FastTrac Planning Workshop OPERATIONS

FastTrac Planning Workshop

™

OUTLINING YOUR

OPERATIONS

OPERATING PLAN

With major support from the Kauffman Center for Entrepreneurial Leadership

Visit our websites at: www.fasttrac.org www.entreworld.org

Copyright 2001 Kauffman Center for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation ISBN: 0-944303-xx-x INSERT NEW NUMBER HERE All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission of the publisher.

FastTrac, FastTrac NewVenture and Take charge of your business are trademarks of the Kauffman Center for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation.

NOTICE OF NONDISCRIMINATORY POLICY AS TO PARTICIPANTS The Kauffman Center for Entrepreneurial Leadership admits participants into our programs without regard to race, color, age, gender, religion, sexual orientation, national and ethnic origin, disability and veteran’s status thereby permitting access to all rights, privileges, programs, and activities generally accorded or made available to program participants at the Kauffman Center. The Kauffman Center does not discriminate on the basis of race, color, age, gender, religion, sexual orientation, national and ethnic origin, disability and veteran’s status in administration of its educational policies, admissions policies, tuition assistance and other Kauffman Center-administered programs.

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Table of Contents Ewing Marion Kauffman ............................................................................................................. 4 History of the FastTrac Programs .............................................................................................. 5 The Story of Social Entrepreneurship........................................................................................ 6 Choosing a Business Workshop ................................................................................................. 9 Exercise: Operational Plan ........................................................................................................ 10 Background Reading: Operational Plan ................................................................................. 20

Acknowlegements ORIGINAL FASTTRAC PROGRAM AUTHORS Entrepreneurial Education Foundation Courtney Price, Ph.D. R. Mack Davis Richard H. Buskirk, Ph.D. PROJECT CONSULTANT Dr. Sandy Dickinson EDITORIAL TEAM Kauffman Center for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation Judith Cone Stefanie Weaver Advant•Edge Business Services Jodie Trana Attorney & Counselor at Law David André Nancy Allbee GRAPHIC DESIGN TEAM Leslee Anne Terpay, Terpay Knowledge Resources

Ewing Marion Kauffman

The Kauffman Center for Entrepreneurial Leadership is a major funder of the FastTrac program. The Kauffman Center was created by Ewing Marion Kauffman, a true entrepreneurial leader. Born into a modest home in Kansas City in 1916, he left as a young man to serve in the U.S. Navy. After returning to his hometown, he took a job to provide for his family. He believed that hard work; dedication to principles, and respect for others formed the path to success.

With an initial investment of $5,000, Kauffman started a pharmaceutical company in the basement of his house in 1950. First-year sales reached $36,000, and the company made a net profit of $1,000. During the years, he assembled a team and built Marion Laboratories Inc. into a diversified health care colossus with annual sales exceeding $3 billion.

Mr. K, as he was called, created the Ewing Marion Kauffman Foundation as an “uncommon philanthropy” whose mission is to help create self-sufficient people in healthy communities and endowed it with more then $1 billion.

In 1992, a year before his death, Mr. K created the Kauffman Center for Entrepreneurial Leadership, recognizing that the health of the economy is dependent on the ability of entrepreneurs to grow companies. He was convinced that the best way to help entrepreneurs is to identify and teach the knowledge, skills, and values that contribute to entrepreneurial success.

If entrepreneurs could learn how to develop successful companies, jobs would be created and the economy would be strengthened. This, he believed, would help the Kauffman Foundation achieve its mission of “selfsufficient people in healthy communities.”

Kauffman’s ability to learn from experiences and his reflections about what’s required to be a successful entrepreneur have provided a rich legacy of knowledge about entrepreneurial leadership, the importance of continual learning, and the spirit of discovery.

The FastTrac programs are one part of a wide range of learning resources created by the Kauffman Center. These resources have been developed by and with hundreds of successful entrepreneurs who have share their knowledge, insights, and stories so that others might learn from them. It is hoped that all entrepreneurs will find them useful as they work to write their own entrepreneurial success stories.

For more information on FastTrac go to www.fasttrac.org. For more information about the Kauffman Center, go to www.entreworld.org or call (800) 489-4900.

History of the FastTrac Programs

The FastTrac programs were developed and designed to train aspiring and existing entrepreneurs by offering a condensed series of entrepreneurial training programs that culminate with the participants’ producing a feasibility or business plan for their ventures.

To initiate the program, a one-day kick off seminar was held in 1986, in Los Angeles for minority entrepreneurs. From approximately 1900 seminar participants, 63 highly motivated minority entrepreneurs were selected to attend the initial FastTrac program.

In the spring of 1988, the Greater Denver Chamber of Commerce sponsored a FastTrac 2 program for women and minority entrepreneurs.

In the fall of 1989, the program was expanded throughout the state of Colorado with the support of the Colorado Governor’s Office of Economic Development.

In 1993, FastTrac entrepreneurial training programs expanded into 14 western states. During that same time, the Kauffman Center for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation, piloted its first FastTrac program in Kansas City, Mo. The Kauffman Center has funded the Entrepreneurial Education Foundation, in Kansas City, Missouri, to disseminate the FastTrac programs throughout the United States. To date over 40,000 entrepreneurs have graduated from FastTrac programs throughout the nation.

In 2000, EEF moved to Missouri and was charted by KCEL to continue marketing and distributing the FastTrac Programs. At the same time, KCEL established an in-house curriculum team to develop and enhance the FastTrac programs.

The Entrepreneurial Education Foundation is grateful to all of the organizations that have provided funding, enthusiasm, and commitment, as their support of these programs assists thousands of entrepreneurs to build more successful companies.

If small business is the engine that drives the economy, then more small businesses and more successful entrepreneurs will impact that economy in positive ways. Because of the success and economic development achievement of its graduates, FastTrac programs are offered in 36 states in the United States and three countries.

The Story of Social Entrepreneurship

The Institute for Social Entrepreneurs defines social entrepreneur as “any person who uses earned income strategies to pursue social objectives, simultaneously seeking both a financial and a social return on investment.”

Social entrepreneurship is a new word applied to an old phenomenon: The Salvation Army has had thrift shops, museums have had gift shops, for centuries. A new word, and a wide-spread raised consciousness, is organizing the fragmented nonprofit sector for greater efficiency and effectiveness.

In recent years, more nonprofit organizations around the country are successfully traveling down the road of social entrepreneurship — learning to operate in a more business-like manner, becoming more market-driven, developing earned income-generating programs, forming strategic business partnerships, and even spinning off forprofit ventures that feed their profits back to support the nonprofit mission.

Like their for-profit counterparts, nonprofit entrepreneurs are driven to control their own destiny. They leverage their organization’s core competencies to capture marketplace opportunity and create economic and social value for our communities.

Populations of people in need keep growing, and the social problems they face keep changing. Entrepreneurship meets several serious challenges faced by the nonprofit sector working to solve social problems: 1. Funding from traditional sources for nonprofits drastically declined — government spending down 23% per decade since the 1980s; corporate giving down 10% a year; individuals giving only 4% of annual income now, compared to 7% in the 1980s.

2. Increased competition for shrinking pie: over 1 million nonprofit organizations in the US, growing annually at a rate of 30%.

3. Traditional funders rarely make long-term investments – shifting priorities and restrictions often keep you from using funds where you need them most.

4. Funders apply increasing pressure to measure outcomes and demonstrate SROI (Social Return on Investment), rarely supplying dollars to support such efforts.

Social Entrepreneurial Ventures Range a Gamut 1. earned income-generating programs based on fees or contracts for service (from recipients or 3d party payors) 2. strategic business partnerships with for-profit companies 3. spin off for-profit ventures 4. social purpose for-profit businesses

Stellar Examples – these nonprofits have gone all the way, establishing multi-million dollar businesses to support their missions: www.housingworks.org - thrift shops, coffee shops and bookstores support housing, healthcare, support services, advocacy, and job training for people living with AIDs and HIV in NYC www.greystonbakery.com - bakery, in partnership with Ben & Jerry’s, makes all the brownies that go into the ice cream, providing job training and employment for hard-to-employ populations in Seattle www.rubiconpgms.org - provides vocational rehabilitation and training for homeless clients and people living in poverty through landscape, bakery, and homecare enterprises in the San Francisco Bay Area www.bidwell-training.org , www.manchesterguild.org - guild mission to educate and inspire inner-city youth and promote community development through visual arts and jazz, conducts workshops, exhibitions and concerts; training center provides career path opportunities in high-tech, culinary, and medical fields in Pittsburgh www.mdi.org - employment for people with disabilities in Minnesota in the manufacturing process, packaging, and assembly industry Three Keys to Success 1. balance mission and money goals, manage to the “double bottom line” 2. understand that ventures launched by nonprofits face the same challenges as for-profit entrepreneurs and demand the same business competencies 3. recognize that traveling down the road of social entrepreneurship is a paradigm shift in culture and mindset for your organization Resources for more information about the movement of social entrepreneurship: www.redf.org, www.svpseattle.org and www.venturephilanthropypartners.org — build communities of contributors to nonprofits based on a venture capital model. a) make long-term funding commitments, b) establish close management and technical assistance relationships c) build internal capacity and infrastructure, d) focus on outcomes www.socialentrepreneurs.org, www.socialent.org, www.communitywealth.com— consulting firms working with nonprofits to increase effectiveness and economic self-sufficiency www.nationalgathering.org — organizing and enabling current and future social entrepreneurs to learn from each other

FASTTRAC PLANNING WORKSHOP Operations Learning Objective In this session, participants will:

Outline an operational plan for their business to coordinate action steps toward growth Exercises

Operational Plan Background Reading

Operational Plan

Operations

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Operational Plan Receiving orders What administrative policies, procedures, and controls will be used for receiving orders?

Explain how orders are processed after being received. Include a copy of the order form in the appendix. Describe what type of database will be created to keep track of customer information.

Billing the customers What administrative policies, procedures, and controls will be used for billing the customers?

Explain how billing procedures will be set up. Include the billing period, billing format, and the like. Consider placing a copy of billing correspondence in the appendix.

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Operations

Paying the suppliers What administrative policies, procedures, and controls will be used for paying the suppliers?

Identify procedures for controlling due dates on bills. List accounting and bookkeeping controls that are needed in addition to paying the suppliers.

Collecting the accounts receivable What administrative policies, procedures, and controls will be used for collecting the accounts receivable? Will you have a separate collection department? Use a collection agency? Use factoring?

Choose whether to collect, have a separate collections department, or hire a collections service.

Consider using a collection agency and factoring to increase cash flow and reduce bad debts.

Operations

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Reporting to management What administrative policies, procedures, and controls will be used for reporting to management?

Explain the communication process for employees to report incidents to management.

Describe the format and schedule to be used for management meetings, who will attend, and how often meetings will be held. List the types of reports to be used.

Staff development What administrative policies, procedures, and controls will be used for staff development?

Explain provisions for employee training, promotions, incentives. Choose among using outside consultants, providing in-house training, and inviting manufacturer representatives for training. List the bonus systems you will use to motivate staff.

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Operations

Inventory control What administrative policies, procedures, and controls will be used to control inventory?

Briefly describe the system used to establish inventory control. Select whether the system will be manual or computerized. Identify at what point the use of technology will be cost-efficient to control inventory.

Handling warranties and returns What administrative policies, procedures, and controls will be used for handling warranties and returns?

Explain the process for handling warranties and how returns are to be documented for proper credit. Identify a system to handle customer complaints. Also, identify how feedback from customers will be used to improve customer service and product development.

Operations

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Monitoring the company budgets What administrative policies, procedures, and controls will be used to monitor the company budgets?

Explain how often budget information is updated for review. Set up budgetary controls for travel, phone usage, photocopies, supplies, car allowance.

Security systems What administrative policies, procedures, and controls will be used for providing security for the business?

Describe how you will protect customer lists and trade secrets. Describe the security available for the building and employees. Explain the procedures for protecting company files and backing up computer information. Include plans of action in case of emergency: fire, tornado.

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Operations

Documents and paper flow What will be the flow of information throughout the system? What documents are needed to prepare for a transaction?

Diagram the flow of information throughout the system. List the documents needed to prepare for a transaction. Identify all the things that should happen to a transaction. Include examples of such forms as invoices, sales tickets, and charge documents in the appendix.

Planning chart: Product/service development When will the product/service be ready to market?

Identify when the product/service will be ready for market. List all the activities necessary to develop the product/service, the names of the persons responsible for each activity, and completion date. Outline the timing of events by month for a minimum of 12 months.

Operations

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Planning chart: Manufacturing What is the production schedule?

Provide the production schedule. List all the activities that make up the production schedule, the names of the persons responsible for each activity, and completion dates. Outline the timing of events by month for a minimum of 12 months.

Planning chart: Financial requirements When will the money be needed?

List what type of money is needed to finance the project, who will provide the money, and the date the money is needed. Consider listing the dates when payments will be made on financing, when dividends will be declared, and the like.

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Operations

Planning chart: Marketing flow chart When will the advertising be placed, brochures be developed, and the like?

List when marketing activities will be carried out, the persons responsible for each activity, and the completion dates. Outline the timing of events by month for a minimum of 12 months.

Planning chart: Market penetration What is the schedule for market penetration?

List the activities for penetrating the market, who is responsible for each activity, and when each activity is to be completed. Outline the timing of events by month for a minimum of 12 months. Include when you will handle sales-force training, sales-calls schedules, selecting distributors, selecting manufacturers’ representatives, and any other pertinent information.

Operations

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Planning chart: Management and infrastructure When will the management team be hired and in what order? When will the infrastructure be used and for what period of time?

List when management and infrastructure persons will be brought on board, who is responsible for hiring, and for what period of time.

Risk analysis What are the potential problems, risks, and other possible negative factors that the venture might face?

Design innovative approaches to solve these problems: sales projections prove wrong, unfavorable industry development occurs, manufacturing costs become too high, competition destroys marketplace (price war ensues), needed labor is unavailable, supply deficiencies develop, needed capital is unavailable, government interference arises, product/service liability occurs, problems with management or personnel arise, product/service development takes longer than anticipated, union problems arise.

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Operations

Salvaging assets What could be salvaged or recovered if any of the above risks do materialize and make the venture unsuccessful?

List what could be salvaged or recovered if any of the risk analysis events do materialize.

Value the assets at what the banker/investor could sell them for within 30 days. Include patents, inventory, accounts receivable, equipment, office furniture, customer lists.

Operations

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Operational Plan The key to successful venturing is making all the things happen that the CEO has promised for the management team, investors, bankers, and board of directors. The role of an operational plan is to unify a company to accomplish all the necessary tasks that must be done in the necessary order.

The operational plan is an action document, in contrast to the business plan, which is essentially analytical and contemplative. The chief executive officer (CEO) uses it to coordinate the efforts of all phases of the enterprise toward achieving the venture’s goals for 12 months.

The key to successful venturing is making all the things happen that the CEO has promised for the management team, investors, bankers, and board of directors. The company must be unified to accomplish all the necessary tasks that must be done in the necessary order.

This is the role of an operational plan.

Moreover, at the end of the fiscal period, how are the CEO and management team to be evaluated fairly and accurately without some benchmark against which to measure their performance? The operational plan is such a benchmark.

At the start of the 12-month period, the CEO develops the operational plan, agrees to its execution, and then sets out to do the job.

Each month, the operational plan is used to compare the monthly performance against the agreed-upon targets. The operational plan is based on hard, realistic, tangible, achievable goals that must be reached if the company is to achieve its sales and profit objectives.

What a company accomplishes in the first year of operations directly affects what it will do in each year thereafter. What it does in the first month affects each month’s operations thereafter. Thus, the operational plan is a carefully written, concrete, monthly plan of activities for each unit in the company. It should leave no room for doubt in the mind of the CEO and the management team about what must be done each month of the year. At the end of each month, the CEO and management team will know how they stand.

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CEO Excuses The success of a company depends greatly on the planning skills of the CEO. But many times the CEO has excuses for not writing the operational plan. No excuse is acceptable.

CEOs tend not to write operational plans; either they don’t allocate the time or think that conditions change too quickly. They think up numerous excuses: “I carry all the ideas in my head.” “My business changes too fast.” “How can I plan? My company venture is too small.”

“When there are only a few employees, why waste the time planning?” “As a CEO, I am too busy to plan. I have to be everything from the janitor to the sales manager.” “How can I plan for a year? I don’t know what will happen next week.” “I don’t want my managers to know that much about my company venture. I’m the driving force.”

An attempt was made to convince a CEO of a publicly held venture—who is an exceptionally bright and able driving force—to at least install some budgets as a beginning of an operational plan. He kept insisting that he could not plan operations because things were moving too fast. The firm kept growing until he had to hire a financial officer. He was lucky to have hired a good one. One of the financial officer’s first jobs was to install some good budgets. The company is now moving faster and is much bigger and more profitable. Even small, fast-moving operations can and should use an operational plan.

Operations

The first time The first operational plan is the most difficult and takes the most time. Subsequent ones become significantly easier to write and implement.

The CEO must train the management team members to provide the necessary information to plan the company’s future. They must be taught how to do their own operational planning. This can be time-consuming and is not without some distress. Many operating managers resist formal planning. They do not want their feet held to the fire by a document to which they have agreed.

For example, a small cooling-tower manufacturer, which was a subsidiary of a much larger company in another line of trade, had hired a new sales manager who previously had been a city manager. A planning meeting had been called by the firm’s five regional managers. Sales were terrible. The subsidiary was losing money.

Everyone has heard about sales quotas.

They are a simple part of the sales-planning process. Nearly every sales manager assigns some sort of sales quota to the sales operating units in the field. This company had no quotas.

A strong recommendation that sales quotas should be set for each region was met with rebellion. The regional managers had an ample supply of reasons why quotas were not needed, would not work, and would be met with resignations.

The regional managers were the crux of the problem. The new sales manager was intimidated by them. He was totally inexperienced; thus, he was afraid of the five regional sales managers.

Instituting planning efforts the first time can be very difficult. Much time is required for setting up the planning apparatus because each business venture requires a little different format and planning process.

Operations

Change is constant Rather than being an excuse for not creating an operational plan, constant change is one of the major justifications for using an operational plan. Changes can be accommodated easily and quickly in the operational plan. As changes occur, items are either added to or removed from the plan. The impact of each change upon each item in the plan can be assessed formally, with little chance that some loose ends will be overlooked.

Most organizations recognize change only after the end of the fiscal year, when the accounting department gives out the report cards. Then some drastic changes are usually forthcoming.

In the operational plan mode, changes are recognized monthly and appropriate actions taken. This applies to small and large companies. It is easy for the CEO to install an operational planning system with a smaller company. There are not as many people to train. He or she does not have as many activities to forecast. It is good to get the system in place and working while the company is small, so it is in place when new people are hired as the business grows.

Controlled, planned growth seems to work better than uncontrolled, random growth.

Many times, the successes of small companies led them to disaster as they grew “too fast.”

What is “too fast”? It is faster than what was tacitly planned. With sound operational planning, such small, rapidly growing companies will be less likely to get caught in growth squeezes. If a sales increase of 50 percent is planned, the money and resources with which to finance operations at that level must be planned to accomplish that goal.

Fear of salary demands “Hey, the company is making a lot of money. I want some of it.”

Such logic is common. While the astute CEO tries to avoid hiring people who think this way, a good operational planning system can go a long way toward rationalizing the firm’s wage structure. The plan shows how much money the company can afford to pay if certain results are realized. It can tie incentive pay to the achievement of the plan. Thus, the CEO can tell management team members that if they do what has been agreed to, then they will be rewarded accordingly.

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Loss of power “It is my company and I’ll run it any way I want.”

Power is real. Many people relish it. They hold on to it tenaciously. They view the operational plan as a bestowal of power over subordinates. CEOs often want staff members involved in the company to come to them continually for orders. Then they wonder why they are so busy and why nothing happens when they aren’t there.

The operational plan directs each organizational unit’s work; thus it relegates the CEO to monitoring performance against the plan. It is a management style that differs significantly from that of a one-person band. But it is the only way in which a small firm can penetrate that real, but invisible, barrier that seems to block small firms from growing into big ones.

Security from employees leaving Many CEOs tend to fear that their staff members will quit and go with a competitor or start their own businesses. CEOs rationalize that if their management people discover how profitable this business is, they’ll leave and start their own. The CEOs think, “Why do I want to provide them a road map for doing so? Why do I want to develop their management skills?”

Yet one of the firm’s major assets is its people. Adept, able people get the job done.

Businesses cannot grow without them. Yes, some employees will leave. That is inevitable.

However, it is likely that fewer of them will leave a well-managed company in which they are part of the planning process and have available to them tangible evidence of their contribution to the company’s good.

Recognition of their efforts will more likely be forthcoming with a well-administered operating plan than without one.

Tax irregularities Games with tax authorities are not unknown.

Some CEOs do not want their employees to know all of the financial information because of the fear they could someday report them to the authorities. Businesspeople who try to evade taxes are exceptionally protective of their financial information. They will opt to do without an operational plan because it requires letting their managers know about the financial side of the business. This strategy is double jeopardy.

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Purpose of the Operational Plan A good operational plan should accomplish several major functions. The operational plan: ■ Forces the CEO to plan the coming year in detail.

■ Provides a detailed road map for the coming year.

■ Communicates and coordinates activities.

■ Provides a control and monitoring tool.

■ Creates a peer-pressure management style.

■ Facilitates managerial continuity.

■ Shortens management meetings.

■ Provides an objective evaluation tool.

■ Provides information to infrastructure.

Forces the CEO to plan the coming year in detail The entire process starts with the CEO’s recalling the company’s overall goals. Then he or she formulates a list of very specific goals that must be met if the enterprise is to make satisfactory progress toward its overall goals.

Specifically, what must be done to stay on track?

There may be some slight changes in the company’s annual goals as the second-tier managers are brought into the process. These can be easily accommodated. A CEO often sits down with the management team to discuss company goals without giving sufficient thought to his or her own goals for the venture.

This can be a mistake. The final goals may end up contrary to his or her desires and those of the corporation. After all, the CEO is the driving force and should not be saddled with goals with which he or she is not comfortable.

When the CEO selectively ignores goals that he or she does not agree with, the team loses faith in the process. The goals become meaningless, and employees rationalize that the CEO is going to do as he or she pleases, so why the pretense of group participation?

Goals that are agreed upon must be met.

There is no room for “window dressing” or “high hopes.” The organization must accept as dogma that the plan will be met, that the goals will be achieved. Thus, team members cannot be allowed to come to the meeting with their own agendas. The discussion should start from the CEO’s agenda.

Operations

Provides a detailed road map for the coming year Many managers come to work each day wondering just what they will do. They are reactive, responding to whatever fires are burning, rather than being active and making things happen.

The aggressive modern entrepreneur recognizes that he or she is a driving force who makes necessary things happen if the organization is to achieve its goals. But there is always a distance between where the enterprise is and where it wants to be. A traveller doesn’t want to be sitting beside the road somewhere in Virginia when he wants to be in San Diego. A road map is essential.

And that is precisely what the operational plan gives the CEO—a road map on how the organization will move from where it is now to where it wants to be by the end of the year. It’s a way for the CEO to say: “We want sales of $20 million, a profit of $4 million, and a successful introduction of our new line of products this year; now, what must every unit do to achieve those goals?” The procedure for developing the operational plan forces each operating unit to consider in detail what it must do if the company is to reach its goals, month by month. Each unit must promise that it will be so far down the road by the end of each month.

Even with a detailed month-by-month road map, it must be recognized that there will be detours. Things happen. Everything does not always go as planned. Changes must be made immediately. For example, Steve Taylor of the Xerox Venture Capital Group observed, “Yes, planning operations is good as long as the CEO and the investors recognize that, as they go down the road, some great opportunities are encountered that should not be ignored. They shouldn’t fall in love with an operational plan to the extent that they ignore fortuitous developments.”

Operations

Communicates and coordinates activities Everything must happen in a meaningful sequence. Goods that are not produced cannot be shipped. Goods that haven’t been sold cannot be shipped. Avoid advertising products or services that are not available for sale.

Production cannot be increased without hiring some new people or buying more goods.

During the heat of battle, one of the most difficult tasks of the CEO is getting all departments pulling in the same direction. A new product is in the development stage.

Research and development (R&D) must coordinate with marketing to make certain that the marketers do not get ahead of themselves and start selling before the product is ready. Yet marketing cannot wait until R&D releases the product for manufacture, or it will take too much tool-up time to get the marketing machine going. Some things must be in motion prior to R&D release. In the same vein, production must have some idea of when the product will be coming its way so that it can plan for its manufacture. This is called coordination. Often termed critical path management (CPM), these techniques are used in the operational plan to accomplish it.

The CEO must have at his or her fingertips monthly information on how each department is progressing in its tasks related to preparing for the new product or service. Who is falling behind? What roadblocks have been encountered? Monthly management meetings address the resolution of such problems. But first the problems must be identified.

Department managers may be reluctant to bring their deficiencies to the attention of the management group. The operational plan does it for them. “Hey Joe, you were supposed to have the package-artwork proofs ready for our approval this week. When will we see them?”

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Provides a control and monitoring tool With a written operational plan in hand, the CEO is better equipped to deal with each department daily. He or she knows what the department should be doing, what should have been done, and what should be talked about. And the CEO should know what the department should not be doing. If he or she walks into a department and there is some work going on that doesn’t seem to make sense in light of the plan, some questions may need to be asked. Or if the CEO knows that a certain large order is due to be shipped by the end of the month, yet it sits in the corner uncompleted, some action may need to be taken. Some stimulating questions need to be asked to find out what is happening.

After the CEO does this a few times, employees will learn that he or she is on top of everything that is going on. Thus, they are less likely to let things slip. Employees are trained to be orderly or trained to be sloppy, depending upon management’s attention to what goes on. If the CEO does not make an effort to learn what is happening in the firm, the employees can conclude that he or she does not really care much about it.

Mack Davis recalls a problem he had as CEO of Synergetics International: I would take my operational plan book under my arm, and each Monday morning I would walk around to each of my departments to talk to them about what they were working on. I stressed at the time how important what they were doing was to the success of the enterprise.

One morning, I went down to talk to the vice-president of production. I knew that one of his tasks for the month was to test some returned computer boards to find out what was wrong with them. We were getting killed with them in the field. I asked him, “How are we doing?” He said, “No problem.” So I went out to the testing area to visit with the testing engineer and made the comment, “Well, we should have the problem of faulty computer boards solved right on time. We’re in great shape!” He gave me a funny look and said, “What are you talking about? I haven’t seen any computer boards.”

The cat was out of the bag. The VP was behind in getting out shipments, so he was ignoring the computer-board testing. Yet 24

clearly on the operational plan for the month was that the prime goal for production was the resolution of the computer-board problem. Why ship out any more mistakes?

A mistake had been made. It was right there in black and white, and he had signed off on it. No way could he wiggle out of it. If I hadn’t had my operational plan book, the whole problem could have escalated to who knows where.

Creates peer-pressure management style When the CEO critiques a subordinate, often this is not taken well. The subordinate’s defense mechanisms may go into full throttle to deny or transfer the blame. When the same manager is held accountable by his or her peers for the monthly performance of the operational plan, the CEO seldom has to say a word.

The stronger managers will help the weaker ones develop, since they know that their own performance depends upon the performance of all other managers in the system. Davis recalls: We were coming to the end of our quarter.

It was important to ship a lot of products if we were to meet projections. I went down to the office one Saturday morning, and there were eight of my marketers dressed in Levis down in the factory, packaging products for shipment. I went over and asked the marketing director, “How come you’re doing this?” He said, “If production is to achieve its goals, it needs some help. I’m not about to let any of our management team walk into our monthly meeting without having met its goals.”

One of the real joys of working with an operational plan is that often you can just sit at the monthly management meeting and say nothing as the various management-team members judge themselves against the goals for the previous month.

In the first month at ZDC, another of my ventures, there were 16 goals, of which 10 were met. The second month had 15 goals, of which 12 were achieved. When I congratulated the management-team members on their achievement, they confessed that there was no way that they were going to walk into the meeting to face their peers without having met their goals.

Davis discovered that peer pressure is far greater than boss pressure.

Operations

Facilitates managerial continuity People resign. People retire. People are terminated. Sometimes they are key managers in the company. Their replacements usually know little about the situation. It takes a lot of time, often critical time, to bring a new manager up to speed. That training time is greatly lessened with an operational plan. A new manager can immediately see what has been done and what needs to be done and can gain an overview of the entire operation by studying the operational plan.

Shortens management meetings Meetings have a bad reputation. They often ramble on with little accomplished. A good operational plan goes a long way toward halting such nonsense. It provides the agenda for the monthly meeting. How well did each department meet its goals? If not, why not?

And what is going to be done about it?

Everything is focused around the operational plan: how well it’s being met and what changes need to be made in it.

Similarly, board of directors meetings are shortened and made more effective if the board has been furnished with copies of the operational plan. The plan helps them understand what the organization has agreed to do and how well it is meeting the objectives.

Provides an objective evaluation tool The work of each person must be evaluated if equitable rewards are to be bestowed. But how, on what basis? Often rewards are a result of prejudices, personal preferences, offhand observations, or some other subjective factor.

The operational plan provides an objective basis upon which to reward staff. Make a deal with them. Execute the operational plan as agreed upon, and objectives should be met.

Failure to meet the expectations in the operational plan negates the agreement. Mack Davis relates an example:

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Often a worker would come up to me and say, “I don’t like to work with my feet held to the fire. I work better without pressure.” I say, “Fine, then you don’t like to be evaluated on an objective basis, so when it comes time to reward you, we’ll do it subjectively. You’ll get whatever I think you deserve.” That always gets the workers’ attention. They quickly get the picture.

In this way, Davis stressed to his employees that the operational plan provides them with protection. They had proof that they were doing their jobs well.

Provides information to infrastructure Entrepreneurs give their operational plans to bankers, CPAs, investors, employees, suppliers for credit, and potential distributors. They use it at every turn, and it works well. These people are impressed with this professional management approach. It illustrates that the managers of this firm aren’t a group of amateurs playing around in business. They are serious players who know where they are going. In sum, the operational plan can be used to lubricate relationships with external organizations. The message: Get on board before you miss the boat.

Bankers are particularly impressed. Mack Davis relates an example of when he went to the bank for a sizable loan to support his firm’s growth for the coming year. He took the operational plan to the loan officer and walked the loan officer through the year step-by-step and showed him why the loan was necessary.

Davis then informed the banker that at the end of each month he would show exactly where the business was against the plan, not only financially but how it was achieving goals that would affect future financial needs. The banker explained that most people provided him with financial checkpoints but never gave him a tool with which to monitor operations outside the financial arena. The loan was approved. Loan officers should make it mandatory that all firms requesting a loan provide an operational plan. Then it could be reviewed monthly to track the business’s progress.

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Content The operational plan should include the CEO’s resume, an organizational chart of key employees, corporate goals, financial data, and departmental planning formats. Each of the sections will be examined in detail, including how to prepare them, what they contain, and how to use them.

CEO’s resume While it might seem a bit presumptuous to begin the operational plan with a statement about the new venture’s driving force—the CEO—there are good and forceful reasons for doing so. First and foremost, the outside readers and users of this document hold the CEO responsible for the execution of the plan.

The banker does not look to the marketing manager or the production head for explanations. Not much money is borrowed on the strength of the production manager’s credentials. The readers want to know a great deal about the person who is going to make all these wonderful things happen. Who is this person? What reasons are there for believing this plan? Do the credentials lead people to believe that he or she can accomplish the plan?

So the operational plan begins with selling the CEO. Second, when the plan is presented to other people, the first sections of it—that is, the management team, the corporate goals, and the overview of the financial section—must be presented by the CEO. It is imperative that the CEO understand the financials inside and out even though other professionals may have developed them. If the CEO indicates the slightest ignorance about them, much credibility is lost. On the other hand, much credibility is gained if the CEO demonstrates an intimate knowledge of all aspects of the company’s financial performance. The resumes of each of the other key employees appear at the beginnings of the sections of the plan for which they are responsible. To bunch them together destroys their effectiveness. It overwhelms the reader with resumes. Instead, good plan writing requires that the reader get only what is needed at the time.

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Organizational chart of key employees The readers want a cast of characters for the drama that is about to unfold. The operational plan should provide an overall picture of the management-team members and how they relate to each other via an organizational chart.

There may be some empty boxes because some players have not yet been hired. Still, the functions should be presented and the types of people being sought to fill them, when they will likely come aboard, and how much they will probably cost should be indicated. The readers should be informed that the CEO is well aware of the management needs and is on top of the situation.

One banker related the following story.

I was looking over this operational plan and noticed that the company had no financial officer even slotted into the organizational chart. I inquired about the vacancy and discovered that the CEO had not been giving any thought to hiring one.

Since the firm was now big enough to afford one and certainly needed the services of a good financial officer, I found the CEO’s attitude very disturbing. I had to tighten the reins on our commitments to the company, for I feared some financial crunches down the line. The CEO was not managing his cash flow well. He needed some serious help with it but was not even thinking about this problem.

Corporate goals While the goals for each company will vary from one another significantly, there are six common areas that must be addressed: market needs, product needs, financial needs, operational needs, personnel needs, and investor and owner needs. Each of these is discussed below.

Market needs Markets need attention. They have needs; what are they? Perhaps there are some markets that need more promotion. Perhaps there are areas in which distribution is spotty or inept. What new markets have opened up that should be explored? The list could go on at some length.

All sorts of things take place each year in each market that could affect the corporate goals.

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Product needs Products require development. They need changes if they are to remain competitive.

What do they need? The goals in this area should be clearly set forth. New product lines may need some improvements based on early customer feedback. Some R&D may be required in certain areas. Perhaps the firm wants to examine some new technology. All of these things require goals for the technical people; otherwise, the CEO will likely be displeased with the output of the technical side of the business. Some things will come out of the lab that are not in the game plan. Engineers like to work on things they are interested in doing, and those things may not be the same things the CEO wants done. The “techies” need to be accountable for things that they must do for the coming year.

Financial needs The operational plan should target the company’s sales volume, gross margins, and net profits for each division, product line, or business unit in a statement such as “We will do $20 million net sales with a 42 percent gross profit and a 15 percent net profit after taxes.”

Then those figures should be broken down by departments and staff members given dollar goals to reach.

Total goals should be set first, and then the departments can set their budgets based on them. It is imperative not to try to build the overall figures by compiling the budgets of subordinates. They are far too kind to themselves. They should be told what the big picture is going to be, and then allowed some time to figure out how they are going to reach it.

Gross margin targets are particularly critical. A case could be made that they are far more important than sales goals. Up to a point, would the CEO really care what the sales volume is if he or she were handed a $10 million gross margin? In their quest to make sales volume, many firms cut prices to the extent that the resulting gross margins will not allow a profit to be made. Remember—the key to profit is gross margin, so a goal should be set for it.

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The firm’s gross margin will establish the goals that will drive the action plans of almost every department. It affects product mixes, customer selection, product quality, expense budgets throughout the venture, and the like.

Every increased dollar in gross margin will go directly to the bottom line (assuming a static expense budget), but a dollar increase in sales volume may result in only a 30 cent increase in profits. Moreover, the costs of the sales increase may exceed the results, while the costs of getting a higher gross margin may be slight.

Operational needs As the venture grows, it needs many things— new procedures, new control systems, and new equipment with which to implement them. It is generally unwise to wait until after the growth has occurred to introduce new systems for controlling inventory or cash. The horse may be stolen before the barn door can be locked.

Plan for the barn and locks before the new horses arrive, not afterward.

Often, the CEO, in his or her strategic planning endeavors, overlooks the operational planning that must support the grandiose conceptual thinking.

Personnel needs The plan should address such matters as salaries, bonuses, incentive programs, new managerial positions that need to be filled, employees that need to be hired or terminated under the new plan, and employee-benefit programs.

Investor and owner needs What dividends will be paid? How will loans be paid off? What securities will be sold? What sources of funds will be used to finance operations? Any change in capital structure should be set forth.

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Financial data The overall targets have been set. Projected sales, gross profit, and after-tax profits have been determined. Now the department heads must go to work. With those goals in mind, the head of each organizational budgeting unit must develop the plans pertaining to his or her operation.

The documents that will be produced are as follows: ■ Department budgets for the year ■ Staff projections by the month ■ Capital expenditures and depreciation ■ Cash flow projections for the year ■ Profit and loss projections for the year ■ Balance sheet projections for the year ■ Five-year growth plan In order to develop these documents, each department head must submit certain plans and projections for his or her unit.

There is a certain order of work that must be followed: ■ Sales budget ■ Production plan ■ Expense plan ■ Staffing plan ■ Capital expenditure plan ■ Five-year plan After these plans are completed, it is easy for the accounting department to develop the financial data.

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Sales budget The sales budget or plan must be prepared by the sales manager, who works in conjunction with the sales force and the head of marketing.

It must be done in great detail, not in aggregate dollars. It does other people little good to be told that the new venture will sell $3 million of goods in January. What models, what sizes?

Perhaps a monthly projection is too broad for some operations. Weekly or even daily projections may be needed, based on the size of the venture. Thus, the sales manager must first submit the sales plan before the others can get their planning under way.

Some of the questions that need to be addressed: How are the sales going to be paid for? What promotions will be forthcoming?

What prices will be charged? What warranties are to be made? What return policies will be recognized?

Production plan The production plan takes the sales budget and from it plans what must be produced, when it must be completed, what must be purchased to do so, and what must happen in terms of people and resources to accomplish what is planned. The production plans are a wealth of critical financial information. From them, the cost of goods sold is developed, along with inventory levels, payables, and product-cost information. In turn, these figures are fed into the projected financial statements.

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Expense plan Most expenses are highly predictable and can be furnished by the controller or chief financial officer (CFO). The department heads budget the expenses directly connected with their operations. This phase of the operational plan is perhaps the easiest to formulate. Naturally, expenses are related to sales volume. If sales volume is planned to go up 30 percent, telephone costs will rise, and so will most other costs. It costs money to do business, and the more business conducted, the more operating money required.

Avoid the trap of thinking that most expenses are fixed, that is, not related to sales volume. While they may not vary directly with sales, they do vary. Even the copy machine costs will rise as activity levels increase. Many expense plans assume a level amount of monthly expenditures for many general expenses, such as telephone, postage, supplies, when, in reality, they go up with volume.

The wise CEO will not accept mere dollar amounts for these expenses. Each must be supported with an explanation of how the amount was derived. What were the assumptions? Employees cannot use unsupported numbers. If that happens, then the entire process becomes wishful thinking, instead of careful planning.

Staffing plan The CEO sets the salaries and the incentive and benefit package for the department heads in conjunction with the human resources department. The department heads should have input on the people who report to them.

However, the CEO must make certain that the plans are in line with one another. Trouble arises when one department head is able to obtain better salaries for staff than others. The human resources department will strive to ensure internal pay equity.

While larger firms have human resources departments that are involved in pay equity, the management of small and moderately sized companies must perform these functions for themselves. Fortunately there is often much virtue in doing so. For one thing, employees

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clearly recognize who is paying them. The power of the department heads is enhanced if the staff members know that pay recommendations begin and stop with their supervisors.

Since payroll costs are usually a substantial portion of a department’s total costs, it makes the manager sensitive to the number of people hired and their salaries. Managers know that holding the line on these costs is critical if the business is going to be able to achieve its goals in the total financial plan. It is all too easy for “budget hogs” always to be pressing for more and more people to get the job done. “We need more people if we’re going to get out the work on time!” The typical response is, “OK, hire them if they are in your budget! If they’re not there, then you have a problem.” Naturally, each of the department budgets should be carefully studied and modified by the CEO and financial department, in concert with the department manager, to force it into alignment with all other departments in the venture.

Remember, however, that not all firms require this degree of coordination, especially if the venture is relatively small.

The first staffing-plan submittals are frequently greatly overestimated. So a lot of give and take is necessary in the salary-setting sessions. The entire process works best if each department head really feels that he or she formulated the staffing plan. Thus, each of them must sign off on whatever is finally agreed upon. If the CEO dictates a staffing plan that department heads consider totally unreasonable or impossible, then many of the benefits of this process are lost. The department heads will no longer feel much obligation to meet the staffing plan. Indeed, they may harbor a secret desire to prove to the CEO that the projections were wrong. The department heads will want to prove that they were right and that the boss does not know what the real world is like.

Some organizations go to great lengths to let the department managers suggest salary increases and incentive systems for their people. This makes a lot of sense. One perplexing phenomenon often observed is the tendency for insisting that all employees in the

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organization be subject to the same compensation structure regardless of the realities of their work. However, it is close to impossible to motivate sales representatives the same way a production worker is motivated. How can an office worker or the shipping clerk be motivated? It is best to let the department heads develop their own incentive systems as long as they stay within the confines of the overall payroll budget for their departments. Sometimes firms need creative human resources professionals to assist in devising a workable compensation and incentive system that will maintain pay equity within the corporation but still will offer the needed incentives to the management team.

One approach is to divide the payroll budget into two different funds—one for the regular salaries and the other for the incentive program. A strong case can be made that everyone should get some reward if the department meets its budgets. Perhaps other rewards should be forthcoming if the venture meets its total plan for the year. As the year progresses, this section proves of great value to the manager in dealing with special requests by the department managers, such as, “I need to give Mary another $200 a month.” The manager looks at the operational plan book, and if the money is there, fine; if not, “Where is that $200 going to come from? It is not in your budget.” The manager has a problem for which a solution must be developed lest the budget be rendered a foul blow. While many managers express the belief that staff members are the most valuable asset, few take the time to plan for their care and feeding.

A well-presented staffing plan answers one of the investor’s biggest fears—inflated salary expenses. Investors have been victimized in the past by managements that took the money and then paid themselves high salaries to the detriment of the enterprise. For that reason, most outside investors require caps on wage and salary plans. Management does not get its rewards until investors receive theirs.

The monthly staffing plan gives investors a quick look at how lean the company is running as well as a way to check monthly to see if the firm is overspending its budgets. Ventures often require that a few people do a lot if the ventures are to succeed.

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Capital expenditures plan As new projects are undertaken, additional equipment and facilities may be needed. As ventures grow, they usually need additional staff, space and equipment. Old equipment wears out and requires replacement. The department managers should relate their operational plans to their needs for additional equipment and facilities.

Unfortunately, many department managers do not believe that capital expenditures directly affect the profitability of a company to a significant degree because their costs are depreciated over a span of years. Such managers do not understand the financial reality of cash flow accounting. All capital expenditures not financed over time are directly subtracted from the firm’s cash flow projections.

There are CEOs who believe that all capital expenditures should be treated as direct expenses lest their impact on the firm’s cash position not be clearly appreciated by the operating people. One CEO said, “My engineers are equipment crazy. They always want to buy the latest doodad that hits the market. When I scream about the costs, they mumble something about all the money we’ll make depreciating the stuff. They just can’t get it through their heads that when you spend money on something, it comes out of the cash account, and it doesn’t really matter what you call it.”

Before the cash flow impact of the capital expenditures plan can be determined, the financial department must decide how the equipment will be acquired: outright purchase, installment purchase, or lease. Much leasing takes place solely for cash flow reasons.

Then, the CFO must prepare a detailed depreciation schedule on both the new and old equipment. Bankers are prone to request a look at it to see if the firm’s profit and loss projections are realistic. After all, if a CEO wanted to make a company look more profitable than it really was, unrealistically low depreciation rates could be used to accomplish this.

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Five-year plan CEOs decry the difficulty of planning even one year ahead, let alone five years. Who knows what will happen five years down the road, so why prepare plans? The reason is that investors, banks, and boards of directors want them. It gives them some comfort to think that CEOs are looking ahead as they should and not operating daily by the seat of their pants.

Moreover, investors and banks want a fiveyear plan with which to evaluate the firm’s ability to pay off its debt or liquidate some other obligations. The investors want to see where it will make their money. So the fiveyear plan is a dream; give them a dream.

The first page of the five-year plan contains the assumptions underlying its projections: What is going to happen to the new venture’s markets? And how about industry trends, competition, management requirements, financial needs, projected after-tax profits?

The second section presents the yearly cash flow, profit and loss, and balance sheet projections.

All the separate plans should be delivered to the financial department so they can be totaled up. After the shock of seeing the totals, the reality of adjustment sets in. It is time for meetings with each department head that will ultimately end in a realistic set of plans that fits into the overall corporate goals.

It would be easy just to slice the plans up to make them fit into the corporate reality. However, much damage is done by such measures. First, the department managers conclude that it is foolish to waste their time on the planning process if the end result is really determined by a quick CEO flick of a pen. “Why should I spend time on this game, when the CEO is going to give me what he wants to in the end? Let’s all save time—tell me what I have to spend.”

Second, real damage can be done to operations by budget cuts done by CEOs who do not know the realities of the department’s needs. What does it really take to get the job done? The manager on the spot should be the one to know what can be cut and what should be left alone.

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Third, the department managers are let off the hook. “I didn’t see the budget. You did. I told you it couldn’t be done. You wouldn’t believe me. See, you were wrong.” Those usually unspoken thoughts predominate the department managers’ minds. Indeed, some of them may subconsciously set out to prove the CEO wrong. They will work hard to make the budget not work.

It’s the CEO’s job not to let the financial department perform the budget negotiating with the department heads. The results may be counterproductive to company goals. Bear in mind that most operating people are nearsighted. They don’t look very far down the road. Financial departments have not been famous for their vision.

Horse trading will occur. “I’ll not go to five trade shows, but you can’t stay in $300-a-night hotel rooms.” The CEO should let the managers meet and pound out the costs. But the CEO, not the financial department, must be in control of the final result.

Goals should not be set in concrete. They should be realistic. Sometimes after many cuts of the budget, it still won’t fit into the company’s goals. The projected profit cannot be reached. The goals may need to be revised.

They were unrealistic.

The end result of this process is communication. While the focus has been on generating numbers, the real process has been dealing with communications. Each member of the management team who participates in this planning process comes to understand the workings of the company and how everything fits together. All learn about the other departments. They learn how to work with the other people on the team. So it should be a team project.

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Department planning formats The operational plan for each department is established for the year by months and includes the following: ■ Resume of department head ■ Assumptions on which the plan is based ■ Monthly action sheets ■ Project-planning detail sheets ■ Department head signature Marketing department planning sheets contain additional detail of sales forecasts for each product both in units and dollar volume.

Often price forecasts are critical.

Resume of department head The qualifications of the department heads are as important as those of the CEO. After all, they are the people who really will do the work. Outside readers such as investors want to know about the people who are to do all the tasks presented in the plan. All the fine plans in the world will not become realities if the people who are charged with doing the tasks are not able to perform.

Assumptions on which the plan is based Every plan is based on assumptions, either explicit or implicit. If assumptions are recognized and recorded, they are explicit. If they are not recognized, they are still there but are implicit in the venture. Implicit, or unrecognized, assumptions can cause much mischief in management. The availability of sufficient money might be implicit in a plan; subsequent reality might disclose a shortage of funds on which to operate. Thus, the plan becomes fiction, for the reality of the basic assumptions was not tested. They were not made explicit.

Moreover, people reading the plan will not know most of the assumptions that operating personnel take for granted. So the plan must bring out the framework under which the firm operates. While the overall company goals operate under its general assumptions, each department functions with its specific set of assumptions. For example, the CEO and management team may assume a revenue flow of $50 million in the company’s goals, but the marketing department may supplement that general assumption with some specific assumptions:

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■ ■ ■ ■ ■ ■ ■ ■

Continued market acceptance of product.

No unusual competitive activity.

Price stability.

No strikes in customer plants.

No product-liability suits.

Two new market areas will be developed.

One new product will be introduced.

Two old products will be dropped.

Monthly action sheets First, what are the department’s goals for the month? What does it intend to accomplish by the end of the month? Often these goals are repeated each month. For example, perhaps the marketing department intends to add one new distributor each month.

The goals cannot be vague; they must be specific. “To increase sales volume” is an unacceptable goal. The goal should be stated: “Sales will be increased by $200,000.”

For example, one venture had a marketing VP who was young, aggressive and impatient.

Rick wanted to conquer the world in a day.

When he turned in his first plan, he had listed 45 goals, all sound and needed. The CEO told him to go back to his office and list them by month, giving how much time it would take to accomplish each goal. He said, “Don’t forget, Rick, you’ve got to figure in your vacation time, holidays, and unforeseen sick leaves.”

Five days later Rick returned with the statement, “I’ll have to work 23 hours a day, seven days a week, 52 weeks a year to do all this.” He got the point.

The CEO then said, “Now, Rick, go back and select only those goals that provide the most results to enable us to reach our goals.”

Many things are worth doing, but they don’t really provide that much to the bottom line.

The saying is, “You are looking for the most bang for your buck.”

Rick reappeared later with 14 goals all directly related to the goals of the company for the next year. The lesson is: Let department heads go through the exercise of pruning their goals. The CEO should not do it for them.

Second, the projects for the month must be identified. A project is a specific activity to be completed. It has a beginning and an end. This is in contrast to the unit’s normal, routine operations of getting out the business,

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whatever it may be. Each department head should think in terms of projects that need to be accomplished if the goals are to be reached.

Each project must be goal related.

The manager must learn to think in terms of isolating each goal and then itemizing the projects needed to accomplish it. For example, if sales are to increase by $200,000, what projects must be completed for that to happen?

Perhaps a new advertising agency must be selected, a new distributor picked, and two new sales representatives hired.

Managers must understand that many of their projects are intertwined with those of other departments. Marketing cannot proceed with its project of testing the market acceptance of a new product unless R&D completes the scheduled prototypes.

Everything must mesh together.

Third, the costs of the projects must be recognized. Each project must be priced. How much will it cost to complete? Not only must all expenses be recognized, but also any capital expenditures must be itemized. It is easy to list all sorts of needed projects, but many of them may cost more than they are worth. A cost/ benefit analysis should be explicit.

Make certain that all such costs are fed back into the financial plans and are approved by the financial department. There is no sense in starting a project requiring an expenditure of money if the funds are not available. Each project must be funded before it is started.

Project-planning detail sheets A sheet for each project should reflect the detailed planning for each project. It states the following: ■ Objective ■ Specific activities required ■ Completion date ■ Personnel responsible ■ Detailed breakout of costs ■ Detail of capital requirements Department head signatures All staff members must sign off on their work so they can’t claim later that they misunderstood what was expected of them.

They made the plan and agreed to it. Such identification works wonders with their sense of responsibility for the plan.

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Common MIstakes Several common mistakes related to newventure goals occur; they are related to faulty assumptions, insincerity, vagueness, longrange dreams, too many goals, unobtainable goals, and too rapid growth rate.

Assumptions. All plans are based on a set of assumptions as to what the future holds and what realities will exist within which the CEO must operate. Most assumptions are implicit.

They are there but lie unrecognized. However, if the assumptions are faulty, goal setting will always be faulty and misleading.

Insincerity. Sometimes management members set forth goals that they well know cannot be achieved. “Sales will be $100 million by 2002.” They will be delighted if revenues reach $20 million by then and will be looking to sell out if that happens.

If a goal is set, it should be meant. In other words, it will be done. The organization should be informed and should understand that the goals are serious enough matters not to be taken lightly. They are commitments.

Consequently, goal setting is not a frivolous activity undertaken to pacify outside parties. It is not window dressing. Indeed, a management team that sets unrealistic goals or ones that are obviously insincere will be severely downgraded in the eyes of its superiors.

Vagueness. “We will increase sales.” Great.

How much? A goal must be specific.

■ “We will have the best service department in the industry.” What does that mean?

How can it be measured?

■ “We will have lower expenses than industry standards.” It must have some numbers.

■ “Our goal is to sell 20 percent of the total market.” It should specify dollars.

■ “We will improve the employee-benefit program.” How will this be done?

Most company goal statements suffer from a terminal case of vagueness. They are so vague that there is no way to evaluate the success in achieving them. Is there a reason why management makes them vague? After reading the company goals, there should be no doubt in the readers’ minds exactly what the organization plans to accomplish during the coming year.

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These goals are the guideposts that all department heads use to develop their action plans. If they are given vague goals, vague action plans will result.

Long-range dreams. Commonly encountered long-range goals (aka dreams) should not be confused with operating goals.

The goals being described here are real oneyear goals that must be achieved if the new venture is to reach its long-range goals, whatever they may be. “We will expand our international business over the next five years.” What will be accomplished during the next 12 months to do this? Instead the goal should read, “Establish distribution in China.”

Too many goals. “The Christmas tree” or wish list of goals has something on it for everyone. Such lists are almost endless. They are most certainly useless. A statement of goals for a steel prefab panel company included more than 172 specific goals. These covered such areas as increasing the customer satisfaction index, reducing invoice cycle time by nine days, reducing shipping damage to the panels by one-fourth, improving employee satisfaction by two points, reducing employee turnover, increasing market share by 7 percent, moving into two new West Coast territories, adding three new departments to manage new product development, and an additional 164 goals. The list of goals had no prioritization, no implementation plan, and no individual assigned responsibility for each goal. The list of goals should be focused on critical success

factors, and be realistic and achievable. It is better to have a short list that can be achieved rather than a long list that accomplishes nothing.

Unattainable goals. What is the value of a goal that cannot be reached? Some CEOs believe that by giving people high goals, ones beyond their grasp, they will be better motivated. Experience indicates otherwise. The sales representative whose quota is unattainable rejects it and goes about business as he or she wants. If the management team rejects the company goals, the entire planning process will crumble. Team members must accept the goals as theirs. The management team must believe that goals can be accomplished with a reasonable amount of effort.

A manager of a women’s wear manufacturer complained that the sales goals he had been given for the year included the usual 10 percent increase in volume that had been the case for the previous 10 years. There was one hitch. The economy from which the company had obtained its revenues was in terrible shape. Sales were down 15 percent. The people revolted and rejected the goals. There was no way to reach the impossible goal.

Instead, management should have approached the year with the attitude, “We know it’s going to be tough, but let’s just try to maintain what we’ve been doing in sales volume but decrease our expenses by 1 percent. Now give us some solid action plans

Common Mistakes to Avoid When Writing the Operating and Control Systems Plan ■

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Inadequate system of accounting, failure to keep important business records Failure to establish procedures that will produce accurate records for the IRS Not having adequate inventory controls Failure to develop policy-and-procedures manuals in operating the business Failure to establish security systems to protect such critical assets as trade secrets and customer lists Failure to identify and prioritize major goals Failure to identify responsibilities of key management team

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Not developing a contingency plan when schedule cannot be met Failure to identify uncontrollable variables Failure to establish procedures that trace and control the flow of cash Failure to maintain control over accounts receivable Not developing a contingency plan when schedule cannot be met Failure to review and revise schedule periodically when conditions change Failure to identify key goals and to allow enough time to accomplish them

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to reach this goal.”

Too rapid growth rate. Rapid growth can cause serious problems. Often the totals set, while attainable, are too rapid for the good of the venture. Not only is too much pressure placed on the entire organization, but also the rate of growth may be institutionalized to an extent that it cannot be economically modified when the need arises, when the growth rate significantly tapers off.

Often the ambitious driving force, in the desire for quick success, builds a “house of cards,” a firm without a foundation.

Mack Davis relates: We had identified a huge market for one of our products in the power industry. I was eager to capture this volume as soon as possible, since we were planning a public stock issue, and such sales would have greatly lubricated the deal. The one drawback was that we knew it took about nine months to negotiate a deal with power companies. I had the notion that by throwing a lot of dollars into selling them, I could force a rapid rate of growth in this market niche. Thank goodness I had an astute product manager. He convinced me that while the market was available, if we were to try to penetrate it that rapidly, we would not only fail but would likely ruin the market for future development. So my year’s goal for that product manager was for him to contact four electric-utility companies each month to start the sales cycle with them. Two years later the company enjoyed a very nice market with them. During the year of sales calls, engineering and production had time to do their jobs properly, so our quality control was in place and working.

Operations

Sequencing the Preparation The management team should first meet to discuss the company goals for the coming year.

This often can be done better at a weekend retreat than at the office, where ongoing work flow can be interruptive. This should be a brainstorming meeting at which staff members should have freedom of thought to go wherever they want. Allow at least a week for the group to reflect on the session before assembling the members again for crystallization of their ideas into a set of company goals for the year.

Second, preparation of the financials should be started. The department heads should meet with the financial department to prepare the first-draft budget, staff requirements, and the capital expenditures needed for the coming year. The CEO should meet with the human resources department to process the staffing requirements and prepare the incentive programs for the department heads. The CEO should then meet with the department heads to work with the first draft of the budget. The meetings should continue until the budget is completed.

Third, the department planning formats should be developed by the department head in alignment with the budgets that were approved. A group meeting of all department heads with the CEO and the financial department should be held to ensure that all formats properly dovetail and that everyone knows what the other person is doing.

Finally, a meeting should be scheduled for formal approval of the final draft of the plan, at which time everyone signs the document. Now the plan is ready for presentation to the board of directors. Each department head should make a presentation of his or her plan before the board.

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Using an Operational Plan Book The time and effort spent developing the operational plan book was not just for window dressing to placate the investors, bank, and board of directors. It is not a document that, once done, is put on the shelf so it can be shown to others. It should be used daily.

The CEO should meet with the financial department prior to each monthly management meeting with the department heads to compare actual dollar performances against the projections in the plan. How are we doing? Who is meeting their projections? Who is not? Where are we having trouble? How bad is it?

Big deviations from projections, both overs and unders, should be examined. A marketing manager who planned to spend $50,000 for advertising in the month but who has spent only $2,000 is signaling that some trouble has developed. What is holding up the advertising? It is not so much that the lack of advertising is important but that the reason for its delay may be serious.

Many department heads do not like to come forward with bad news. Moreover, the worse the news, the more reticent they may be to come forward. Some may try to conceal disasters as long as possible, hoping that somehow they can get out of the mess. Often, the only way to detect the problem in the early stages is by discovering some derivative expenditure that is out of line.

Before meeting with the department heads, the CEO should research with the financial department the reasons for the identified trouble spots, and ask about what has been charged to each of the troubled accounts.

Sometimes it is merely that something has been wrongfully charged to it, or some other explanation emerges. Few things lessen the stature of the CEOs and their eventual effectiveness more than to continually confront department heads with implicit charges that something is wrong in their departments only to have the department heads easily prove otherwise. Eventually, if the CEO is continually shown the error by subordinates, he or she will shy from ever questioning their performance

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for fear of being proven wrong. It is important to be certain of all data before questioning others.

Look for trends! Suppose the telephone budget has been running 20 percent over budget for the past two months. Pull the bills and examine them. An unusual number of calls to Atlanta to a number that seems familiar is discovered. Oh yes, the new distributor has been contacted. Certainly, the phone bill will go up as operations are expanded. So what can be done? The telephone budget can be increased 20 percent to allow for the increased activity in the Southeast. That makes sense.

Unfortunately, what some CEOs do is enter the meeting improperly informed. They yell about how high the phone bills have been and that excessive phone calls must be stopped right away to get the budget back in line. Sometimes this is not a possible solution.

Budgets are in continual flux. They constantly change as conditions change. Thus, they need continual review. It is most important that budgets be quickly reevaluated if sales fail to meet projections. The whole idea of budgeting is to keep revenues and costs in proper ratio. And never forget, revenues are supposed to exceed costs.

Now the CEO is ready for the monthly review meeting, which he or she should monitor. The responsibility is to make certain that each department has achieved its goals and completed its projects according to plan.

As the department heads review their plans, if they have not performed according to plan, then everyone must discuss whether these goals or projects are worth doing. If not, they should be forgotten. If so, then they should be repositioned within the future plan.

As one department changes its plans, other departments may have to change theirs. If R&D has not yet finished with a new product, production and marketing will have to move their plans back for that item. Thus, it can be seen that the failure of one department makes life even more complicated for everyone in the group. People who do not do what they promised to do quickly become unpopular.

Peer pressure can be great, even overwhelming. The department heads fear their peers more than they fear the CEO. They have to deal daily with peers, but they can hide from the CEO.

Operations

If the CEO and the management team fail to meet monthly to check the progress of each department in meeting the plan and make appropriate changes in it, the operational plan will self-destruct in a few months. A lot of work will have been done for nothing.

At the end of each monthly meeting, weaknesses both financially and operationally have been identified. Those trouble spots should be closely monitored during the coming month, and the CEO must work with the department heads who have not performed up to plan. The efficient CEO working with an operational plan spends time working with the critical factors. The CEO who does not have a good operational plan tends to work with the business as a whole and does not know how to pinpoint the trouble areas.

Conclusion The operational plan is a carefully written, concrete, monthly plan of activities for each unit in a company. It is the instrument the chief executive officer uses to coordinate the efforts of all phases of the enterprise toward achieving the venture’s goals for 12 months. The operational plan is not a document that is done just to be shown to others. It should be used daily.

The role of an operational plan is to unify a company in order to accomplish all the necessary tasks that must be done in the necessary order to achieve success. It is based on hard, realistic, tangible, achievable goals that must be reached if the company is to achieve its sales and profit objectives.

Each month, the operational plan is used to compare the monthly performance against the agreed-upon targets—to answer the following questions: How are we doing? Who is meeting their projections? Who is not? Where are we having trouble? How bad is it? It should leave no room for doubt in the minds of the CEO and the management team about what must be done each month of the year.

Moreover, at the end of the fiscal period, how are the CEO and management team to be evaluated fairly and accurately without some benchmark against which to measure their performance? The operational plan is such a benchmark.

Operations

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