becomes very difficult and may not guarantee success. In fact, in some cases, such form of planning may be inaccurate and misleading.
The challenge lies in the absence of any past indicators, further complicated by the nature of investments and expenditures: whether Capex or Opex, whether fixed or variable. The uncertain future of an upcoming technology or the industry adds to this complexity.
If this describes the position of your company or industry, planning for the future ideally has 2 steps: “Experiment with Everything” approach followed by growth through vision and values.
Experiment With Everything Approach
More and more companies are waking up to the power of experimentation and are benefiting from the financial ROI of conducting experiments. An “experiment with everything” approach has surprisingly large payoffs.
In the fast-moving digital world of VUCA, even experts have a hard time assessing new ideas. Traditional management decision making used to be based on a combination of 3 things: analyse detailed evaluation of past data, have the guts, and be the loudest voice in the room.
Given the complete uncertainty of upcoming markets and products (especially in the realm of digital), it is necessary for new age managers and leaders to take a different approach to decision making.
One of those approaches and ways of thinking, is experimentation. Traditional analysis only helps in evaluating the past but may not guarantee replication of the results in the future. This is primarily because all the environmental variables that were true for past results may not be exactly replicated in the future. The risk that analyses of past data poses – is that of mistaking correlation with causation – and it is extremely difficult to prove causation.
Experimentation through A/B tests ensures that the test conditions are identical and randomised across multiple variations of the experiment. In an A/B test, users are exposed to different variants of a product’s UI or UX at the same time. (e.g. different text or copy for call to action, colour, position of a button, etc.)
The key point to note here is that since test conditions are identical, the deduction drawn on causality of a product feature on user adoption and other metrics is a lot more accurate. A lot of thought needs to be given on how to properly design and execute A/B and other controlled tests.
By doing so, it ensures their integrity, interprets results, and avoids pitfalls. One may argue that if a company sets up the right infrastructure and software, it will be able to evaluate ideas not only for improving websites, but also for new business models, products, strategies, and marketing campaigns—all relatively inexpensively.
This will help it find the right path forward, especially when the answers aren’t obvious or people have conflicting opinions. Leading digital companies have in fact set up their own innovation labs where they reportedly conduct more than 10,000 online controlled experiments annually.
An experimentation group could be made up of representatives from key functions and businesses such as Product & Engineering, Marketing, and Planning, which may be rotated every 2-3 months. They’ll meet about twice a month to review past experimental results and discuss about upcoming experiments.
Experiments can be planned on the basis of the product’s ease of implementation and the expected impact. It’s best to keep the activity fun and engaging by introducing friendly competitions like predicting which creative work will get the highest click-through rate. Lastly, disseminate these quarterly learning reports to highlight results and key learnings, so that everyone in the company can learn too.
Plan for Growth Through Vision and Values
In stable industries – in order to achieve growth – there are clear sets of learnings and best practices to implement. However, in most emerging consumer technology or digital companies, the growth drivers and even measures of success are not as obvious.
While every company possibly needs and wants to grow, how do you measure success? As Lewis Carroll states in Alice in Wonderland –
“If you don’t know where you are going, any road will take you there”
In a VUCA world, the final destination is not always known. In this context, how do companies excite their teams?
One way to align all key stakeholders is through a bold vision and clearly demonstrated values.
Given how fast consumer tastes are changing, having narrowly defined “SMART” goals may in fact be counterintuitive and lead to tunnel vision. As research has shown that intrinsic motivation through a higher purpose helps achieve growth for young organisations.
Essentially, your company or team may ask itself 3 questions – What is our purpose of existence? What are our key measures of success? What are our aspired behaviours to achieve success?
The key point to note is that this exercise can’t be done top down. The approach is to have a co-creation process where all of your key members contribute to a shared vision and mission for the team. This is then brought to life in performance discussions, learning sessions and promotions. While the specific answers to the above will of course vary for each company, the benefits can be reaped by everyone.
Once the overarching vision is laid out, it becomes the north star that guides the company towards future success. The company then essentially plans for experiments that will assist in answering the unknowns and redirect the company to the right path towards success.
Ideally, your company should be dynamic by resetting and reviewing the objectives and key results on a quarterly or sometimes even monthly basis to measure progress towards the overarching end goal of the company.
3 Key Insights
- Preparing Your Budget in a Stable Environment
Relook into your budgets and benchmark each number and figure against industry standards. For example, you could compare your intended 5-year revenue growth against 5-year industry growth for accuracy and a better estimate. While you’re doing so, make sure that your short-term and long-term budgets are aligned and in sync with each other.
- Minimise the Risk of Your Product Failing
For any of your upcoming products and services, apply the A/B test before implementation. Gather a group of representatives from each department and let them try out two or more variants of your upcoming products and see which variant they prefer. Collate their feedback and observe their interaction with the product or service.
- Set Vision & Values For Your Business
By setting a company vision and values, you connect your shareholders and members to a common objective. Ask your team if they know the company’s purpose of existence, their key measures of success and aspired behaviours to success, to which their answers should be similar.