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New Year’s Resolutions: The Time for Change is Now!

By Jon Sawyer on 07/01/2015 - 0 Comments

The start of the calendar year should herald a time to review and evaluate the key lessons from the last 12 months activity so that the business can be stronger moving in 2015. 

Trading can be tough and achieving a sound cash flow and profitability in competitive markets can be very challenging. The key to this may lie in understanding what ‘successful’ businesses do that others may not.  At ICON Business Solutions we find that businesses that consistently outperform their competitors tend to have a robust business planning and review process that helps them to build on the strengths, and to increase market share and profitability.

Why is a business planning and review process a critical business activity? In the words of Stephen Covey (7 Habits of Highly Effective People), it is essential to ‘start with the end in mind’. However, it is the contention of this article that the fundamental reason for the lack of change is often down to the business owner. 

Starting with the end in mind may be a few simple words, but research at ICON Business Solutions has found that many business owners do not have any formal planning mechanism in place to do this.

The purpose of this article is to explain some of the reasons for this so that business owners can identify why and how they need to move forward. Starting off a new year, there is no better time to start.

What is Business Planning and why is It Important?

Business planning is fundamentally about managing the key financial and operational metrics within the business. Any operation should have key goals in place that can be measured on a monthly basis to track how the business is performing so that adjustments to activity can be made to propel the business toward year end targets. These goals should include financial goals to map out sales revenue, gross margin, cost management, and profit achievement. Operational goals may include measures on productivity and output. These goals can then be translated into key monthly milestones from which the performance of the business can be evaluated.

The advantage of using such an approach is that tracking such information allows the business owner to constantly review what is working and what is not, so that appropriate action can then be taken. This adaptive process ensures the business is more flexible and responsive in order to meet the needs of the market.

Sounds simple – but why do most business owners fail to have a formal planning mechanism?

Why do Businesses Often Fail to Plan?

Part of the explanation may be the result of 2 key factors. Firstly, many business owners may have started their business without developing the ‘broader’ range of business skills that are essential in running a profitable business. Secondly, it may be a result of the lack of awareness of the benefits of a planning process, and as a result such activity may not be prioritised. It is in the work of Daniel Kahneman (Thinking Fast and Slow) and Professor Steve Peters (The Chimp Paradox) that examines the way in which we process information that may lead us into taking decisions that may ‘short circuit’ the planning process.

To understand the first reason it is important to firstly understand why an individual may want to start their own business. In the Quarterly Survey of Small Business in Britain published by the Open University (Q2 2014), they find that the main reasons for starting a business are to have the opportunity of running your own business (50% of respondents), or in terms of more flexible working hours (39%), opportunity to be more creative (29%) or simply just to be your own boss (25%).

The research found that it was personal satisfaction that was the most commonly identified measure of success applied by business owners, ahead of any measure of profitability. These findings are consistent with those identified by ICON, in terms of lack of a formal planning of business process. In such circumstances, it is reasonable to assume that that formal planning skills have not been acquired prior to starting a business, and the implication of this is that either these are considered not important, or that they can be learned ‘on the job’.

Do business owners try to fill this knowledge gap? It is unlikely that they do as a quick review of the Open University findings suggests that many business owners do not actually achieve their goals for starting out in business. This can be found in some of their comments from business owners:

“You never really ‘work for yourself’ – you are, in effect, serially employed by every customer. This is somewhat lost on most staff”.

“My income has, in any case, been lower (1998, the respondent’s last year working in a large company) in every year since. I also do long hours and often think the whole thing is a treadmill that I can’t escape”.

What Holds the Business Owner Back from Planning?

If this is the case then why do business owners fail to take steps to put a planning process in place that could help them steer their business to a more profitable future?

To understand this in more detail it is necessary to understand what it is like to run a small business. Running a business requires an understanding of all the functional areas in business (marketing, sales, operations, HR, Legal, IT, finance and administration), and how these all are interdependent i.e. if any change is made in 1 functional area this normally will impact other areas of the business.

Put simply, to grow sales is not just an easy matter of getting more orders in. This requires careful planning to ensure you have production capacity to cope with the extra demand, staff that are skilled and equipped to deal with this, an administrative function that can manage with the extra workload and that there is adequate cash flow to fund the growth. Any increase in sales will always impact cash flow as raw materials and production/distribution and marketing costs need to be paid up front, prior to receiving any orders. It is normally inadequate cash flow that is the main reason for businesses failing.

So understanding all of these areas and their interdependencies can be fairly daunting. Having measures in place to evaluate performance facilitates a robust monthly review process and will help business owners more easily identify and therefore remedy any ‘fault lines’.

Reviewing the work of Kahneman and Peters it may be argued that the way we think may lead us to avoid facing this tough evaluation process. For example, Peters argues there are two ways of thinking. Both forms of thinking receive the same information, but Peters argues it is up to us whether or not we channel this information through our human side or our emotional (quick response) ‘chimp’ side.

It is the human side that will seek out the facts and search for the truth. However the chimp side will look for a quick answer which normally is steered by an emotional context. In short faced with tough decisions, business owners may seek a fast answer as business problems may drive an emotional response. Kahneman in similar work also identifies two main forms of thinking which he calls System 1 and System 2. It is System 1 that is the filter which stops System 2 from working to try to understand the problem in more detail. In essence it is System 1 and the ‘Chimp’ information filtering and review process that may result in business owners working harder and not smarter.

Avoidance of facing difficult decisions is not a deliberate process, but a psychological process in which our brain starts to ‘filter out’ having to take difficult decisions. Stress will increase the likelihood information is processed by the Chimp or System 2 process. In this context, it is likely the business owner will opt for ‘business as usual’ in the face of an overriding reasons for change. It is probable that in such circumstances if planning skills have not been acquired prior to starting a business, then it is very unlikely they will be learned ‘on the job’.

Whilst having a planning process is not a panacea – it is a vital element to achieving sustainable profitable growth, in order to achieve pre-defined business goals.

Calling all business owners - if you are aware that you have avoided putting a planning process in place there is no better time to start than now to acquire these skills. Don’t face this challenge on your own – help is always at hand at ICON.

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