Time to Act
Charlie Goodrich 


When it is annual plan time, before starting, make sure you know what you are trying to accomplish. Then, use the right method and process for your organization and situation.  

In today's newsletter, I share seven reasons for developing an annual plan, along with suggestions for getting yours done properly. 
I appreciate your comments. Just click "reply" to send them to me.




Charlie Goodrich 

Founder and Principal

Goodrich & Associates
November 2014 Vol. 3 No. 11
In this issue...
Bogged Down In The Annual Plan Process? Step back And Understand Why You Do It.
Heard on the Street - Is mild deflation a bad thing?
About Us
Goodrich & Associates
[email protected]
Bogged Down In The Annual Plan Process? Step back And Understand Why You Do It.

With the end of the year nearly upon us, many financial people are currently buried in the annual plan, budget or forecast. Call it what you like, it's worth taking a good look at why we do these in the first place.

What are you trying to accomplish? Clarity of purpose goes a long way in improving the planning process. After all, a process without a purpose is not a good process.

So, why have an annual plan or budget? Seven good reasons...
  1. To vet the financial feasibility of plans to achieve goals - financial and otherwise. Most of us are familiar with this annual planning objective. Will our plans work, given that we are on the hook to deliver? Here, process is needed to assess the feasibility of operating plans and to determine that those plans, if successful, will achieve our financial goals.

    My own bias here is to use business driver-based modeling, but old fashioned budgeting can work too. Involvement and review by experienced operators is the critical success factor to meet this objective.
  1. To set detailed performance targets. Here we are talking about annual performance measures at a detailed level, things like productivity metrics for a particular machine or sales goals for a given salesperson.

    Too often, this process becomes part of other processes whose goal is to review plan feasibility, target setting and so forth. No need for such details here; better to wait until all is done and then crank out these details.
  1. To set expectations and goals for operating units, departments and people. Don't make the same mistake as one company I worked for, State Street Corporation. The Bank tried to use a detailed, bottoms up budgeting process (certainly not financial planning) to come up with financial objectives for operating units. Not surprisingly, the Bank ended up with no meaningful financial objectives for the business units, something that made business unit heads very happy.

    Any goal setting process is destined to fail if the culture of the company is one of zero accountability. For companies with accountability, however, this is where gamesmanship rules. If you are responsible for setting expectations - as opposed to managing expectations of what you can deliver - make sure you have a good understanding of the business and that you develop your own, fact-based, analytically supported point of view.
  1. To commit to goals, financial and otherwise, to a company's owners. These goals may vary from a public company, to a family owned business, to a privately held investor owned business.

    When I was responsible for the annual planning process at Kraft Foods many years ago, our goal was to be the leading food company. Financial performance-wise, this meant being slightly beyond the efficient frontier of our competitors' performance on the EPS growth for ROE tradeoff. We plotted the curve based on stock analyst projections for our competitors and so we knew what we had to deliver.

    Companies owned by private investors, on the other hand, may focus on EBITDA growth, while family held businesses may have other objectives.

    The point is, the way to decide this (usually) is with high level projections and not with detailed budgets.
  1. To decide the best way to deliver on goals to the owner. This may involve financial leverage, operating improvements, investing in or milking a business, or some combination of all of these.

    Taking the Kraft example, after determining an acceptable range of financial performance that would meet our objectives, we decided how much to achieve by financial engineering while maintaining our dividend policy and how much to achieve from operating performance. We then divided up the operating improvements between the business units.

    All companies are different, of course. The point here is that figuring this out is not the same as vetting a detailed plan.
  1. To make major resource allocations. Whether this involves giving cash to shareholders by way of dividends or stock buy backs, investing in the business or businesses, or something else entirely, resource allocation decisions are made throughout an organization during the planning process.

    The key is to recognize this and to make sure the decisions are made consciously and not as a byproduct of the plan or budget.
  1. To make sure the business has sufficient liquidity and capital to achieve its plans. Often neglected by my clients - that is why they become my clients - understanding the cash flow dynamics of a plan is essential. No point in getting into detailed metrics here. In larger companies, the business heads don't need to be involved.
So that's the why behind developing an annual plan or budget. Here then, are a few suggestions for getting this done properly:
  • Use the right forum for the right purpose. For example, when I was at Kraft Foods, I knew the process was wasteful and wrong when the Company CEO starting flipping pencils in the air to see if he could make them stick in the ceiling tiles during detailed brand reviews.

    I changed the process so there were small meetings that I didn't attend; just the CEO and the line head. There they could talk freely about specific people (Could the VP of marketing really deliver?) as well as whether the line head had what was needed. These conversations need to happen - they won't in larger enterprises unless they are scheduled, planned and small.
  • Use the right process for the right purpose. A detailed bottoms up plan, for example, is a horrible way to make macro resource allocation decisions. These decisions are better made as part of an executive level process that uses simple models.
  • Use the right model for the right purpose. I talked about this in my recent September newsletter. Read it again here.
  • Use the right degree of granularity for the right purpose. Detailed budgets to track performance with a high degree of granularity should measure business drivers, not account balances.

    Sometimes businesses feel the need to measure performance down to the size of a gnat's derriere. While I question the need for this, if you insist on doing it, make sure the measurement is something that little gnat can control - usually a driver or metric that is not a chart in the general ledger.

    On the other hand, profit center managers and the like should be measured on things such as profits, return on investment, cash flow, market share and so forth.

    Additionally, cranking out these measures, particularly at the gnat level, should wait until the final plan is done; that means high level and operating performance expectations are locked in for the new year. Overall, this exercise is painful and mind-numbing in its detail. If you must do it, do it just once.
Remember, when it is annual plan time, before starting, make sure you know what you are trying to accomplish. Then, use the right method and process for your organization and situation. There are several good reasons to plan, but the best way to do them differs.

Heard on the Street

Some think we are at the beginning of a long period of low interest rates, rather than near the beginning of rate hikes. We might even experience an extended bout of mild deflation.

Bad? Not according to John H. Cochrane, the AQR Capital Management Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. In his recent blog post titled, "Optimal quantity of money, achieved?", he makes his case.

Don't worry, the article is not egg headed, just cone-headed, in a neo-Aykroydian way.

About Us

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent financial problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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