In today’s world, new businesses are born from the culmination of innovative ideas. Each business operates primarily to make profit on investment by providing products and/or services that meet an existing or expected market need. The fact that a business boasts revenue does not imply that it is profitable. Profit making businesses, small or large, create success and continuously improve by effective planning, execution, tracking and controls.
At the initial stage for many small businesses, financing is typically a major hurdle, especially within a Nigerian market where easy credit facilities are still in the evolution process. As such, angel investors, which may include friends, colleagues, family, are usually approached by beginning entrepreneurs saying – “I have a business idea…will require start-up capital of N500k. Can you help?” In expected response, the potential investor whether family, friend or private equity firm will request to see a business proposal – “Show me your business plan“.
Planning, top-down or bottom-up, is one of many crucial factors to business success. Simply put, the business owner needs to be clear on a number of points – What is the product/service? What output capacity is planned (e.g. No of units/day/month/year)? How will this be achieved – What key activities are required to achieve output? What are the human resource needs for each activity? What materials and equipment do you need to get started? How much revenue do you expect per unit? What is the total owner’s cost per unit? Investors will expect you to prepare a cash flow sheet, determining the present value and expected profitability of your business. These metrics are only ascertained based on your business plan. So, plan properly.
Now the financing is in place, the business plan approved, and somehow, you have started running business operations. How well is your business doing? While it is understandable that many times, businesses may not ‘stick to the plan’ due to complexity and uncertainty in business environments, it remains essential that progress on the plan must be tracked. Plan it, and Track it. A local cement block making business planned to produce 400units/day and sell at least 350, leaving a daily inventory of 50units/day for the first 6 months. After being funded, the business commenced accordingly. However, over the first month, actual production was 250units/day with daily sales of 200 units. The business owner, oblivious to this gradual development, continued operations, overjoyed with the decent revenues. Was the business making money? Yes, probably even covering cost, but how well was it performing? It was certainly not meeting the plan, and was certainly underperforming its profit, if it expended the planned cost to produce yet less output.
It is one thing to track and measure, it is another thing to track and measure the right things. Readily, a business would prefer to track and measure quantity of output and cost but focus must also be placed on quality, speed, dependability and reliability. Were customers pleased with the quality of cement blocks produced? Were they durable, reliable and dependable? Having displeased customers is easy potential for undermining expected sales. What is the rate at which the cement blocks were being produced? Why the drop versus the plan? Was it due to faulty equipment, incompetent employees or perhaps environmental factors like continuous rainfall? At the end of the day, the business must not forget to track its customer base. What sorts of customers are most frequent and loyal? Which ones have reduced patronage? Why? Do you need to target other types of customers? What works for one business may not work for the other. It is important to track the right metrics.
Performance tracking, controls, and progress measurement provide a health check for any business and should be done on a routine basis. Small or big, each business should produce a periodic form of reporting. It could be weekly, bi-weekly, monthly, documenting specific performance indicators, plan versus actual etc. Effective tracking raises red flags, identifying operational issues very quickly, to enable the business respond promptly and appropriately.
To fail to plan, they say, is to plan to fail. What you do not track and measure, does not get done, so goes the old management adage. How can you improve business performance if you hardly know whether it’s doing well or not? To the business owner, the message is clear – Plan it, Track it…..or Lose it.
NB: This post was first featured in an SME Magazine (June 2012), and then YNaija (September 2012)
Great stuff Sir!