Meet Your Plan
Early in my career as a business unit leader, there was a year with an unusual spike in input prices. This upended my annual financial plan, which was based on a very different series of assumptions. My initial reaction was that the input price spike would be a clear “reconciling item,” since achieving the plan under these new conditions seemed impossible.
After conferring with more seasoned colleagues, I realized that the prevailing culture was “The Plan is the Plan” and that excuses—also known as “reconciling items”—would not be acceptable. I set about delving into actions that the organization could take to achieve the plan.
This mindset of viewing the plan as inviolate—or even better, viewing the plan as a minimum acceptable level that should be exceeded to the extent possible—is an aspect of culture that may already exist in your company. But if not, I suggest you consider how to inculcate it. It sets up an achievement and a commitment culture, which I believe will serve you well.
Of course, meeting the plan can be very challenging in times such as those we have experienced during 2020 and 2021. The year 2020 was marked by huge uncertainty and demand destruction due to the onset of COVID-19 along with ensuing business shutdowns and safety concerns. And 2021 has been characterized by reopening of the economy, higher demand, supply chain woes, higher raw material costs and human resources challenges. As you construct and execute your 2022 annual operating plan, please consider the following ideas.
Meeting the plan starts with constructing one that is feasible yet stretches the organization to achieve more. I favor starting with a detailed planning tool and a “bottoms up” planning process. Your sales organization should input forecasted sales data by product. Your marketing organization should provide guidance about margin expectations based on actual data and expectations of the business environment.
Once that information is rolled up, the leadership should review the resulting financials and instruct the organization to modify the input as necessary to meet high-level financial goals. High-level guidance should be given regarding fixed costs by function and functional managers should allocate their budgets in line with their annual goals and objectives. This process may take several iterations to get it right, but it should result in an annual plan that the organization can commit to at every level. This plan can then be used to set functional and individual goals.
Monitoring progress against the annual plan is the crucial next step. You should have a robust monthly process for assessing how you are doing in relation to your plan regarding sales volumes (by type), margins and fixed costs. You need to react as early as possible if you see a shortfall (other than expected seasonal variations); the longer it takes to react, the harder it is to make up the shortfall. I suggest you address shortfalls as follows:
Margin shortfall:
- If the margin shortfall is due to higher raw materials costs, evaluate the opportunities for passing on price increases to customers; encourage your procurement organization to find ways to offset the increases.
- If due to an increased competitive environment, ensure that price reduction situations are being properly evaluated, and consider whether there are opportunities to introduce a more competitive product.
- Ensure that freight, logistics and packaging costs are properly passed along to customers.
- Ensure that new products and premium products are fetching the appropriate differentials in the marketplace.
Sales shortfall:
- Work with customers to understand the end market situation and determine whether the shortfall is due to competitive dynamics or in line with the overall market. Act accordingly.
- Ensure that new product launches are on time.
Fixed costs overrun:
- Understand whether cost overruns are due to one-time events or are expected to continue (and why).
- Slow down or halt non-critical projects.
- Accelerate the pace of cost savings projects.
- Delay hiring programs; reduce use of contract staff.
Of course, all these actions are much easier to say than to do, and many of them will take significant effort and incur some market risk. Be sure to involve the various functional leaders in the decision process as to which actions will be taken, so that you take those that will maximize the return and minimize the risk.
While I have emphasized here that the plan is sacrosanct, I have also found that there are times when you have to “suspend” thinking about the plan and allow the organization to have more flexibility in the face of certain unexpected events. For example, in the face of a damaging hurricane, a fire at the plant or perhaps a significant technology or customer issue, it may be necessary to take off the plan “handcuffs” temporarily and devote a lot of resources to fixing the problem as quickly as possible.
If this is the case, be sure to keep a log of the spending associated with this specific event, because it may qualify for some insurance relief. If not, it will need to be the subject of a look-back for learning. While you may suspend the fixed-cost constraints in one area, consider whether you can find offsets in other areas to limit the overall impact on the plan. Engage with your board of directors to find the right balance between the short term and the longer term by presenting them high-level options regarding spending and risk.
Cultivate the mindset that delivering the financial plan is critical and ensure that your processes for development and execution of the plan are timely and robust. Your business will reap the rewards.
Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. Contact her at saralefcourt@gmail.com or (908) 400-5210.