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BUSINESS BRIEFS: A Plan Is Not a Budget

March 1, 2009
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A manager has three basic tasks: planning, organizing and controlling. It is through these three activities that the manager directs his business or function. Therefore, if he/she is to be successful, the manager should develop a thorough understanding of each of these tasks. Today, let’s focus on planning.

Terminology

It is important to note that a plan is not a budget. Many managers develop budgets in order to control costs over the next month or year. And while budgets are important, they are not plans. What is the difference?

A budget is a projection of inputs and outputs based on historical relationships. For example, if you are going to produce 100 units and it historically required 100 lbs of raw material to produce those units, your budget would reflect that historical relationship. Using the budgetary standard of 100 lbs per 100 units, the manager can generate a standard cost and calculate a projected profit. The budget projects what will be based on what was.

A plan projects what will be based on what will be done differently. A budget projects the status quo; a plan projects a change. A budget is built on standards; a plan is built on actions. A budget pulls the organization along an established track; a plan pushes it in new directions.

This doesn’t mean that a plan has to be grandiose. In reality, it can be quite modest. For instance, your sales team may have budgeted sales for each of their existing customers. In addition, they may have planned to add two new customers in the coming year. This would be a modest objective compared to a plan that sought to introduce a totally new product into a new market. The second goal might require retraining, reallocation of territories, and establishing new factors of competition. Such a bold plan might change the nature of the organization. The addition of two new customers would not create such drastic changes, but it is still a plan.

Building Plans

Now that we know what the purpose of a plan is, let’s look at how to build one. Basically, plans consist of seven elements: goals/objectives, self-assessment, assumptions, available resources, strategies, action plans, and results. We will expand on each of these elements in future columns. For now, let’s just define each.

Goals/objectives define where you want to go. A goal is a qualitative statement that provides the overall theme of your plan. For instance, the goal of a company might be to improve quality. An excellent aspiration, but how do we measure it? That’s where objectives come in. Objectives are quantitative. They not only provide a target to hit, they also provide the means to measure how close we’ve come. Thus, beyond improving quality, the company’s objective could be to decrease scrap by 10%, or returns by 20%, or rework by 50%.

While goals/objectives tell us where we want to go, self-assessments tell us where we are now. All that follows is designed to help bridge the gap between them.

We have to determine the environment in which the company will implement the plan. This requires that we forecast the economy, the competitive landscape, technological advances, government regulations, etc. While assumptions are routinely disparaged, they are necessary. A 20% sales increase during an economic expansion requires a different plan if the economy is in a recession.

All companies have limited resources, and your plan needs to fit within those limitations. Companies have grown themselves into bankruptcy because they failed to recognize their resource limitations. An honest resource assessment is critical to a successful plan.

The next step is to determine how we get from where we are to where we want to go, given the expected operating environment and the available resources. Strategies answer the “how?” question.

An action plan is a doable piece of the overall plan. It is the key to implementation because it translates the plan into small projects that are controlled by specific individuals within the organization.

Results forecast the financial impact of a successful plan on the financial health of the company.

Map It Out

A plan is a roadmap for your business, and it can guide you from one success to another. Planning makes you really think about your business. It is one of the manager’s most important tasks because it allows him/her to see potential obstacles and prepare to overcome them.

Any views or opinions expressed in this column are those of the author and do not represent those of Ceramic Industry, its staff, Editorial Advisory Board or BNP Media.

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