Combine experience and technology to increase business performance
When we first started in business my partners and I had no idea what business was really like and what pitfalls lied ahead.
To our minds, it was all about inventing or developing a product which we thought would be useful to a lot of people and therefore would sell in large quantities and generate a big profit. So, we pooled our resources together and set up shop. When development was finished and since the product was a computer peripheral (adapter card) and operating software (drivers) we had two choices:
Assemble the boards in-house, duplicate the software on floppy disks (does anyone here remember these?), add documentation, package everything in an attractive retail box then shrink wrap the box and place it in a master carton along with 23 more similar boxes, or have someone else (contract manufacturer) do all this work plus perform customer fulfillment functions. Which option was more appropriate? Without much debate we chose option one. It just seemed right to do everything ourselves. Besides, imagine all the extra profit we would be making by not hiring a contract manufacturer, not to mention protecting our intellectual property by not exposing it to strangers.
A year later we were relieved to hand all manufacturing over to a local contract manufacturer. Option one was no longer attractive after a year of struggle with in-house inventory procurement and inventory control, manual labor (all circuit boards were manually stuffed, soldered and cleaned), quality control, packaging, shipping, etc.
Was that the right choice? Probably, although to this day I cannot say for sure.
Why? For the simple reason that we failed to plan, that is, we did not analyze the two options carefully to see which one was more economically (and logistically) beneficial, and to what extent, given the potential scalability of the business and the various sales volumes and other business scenarios.
What’s worse, we did not plan the product line – what products to develop, at what cost and price and when to release based on potential market demand and acceptance, everything that a more mature company should be routinely doing. Other financial planning and budgeting were nonexistent. We ran the business by the seat-of-our-pants.
All this sounds very trivial and obvious to anyone with even minimal business experience but at the time we simply didn’t know any better.
While the majority of business owners and managers, both in finance and operations know the importance of regular planning, budgeting and analysis, I, many years later, am still surprised to see how many companies inadequately perform these functions or in the case of very small companies don’t do them at all.
Why is planning paramount?
Planning followed by a corporate budget helps an organization establish a direction in which to go, a destination and the detail on how to get there. It’s like using a roadmap where the route is clearly marked, then following this route when travelling toward the destination.
The plan should be based on company vision, supported by realistic market analysis, good understanding of product or service development, their costs and duration, marketing effort and costs, required administration, and incorporating everything into a plan that spans one or more years.
Having an approved plan, a documented budget is then more naturally developed, shifting focus on execution of the plan and its related budget. This enables intelligent analytics and empowers the decision-making process. An FP&A (Financial, Planning and Analysis) software solution is a set of tools essential to performing these tasks, as no manual process or other than a purpose-built solution (e.g., a spreadsheet) can facilitate the required sophistication, adaptability, scalability and maintainability of even moderately complex corporate plans and budgets.
The best run and most successful organizations know that and faithfully implement and perform these processes.
A corporate budget, following a well thought out and documented plan entails entering and documenting forecasted revenue and expense items, as well as additional financial information, all of which are reviewed and approved.
Today’s technology allows even smaller organizations to implement an intelligent planning and budgeting solution, with an integrated analytics module where actual results from running the business during the budget period can be compared with the budget. This can start in the first period (month) of the new year and continue throughout the duration of the budget.
What follows are sound and timely decisions based on complete and accurate information retrieved from the FP&A software as soon as each actual accounting period is closed. Modifications to plans can be made with greater confidence, and business risks reduced.
Since an intelligent FP&A software solution also produces forward looking synchronized financial statements, the analysis completed is similar to analysis performed on actual accounting data (i.e., actual financial statement). This, effectively, turns the output from the FP&A software into an extension of the actual accounting into future periods.
I wish I had this technology when I needed it, but first I had to learn what planning was and why it is so vital to have it, even when you first start out.
Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.
Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.