“The learnings are in the gaps!” I exclaimed.
My team looked puzzled. We were having an internal meeting, talking about how to explain to the client the value of (and the difference between) P&L Projections and a Business Plan. We get it. To us, it’s a no-brainer, a slam-dunk, a need-to-have-to-run-your-business, type of investment. But, for our clients…well, they weren’t getting it, and we needed to figure out why.
That’s when the light bulb went on for me. Everyone focuses on the actual projection and business planning process; the piece of paper, or spreadsheet at the end of the exercise. But, in actuality, the value is in the entire process. Up to– and importantly– comparing your expectations versus what actually happened.
In other words, the learnings are in the gaps.
Think of a chart with three lines: one for budget, one for your short-term forecast, and the third for the actuals. Rarely do any of the three fall in line with each other. Rather, there is always some gap between the actuals and the projections. If there aren’t, you must be clairvoyant.
Getting to a meaningful gap (and yes there is such a thing) means that you have to have short-term projections and a budget, both built on solid analysis and assumptions. Coming up with these projections often requires looking at the core operations of your business, and evaluating how each makes you money and asking questions like: Is it scalable? What resources will you need to meet your revenue and profit objectives?
Here’s the rub: this isn’t a quick process. However, the learnings that come from the process–from the time you start all the way through the time the final touches are put on the plan– are (in most cases) game changing. It’s like building a house made of brick, versus building one quickly of straw; both don’t withstand the winds of change equally. So, when you compare your actuals versus your budget (the gap), you are comparing what actually happened versus the well-thought out plan of how the business should operate to generate the profits and revenues you want.
That, my friends, is a meaningful gap.
There are also gaps as you progress through the year, as you gain new information and develop short term financial forecasts. This takes the new information, like your sales pipeline, and creates a more realistic and timely view of what you can expect to have happen in the next 12 months. You can compare this to your budget, to determine how far off you are and what has changed.
The last gap that yields some of the longest-term learnings is when you start comparing the actuals versus your forecast and your budget. Often glazed over as an exercise in futility (as in “our business changes so much that we can’t even put a budget together”), it is an extremely valuable exercise. Because you have spent the time to develop your budget and your forecasts, which represent your business model and reflect changes in your businesses, you have good benchmarks to review why the actuals either exceeded or missed the projections.
If you don’t do this exercise, you are missing huge opportunities to change your business. It is in this disciplined exercise that you find out if your projections were unrealistic, or that you have issues with your sales process, or that your labor costs are exceeding budget because there are inefficiencies in your operations. It’s here that you learn if your margins are different than planned and try to figure out why: do you have a pricing problem? Are your materials costs going up? Do you have issues with production? The list can go on and on. There are tremendous learnings to be had, and various ways to focus your efforts to give you the information you need.
So, in summary, yes— there are tremendous learnings in the gaps. The variance to plan doesn’t have to be a number you report and forget about. Rather, use it for the valuable lessons it contains. It starts with a solid budget, built with thought and analysis, and ends with constant incremental improvements to your operations. Once you identify the gap, the next step is to figure out why you exceeded or fell short of your projections. Keep doing that, and month after month you will start to see your business change and grow in ways you may have been trying to make happen for years.
If you find yourself in a place where you could use some foresight, help unlocking the drivers in your business and want to spur growth give us a call. We’d be happy to help you implement this for your business.