These days more than ever, as a business owner and entrepreneur, you need to innovate or die. This mantra is most true for any business in the technology sector. We constantly need to move forward, create new things, better and faster. The pressure that a small business owner has to leverage innovation into growth is only emphasized by the difficult economic climate. So how do you keep innovating? How do you build a team and foster the right culture to help your company stay on track, and focus on building and innovating to keep growing and moving forward?
After 5 years of being CEO of Palo Alto Software, and over 15 years in the start-up and entrepreneurial world I am convinced that the only way to grow your company as quickly as possible, while not getting ulcers, becoming an insomniac, and aging more than your years, is to engage in Lean Planning. Lean planning is the answer for anyone who has ever said “I don’t plan because it takes too much time, and a few months down the road my plans change – it’s just not worth the time.” If you run a business and have ever said something like this – Lean Planning is for you. So now…. what is Lean Planning?
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Lean planning is not a product, or a service, it is a methodology, a way of managing your business. It is about understanding the minimum viable planning that you must engage in, in order to help understand your actual results, and guide your decisions to grow your business strategically. It is a methodology that allows you to make decisions about what opportunities to take, and which ones to ignore. It allows you to understand where your business has opportunities that you can take advantage of, and where your business may struggle.
What does a Lean Plan look like? It should have:
- An executive summary, or pitch, preferably with charts and images to tell your story quickly and efficiently
- A financial plan with a Sales Forecast, Profit & Loss,Cash Flow Forecast, and Balance Sheet
- An action plan with milestones scheduled and accountability
- Performance tracking to compare ACTUAL financial results with your planned financials and other key metrics.
For existing businesses, Lean Planning is then the process of engaging in reviewing and comparing the planned numbers with the actual numbers. If you go through the process of creating a forecast, you will be forced to think through things like Cost of Goods(COGS), Gross Margin, AR and AP days, Marketing Costs, etc. Once you go through the forecasting, and you set targets for all these key metrics, you are one step closer to being able to manage your business more efficiently and get better and better at innovating and growing.
The next step in the Lean Planning process is to set up a monthly review meeting. Review your planned numbers against your actual results. Anywhere there is a variance, analyze the variance. Why were your numbers wrong? What assumptions had you made that are not true? You may have thought you could collect money from your clients every 30 days, but as you review and compare your actual results for a few months, you may realize that you are actually collecting money every 55 days.
With this information, you can then look at the implications it will have on your cash, and actually do something to prevent any cash problems. You could decide to spend more time and effort collecting money to bring down the collection days. Or you could decide to talk to your banker and extend a credit line, to float you over the longer AR period. Either way, by planning, and then measuring the actual results, you have information that you may not have had. You can directly see the impact of longer collections days on your cash in your bank account.
The last step in the Lean Planning process is to make small adjustments to your plan, every 3-4 months, based on the variance between your plan and your actuals The process of comparing these 2 numbers and understanding why the reality is different than the plan will give you visibility into what decisions can actually change your financial picture, and how you can actually grow your company. This is similar to the Lean Startup idea that you need to throw ideas and technology out to customers, gather data, then tweak and re-launch. In this scenario, you make educated guesses about what you can do, then you see what actually happens, then tweak your plans, and then see what happens. Rinse and repeat.
Now you are actively managing your business through Lean Planning. You are setting goals and objectives, financial targets, and then taking the time to measure these goals and targets, get data about them, and then adjust when necessary. This process makes launching new products and services less “risky”. You can target a minimum viable product or service, set some financial goals for it, launch it, measure it, and then tweak what needs to be tweaked based on the results. If you are spending more money than planned to deliver a service for instance, you can go back and see where you can tweak your service to make the margins you need. Do you need to price higher? Are there ways you can implement the service that are more cost effective?
You also want to think about some other metrics to forecast, and then measure against actual results. If you run an ecommerce site you may want to forecast and track unique visitors per month, and an ecommerce conversion rate (ECR). If you run a restaurant you may want to track not just revenue per month, but table turns per week, or per month. If you run a service business you may want to track new clients vs, retained clients. You need to think through some of the other important key performance indicators (KPI’s) for your business and make sure you are including these when you create your Lean plan, and then using the forecasts to help you understand that actual reesults.
Lean Planning makes innovating and adding new or different products and services to your mix less risky. You have a process in place to make plans, and then you have the ability to measure your results against those plans and make calculated adjustments. There is no better way to manage a business for a business owner. Knowing exactly where your business is financially, compared to a plan you have put together, lets you understand whether there are problems or solutions to problems way before they actually affect your business. Without a process like Lean Planning, I know I would have more stress, more sleepless nights, and potentially an ulcer as the CEO of a business. With Lean planning I know where I am headed, and whether or not I am actually driving in the right direction. Every day, every week, every month I can make small adjustments, and make sure I continue to head in the the right direction: UP!
Article originally published on Forbes.com at this url: http://www.forbes.com/sites/sabrinaparsons/2012/11/16/lean-planning-drives-growth-for-small-business/