For every startup the development of a business plan is a  required first step. It is so obvious – business schools have course on writing the business plan and it is impossible to get funding without one. Teams coalesce around the labor. So, every startup has a business plan.

For the going concern, the ones that are now three or so more years old, the business plan (also called strategic plan -really the same thing) is forgotten, only stumbled on when a move forces someone to pick it up and wonder, “Should I just relegate this to the dumpster?”

This is not a good situation. A business without a plan is like a boat sitting in a pond just waiting to sink to the bottom for nature to compost it. Or, if it has the fate to be afloat in a stream, it will be carried along willy-nilly until it bumps into a stone or dead branch or reaches the ocean where nature will also send it to the big composter.

Every business exists in a world that is changing and filled with opportunities and threats. Your business plan is your set of oars to provide the means to pull in the direction you want to go in, to avoid the rocks. You might even row to shore and portage around the falls, to move to an entirely new river.

But, many people, even accepting the wisdom of having a plan, find it a painful exercise, all too easily avoided. This may be driven by the idea that a business plan involves dozens of pages of writing, lots of spreadsheets with numbers they really don’t believe (sometimes don’t understand). Business plans, strategic plans, these are just the exercises one does in business schools. Or it may be the folk wisdom that business plans are not a useful part of managing and they always end up on the shelf or hidden in a file cabinet only dusted off for display when in search of a bank loan.

However, shift your thinking to view the process of building a plan as a value in and of itself, and adopt a simpler more flexible business plan model you will find that building that set of oars for your little boat is fun and productive.

The Business Plan Model

Lets talk about the business plan model first. Since we are developing a business plan for our internal use it does not need to look like or contain everything that bankers, MBAs, venture capital funders expect. This is a working document to help us move the business in a definite direction.

First, I have found that setting an arbitrary limit of 12 pages focuses the mind and edits out all the useless boilerplate that populates many plans. Second, if you and your team prefer not to write a paragraphed narrative, use an outline, PowerPoint approach. Third, get out your most recent Income and Balance Sheet statements – these will be the starting point for the financials. Fourth, establish an outline of the topics that you feel must be covered and keep to it.

Basically, the plan will include these twelve topics.

1. Describe why you are in business – what value are you delivering to which customers. An important corollary to this topic is to identify why customers buy from you and not someone else?
2. How do you find customers? Who are your current customers? List the big ones and their share of your business
3. How do you produce the service or product?
4. How do you make money by making your customers happy?
5. What are your objectives for growing a larger customer base, adding a new market segment, new products or services, or other growth strategy?
6. What are the external obstacles to accomplishing these objectives and how do you intend to get around them? This is where you might look at competition, SWOT and PEST analysis and apply other analysis tools.
7. What resources do we need to put in place to achieve the growth? Money, people, technology….?
8. What strategies are we going to apply to achieve our objectives over the next year to three years? This should be limited to three to five strategies. State clearly what the objectives are for each strategy – how many new customers, new products, dollars of sales, profits, etc? When will these happen?
9. What key tactics are needed for each strategy? Who is responsible, what resources do they get, when will the accomplish the tasks and what results are you looking for?
10. Build a financial model. The spreadsheet should be not more than 25 rows with columns containing quarterly projections for three years. Starting numbers must link to existing financial statements.
11. What is the schedule for follow up business review sessions where you will examine progress on the plan and take required actions to revise and push the plan forward. The first meeting should be one month after you kick off the new initiatives. The, not less than quarterly.
12. How does all of this fulfill the management team’s personal objectives? The answer to this is not money?

The Planning Process

Now, how do you actually develop the plan?

Four to six two to three hour working sessions with all members of the management team present usually suffices. Some homework will be required between the sessions, typically a  couple of hours. You might imagine a month to six weeks as a useful window of time.

Who should be in the room? Every significant stakeholder – owners, chiefs of marketing, sales, operations, technology or product development, finance, and HR. In small companies this sometimes means that one person has to cover several functional areas. Do not let the group get larger than six to eight people. More than that and you can not have good, deep interactions – the work sessions will be more like a conference or convention. Two or three is fine as long as every key stakeholder in the business is present.

These work sessions are more important, in many ways, than the plan itself. During these sessions, the team will talk out loud and write things down. Arguments, discussions, innovations, deletions, new agreements about the business emerge. These flow out of the group and the whole team understands and owns these discussions and the conclusions.

In my experience, if the management team represents all of the key elements, all of the facts and concepts about the business are sitting in the room. Some people think that business planning is a research project. But, with a team, the process is more a sharing around the table of the facts, consensus building about the situation, goals, and strategies to get to the goals. The most powerful outcome of the planning process is that it arms the management team to convert the strategies into actions to reach the goals.

You Need a Consultant

All of this seems quite straight forward. You may be thinking, “Well, I am the Owner, the CEO. I am a seasoned veteran.  I can lead my team through this planning process.” Resist this line of thinking and here is why, and I say this despite the obvious self-serving nature of what follows.

A good strategy consultant who knows how to lead groups through a planning process will do the following, much of which you as the Owner, the CEO can not do just because of the fact of your position. First, the consultant stands outside of the actual business discussions, runs the sessions, and keeps the team moving forward. Second, the consultant establishes an environment in which the team is a group of equals for the purposes of the planning. This assures that one person will not dominate, that the less forceful personalities, who frequently have significant contributions to make, will be heard and participate. This increases the breadth and depth of the team ownership of the plan. Third, the consultant can bring up the elephants in the closet that no one wants to talk about. Overcoming the baggage of history can be difficult and painful. The consultant can drive the conversations to confronting the facts of the business situation. Fourth, the consultant will bring appropriate analytical tools to the table. The bag of strategy tools is enormous. All of this liberates the Owner, the CEO from the burdens of running the work sessions to focus on the content of the process. This is where their highest value is.

How Do You Convert the Plan Into Action?

For most strategic plans and business plans the end is the document itself. This is the critical moment and here is where Step 11 above, that asks about the schedule of review sessions, converts the plan into action. This is where the Owner, the CEO must take the lead. Otherwise the plan is just a plan and is not converted into action. If you have done a good job of establishing the tactics you will know who is responsible, what the success metrics are and the timetable for action. By tying the planning to the existing financial reporting system, you will be able to measure results directly. The review sessions are not designed to be dull reports, but opportunities to understand where the difficulties lie and where new opportunities pop up. A review session brings together the management team to work on the most important strategic activities of the firm.

Summary

Let’s wrap up this discussion.  A business plan is the result of a process in which the management team comes to a common understanding of:

• • the business situation
  • the value the business provides to customers
  • strategies to achieve new goals
  • obstacles to be overcome or avoided along the way,
  • tactics to bring the strategies to life – this includes who is responsible, resources available, timeline, and results expected
  • schedule of review meetings to take corrective action and make course corrections

The business plan is converted into action through the tactics identified supported by active supervision and follow up by the Owner, the CEO. The plan also provides a common language about the business and a platform to communicate the business’s goals beliefs, and values to everyone involved, employees, vendors, and customers.

More information is available on the strategic planning process in our white paper: Introduction to the Strategic Planning Process here

This article was the subject of an earlier podcast of the same title. It is available here.

This podcast lasts for 8 minutes 49 seconds.

A written format is available here.

The first step in the hiring process is to define the job you want filled. What specific results should the CFO produce for you and your company? Are you concerned about running out of cash because you have taken on a big project but will not get paid until completion? You worry about having enough cash on a regular basis. You are not certain that the bookkeeping is being done in an efficient and rigorous manner? What else of a financial character concerns you? Is your CPA driving you crazy with questions or suggestions that you do not entirely understand?

Make a list. Look back at the seven reasons I gave in my earlier article and see if this don’t provoke some additions to your list of worries. When you have completed your list, these are the problems, largely, that the CFO should solve.

Do not spend too much time thinking about exactly which functional skills are required to produce these results. It is the job of candidate CFOs to demonstrate to you that they have solved problems like yours and produced the required results. You are not hiring a trainee or development project, you are hiring an experienced CFO.

A few concrete skills and experiences you should look for.

First, your CFO must know how to get their hands dirty. This means they must have active skills to build spreadsheets and extract information from financial software systems and paper documents. Second, they must know how to present this to you in a clear, actionable format. A key task for them is to get financial information about company performance into your hands in a timely fashion and in a format that leads to making decisions. Third, preferably they will have experience in your industry so that they can set the analysis within the context your business lives in. Fourth, they should have worked as part of a team so that they have the skills to present the financial “score” clearly and then engage in a dialogue with the other management team members to help drive the business forward in a coherent fashion. At the level of the CFO, finance is not an isolated function, rather, it plays an integral role in managing the ongoing business and developing new strategies.

Write a one page description of the results you require and the skills and experiences that you think will be needed. Keep this simple - bulleted lists are great. You will use this when you go to the next step.

Where to go hunting?

You should certainly alert your close business associates that you are looking for a part-time CFO.  Do a Google search. There are now plenty of providers of these services. Here is a saved Google search (opens new browser window). Put an ad on Craigslist.

I would suggest starting out with the consulting firms that specialize in this work. Interview a couple. You will learn a great deal about how they might approach your situation. This may help you sharpen what you want to achieve. Under no circumstances should you pay for an assessment or any other consulting projects as part of this interviewing. Any consultant should be more than willing to come to your office to talk things over without any further obligation. Since they are experienced, they will conduct their assessment of the situation right in front of you and with considerable accuracy in under an hour. Don’t forget consultants interview far more companies than you.

You may be overwhelmed by the number of candidates. Just pick out three or four who really seem solid. If you are comfortable on the telephone, conduct a telephone interview to sort out the persons you want to invite for a face-to-face.  This article is not the place to discuss interviewing strategies and techniques, but certainly keep in mind that you will be looking to confirm that they can deliver the results you are looking for and have the inter-personal skills to work well with you and the other members of your company. Envision this selection process just as you would for a permanent full-time employee. A CFO, even a part-time one, should be a significant asset in your business, not a simple replaceable part.

The Deal.

Experienced consultants will always present you with a proposal that describes the scope of the tasks, what they will do, and what the “deliverables”, the results, will be. This proposal will also indicate some level of effort that they expect to put into the job. Keep in mind that they do not have to be on site to be productive. The proposal will also define some compensation arrangement for the work. Some will charge on an “as consumed” basis to an hourly or daily rate. Others will propose a fixed monthly charge for the level of effort described. Everything is negotiable, so think through how you would like to work. Always make sure to include an early review period (more on this below) and a cancellation process that is mutual and no-fault. Finally, you should look for a non-disclosure statement as part of any contract to protect your confidential business information.

Getting to Work.

Set time aside immediately to introduce your new CFO to every aspect of your business. They really need to understand what the business is about, who the customers and vendors are, and a myriad of other facts. Include a discussion of your forward looking plans and strategies so the the CFO can set these objectives in view as analyzes are developed.

Be sure to check in regularly with your CFO to make sure that progress is being made on the results you need. Set an early time for a formal review session. A month to two months from the start date would be right. You want to take an early reading of how the CFO is functioning. You will almost always have to make course corrections both to objectives and work processes. However, if you see that you or the CFO have made a mistake and the relationship will not work out, do not delay. Bring the relationship to a halt right away.^[[1]] Find another CFO and ask the old CFO to bring the new one up to speed. You are dealing with professional consultants, not employees. They never like to loose a client, but they will certainly do their best to make the transition smooth. They need you to think well of them.

This is just the beginning of your work with your new CFO. It will be productive. Have fun.

1. I wrote about this issue in an earlier article, “Managers – Early Intervention Is Key To Getting Your People Right” (opens in new window), that you can review if you find yourself in this situation.

This podcast is 7 minutes 20 seconds long

In this time of readily available outsourced or part-time professionals there are very few worthwhile reasons not to have your own CFO. Depending on your size, your CFO might appear once a month or several days a week.

So, let me list a few reasons for you to find a part-time CFO.

1) Keeper of the Numbers. A primary function of a CFO (and the whole accounting/financial management infrastructure) is to keep the numbers for the organization. It is very important that those who are producing the numbers (sales, marketing, operations, new product development, engineering, and so on….) not also keep track of the score. In part this is because keeping score is not what they are really good at. More importantly, you want to avoid the temptations of manipulating the numbers or running off into to self-deluding behaviors that inevitably come from the doers keeping the score. In a parallel line of organizational processes, accounting systems are double entry exactly to increase the difficulty of theft, at the worst, or simple bungling errors. Having a separate score keeping system provides the duplicate set of eyes, ears, and thinking to assure that the top and bottom lines are real and accurate.

2) Cash Flow Analysis and Management. Your part-time CFO will create a cash flow projection spreadsheet so that you can see what your actual situation is today and what it will be in a week, month, or quarter. This will allow you to manage your cash with full visibility to all its sources and the claims against it. This invaluable little tool will also allow you to perform “what-if analyzes” that will show the impact of all sorts of business decisions on your current cash and probably future cash flows. This will move you beyond looking at your checking account and applying mental gymnastics about who owes you money and who else has claim on it.

3) Product/Customer Analysis. Where are your sales and profits coming from? Which of your products, product lines, and customers are actually producing sales? Which are producing profits? Your part-time CFO will build another spreadsheet, extracting information from your accounting package, that will build a picture, in numbers, of how your business model is working. Instead of looking at the aggregate, you will discover where and how you are actually making money.

4) New Product/Project Development. Your CFO will look at the business model for major new projects,  products, services, new acquisitions, mergers, etc. and present an analysis, based on the best numbers available, of whether the project will make money and when. The CFO holds your feet to the fire and brings a different perspective to the enthusiasms of the deal makers, the engineers, and marketeers.

5) External Relations. Bankers and other institutional sources of money have their own language, world views, and processes. CFOs know how to deal with these parties effectively.  Working with the owner, better deals and smoother longer term relations are more likely. In addition, CFOs can manage relations with payroll companies, accounting software vendors, and other third party providers to the financial and administrative components of your business.

6) Implementing Tax and Legal Recommendations. Your CFO will work with your CPA to implement strategies to achieve tax related objectives. CFOs and CPAs share enough common language and process to work together much more effectively than most business owners/managers. And, the CFO can be uniquely assigned to assure that the required tasks are carried out.

7) Organizational Integrity and Reliability. Finally, your CFO will examine your business systems to assure that they are rugged, reliable, accurate, timely and as theft-proof as possible.

In another article, How to Hire a Part-time CFO, I  examine how to find and select a part-time CFO and how to establish a good working relationship that is well integrated into your company.

I picked up this little book, Warren Buffett and the Interpretation of Financial Statements – the search for the company with durable competitive advantage (Scribner: New York, 2008), thinking that I might learn something valuable about the current economic mess and as a possible guide to shaping personal investment decisions. However, from the small investor perspective of building long-term wealth the strategy is summed up in the tag line: “durable competitive advantage”.^[[1]]

But, to return to the Buffett book, I am struck by another use of this book. That is as guide  to the basics of how to read and interpret the important elements of a company’s financial statements. The book covers The Income Statement, The Balance Sheet, and The Cash Flow Statement. If you feel uncomfortable or completely ignorant of these three financial documents, this book might just do the trick.

While you are learning about Warren Buffett’s approach to durable competitive advantage, you will be lead through a tour of these three statements. This is a very literal line by line march. For instance, thirteen chapters, averaging three pages each, cover all of the common elements of the income statement. With the example statement always in sight it is easy to follow the calculations to see what Gross Margin or Earning per Share mean. If you find Depreciation a mystery, this is covered too. In this era of excessive leverage, the book carries along a discussion of the impact of debt on the performance of a company.

So, pick up this book at your local library or buy it. You will understand more about the how and why of Warren Buffett’s strategies and learn to understand financial statements. Then, get out your own statements and march through with this book as a guide.

1. My attention for that purpose has shifted to another more compelling analysis – John Bogle’s The Little Book of Common Sense Investing (John Wiley & Sons, Hoboken NJ, 2007)

Lets take a look at a situation where a web-based services company is experiencing good growth and reasonable profits. They have four lines of business addressing their single basic service to four different markets. Based on their market analysis, they decide that they will focus their marketing dollars and development resources on one of the four for the next year.

Six months into the mission, sales have continued upwards, but profits are not tracking along at the same rate, the quality of earnings is suffering. Why is this happening?

First they muscled their way through some spreadsheet work sorting out their COGS (Cost Of Goods Sold) and reassigning previously Fixed Expenses in marketing that really could be assigned to each of their four market areas. Then they discovered that the the market segment that they had focused their efforts on had never been very profitable and they had made the situation worse by increasing the sales volume through it.

On closer analysis it became evident that the lack of profitability came from two sources. First, the marketing costs of acquiring customers in  this market channel had been 60% higher than in  the others. Second, the vendor providing the back office services supporting this channel was 30% more expensive than vendors supporting the other market segments. In the short run, the managers decided to shift their focus to another one of their markets. In the long run they decided to search for a better vendor and conduct some research on why the marketing costs were so high.

So, if you have a business where you are selling more than one product or service to more than a lone customer, think about developing the financial management tools that will tell you where your sales and profits are actually coming from.