Management Skills and Execution: Developing and Implementing Business Plans

Introduction

This lesson examines management's ability to develop and implement business plans. People in a business must know the
objectives and performance targets of the business before they can work to meet them. Planning objectives should be clear,
realistic, and measurable. A reporting process should be in place to measure the progress of the plan. The planning process
should also be timely.

By the end of this lesson, you should be able to:

Explain the importance of the business plan and its implementation in determining the overall management risk
assessment process.
Identify the two most significant elements in business planning that affect the firm’s cash flow and ability to repay debt.
Explain how to determine if management risk is high, based on the six criteria presented.
Outline the possible effects of poor business planning by management.

Developing and Implementing Business Plans

What You Need to Know

Developing and implementing business plans is a key part of assessing management risk. In order to better understand how this
affects the risk assessment process, you should know that:

A business plan, in the strictest sense, is a blueprint created by management to meet business objectives. A part of the overall
management risk assessment process is evaluating management's ability to plan and manage the plan.

Show the Business Plans

Some business plans are detailed and comprehensive; others provide little more than broad guidance. Whatever
their nature, business plans guide business activity. Therefore, management's ability to develop and implement
business plans must be sound. A business must first know its objectives before it can plan to accomplish them.
Information sources and participation in the planning process should include all levels of staff and the business's
 departments, as well as customers and suppliers. Plan objectives should be clear, realistic, and measurable. A
reporting process should be in place to measure progress of the plan. The planning process should be done in a
timely fashion.

Important sources of information on business plans include financial accounts, interviews of management
personnel, and other general information available about the business. You should meet with the CEO and other
management team members. Request the opportunity to review plans, forecasts, and budgets. Explanations of
variances to plan should include the initial assumptions, why the variance(s) occurred, and the timing and nature of
corrective actions. The information and impressions that you receive from these interviews will help shape your
assessment of management's planning and implementation ability.

Management's ability to focus business activity on clearly defined goals and objectives significantly affects the business's cash
flow and ability to repay debt. This also affects the staying power of the enterprise over time.

Show the Assessing Planning Capability

It is fairly easy to measure a business's history of creating and managing plans. Engage the CEO or manager in a
discussion about the planning and management process. This can be a general discussion if held during a business
development call, since you will not have reviewed financial accounts and other business information in detail yet. .
It is still possible to determine whether a planning process exists, what the general process is, and whether the
business manages its plans successfully. A simple open-ended question like “Tell me about your planning process,”
can initiate the discussion.

The information needed to assess planning ability is readily available, for the most part. The financial accounts will
not necessarily help, although there is a tendency to equate good financial performance with a well-defined mission
or purpose. Consider what can be learned from a discussion about:

The business's client base

Sales objectives and competitive strategies
Inventory (stock) purchases and control
Advertisement and promotion policies
Compensation structure

How does the business mission relate to risk? That is, how does it relate to its cash flow and cash position? Is it
relevant? Most definitely it is, because a strong business purpose helps focus effort and expenditure. It enhances
efficient use of resources and cash, which can favourably impact operating expenses as a percent of sales,
inventory (stock) purchases and control, and sales targets. If management isn't certain about the business's client
base, they can make poor choices about advertising spending, inventory purchases, personnel, and compensation
packages. All can have a considerable cash impact on the business.

Management interviews that focus on the issues raised during the review of the historical financial accounts and
initial projections should provide detailed information on the planning process and the business's effectiveness in
managing to plans.

Management risk is high if:

management does not plan

information sources and participation are limited in the planning process
the annual plan is not in place by the beginning of the period it covers
the product planning process is prolonged to the extent that the business loses sales opportunities
plan objectives cannot be measured or are not realistic
responsibility and accountability for taking action on a plan are not clearly defined

Show Planning and Management Risk

 There are several questions you can ask yourself and the managers of a business to determine whether
management's planning approach increases or decreases risk for the organisation.

Is there a planning process or do things just happen? Small and mid-sized businesses are known to work without a
plan. Many can cite cases when management said sales were so strong, and the business was growing so fast, that
they did not have time to plan. Unfortunately, the rapid growth may not have continued, and perhaps neither did the
business. Maybe yesterday's products did not meet today's customer needs, or they were replaced by competitors'
products. The products may have sold easily at first, but the resources required to support a rapid level of growth—
financial, human, and capital resources—may not have been properly anticipated, resulting in lost sales or heavy
cash outflows.

Who is involved in the planning process? Do customers, employees, suppliers, all levels of management, and all
departments affected by the plan provide information used in the strategic and operating plans and budgets? Are
the plans and budgets a top-down process, with a limited number of individuals making decisions that affect
customers, suppliers, and the business? If plans are not effectively communicated and understood, they will not be
reflected in the activities of the business.

When does the planning process occur? How long does it take? Timing can be everything. If the business plans and
launches a new product line before its competitors, it gains sales and market share. If its competitors produce and
sell products while the business is still planning, the business may lose sales opportunities and market share. If the
annual operating plan is completed, approved, and communicated prior to the beginning of the fiscal year, everyone
knows what is expected and how to get there. Without the completed plan, there is minimal direction and no basis
for measurement, assessment, and correction.

Does the plan contain measurable and realistic objectives? Vague, unrealistic objectives create misunderstanding
and frustration. Objectives must present realistic challenges to stimulate the desired results. Balance is important.
An objective that states “increase sales growth” is vague and cannot be properly measured. Objectives can be more
clearly defined if they include growth rates, time frames, and perhaps product lines and sales territories.

How does the business measure progress to plan? What reports does it use, and how frequently are the reports
issued? Who reviews the reports? Management information systems, the type and quality of information contained
in reports, and the timeliness of reports are all critical to successful management. Expectations contained in the
plans of the business, division, department, section, or another subsidiary must be compared to actual results as
soon as possible. For some areas, daily reports are required; for others, monthly reports may suffice. Meaningful,
timely information provides knowledge managers can use to take corrective actions. If the management information
system does not produce meaningful, timely reports that measure the progress of the plan, and if the reports are not
reviewed by those in a position to take prompt, corrective action, management risk is high.

Who ensures that corrective action is taken promptly? Responsibility and accountability must accompany plans.
Managing to any plan is ensuring that measurable, realistic objectives are met or exceeded. Ideally, all individuals
involved with processes that impact an objective should be held responsible for performance. All employees and
managers, the CEO, and the board are accountable to someone: employees to managers, managers to the CEO,
CEO to the board, the board to shareholders—and everyone to customers. However the business is organised,
those responsible for planning and managing to plans must be held accountable for the results.

Management risk and overall credit risk increase if management does not plan, but rather just reacts. Lenders should look for a
history of developing and implementing business plans, then managing to these plans successfully over time.

What You Need to Do

Business planning plays a key role in the success of an enterprise, and is a strong indicator of management capacity. You
should:

Analyse… Identify…
how well borrower and assess the
management tools management
develops plans uses to develop its
and successfully plans and measure
carries them out. success.
 Understand Evaluate…
how a business's the level of credit
ability to develop risk that
and implement management's skill
business plans at developing and
impacts cash flow implementing
and the borrower's business plans
ability to repay brings to the credit
debt. relationship.

How This is Useful

You engage the CEO and other key managers in discussions about planning and the management process. Through your
interviews, it becomes evident that the business does not have a clearly defined mission. You also learn that annual operating
plans come from the top down, with little input from middle management and other employees. The annual plans are usually not
completed until well into the first quarter of the year. After reviewing historical financial accounts, you also notice that the results
for past years have not correlated very closely with original budgets.

You do not feel very comfortable with management's planning ability and measurement against those plans. Therefore, your
assessment of management risk is not favourable.

Questions You Should Ask

Asking the right questions is one of the most important things you can do when analysing the planning ability of a business's
management team and how it impacts credit risk. The following questions are particularly helpful:

Does the business have a mission statement?

What is the planning process? Does the business create and use business plans? How detailed are they?

How does the corporate mission relate to the business's cash position?

Who is involved in the planning process?

When does the planning process occur? How long does it take?

Do plans contain measurable objectives?

What reports are used to measure progress to plans?

Knowledge Check

Question 1
What might lead to an assessment that management risk is high?

Information sources and participation in the planning process are limited

Management does not plan

The annual plan is not in place by the beginning of the period it covers

All of the above

Management risk can be high for all of the reasons stated, and others. If management does not plan, information sources and
participation in the planning process are limited, plan objectives cannot be measured or are unrealistic, or the annual plan is
not in place by the beginning of the period it covers, plans are likely to have limited positive impact. Similarly, if the
management information system does not produce meaningful, timely reports that measure progress to plan, if reports are not
reviewed by those in a position to take prompt, corrective action where required, or if there are no defined lines of
responsibility and accountability for taking that action, then the business will suffer.

Question 2
When variances to plans occur, what will be most useful to know?

Who is responsible for the variances

Changes made to original assumptions during the planning period

The reporting process in place to measure results to the plan

The initial assumptions, why variances occurred, and the timing and nature of corrective actions

Reviewing financial accounts, interviewing management personnel, and reviewing other information available about a
business will be helpful in this scenario. While meeting with the company chief executive or with other management team
members, take the opportunity to review plans, forecasts, and budgets. Variance explanations should include the initial
assumptions, why the variance(s) occurred, and the timing and nature of corrective actions. The information and impressions
you receive from these interviews or meetings help shape your assessment of management's planning and implementation
ability. While accountability for goals is important, engaging in a discussion about who is to blame for a performance
deficiency may not be helpful.

Question 3
The business planning process should include all levels of business staff and representation from all departments.

True

False

Information sources and participation in the planning process should include and involve all levels and departments of the
business as well as customers and suppliers where appropriate. The planning process should not drag on without end, but
rational inclusion of all critical stakeholders is important.

Question 4
Credit risk is higher if management has not focused business activity around a clearly defined mission.

True

False
 Management risk and overall credit risk increase if the business's management does not plan. Risk increases if management
has not focused business activity around a clearly defined mission because neither they, nor those who report to them, will act
in optimally efficient ways. In businesses where profit margins are thin, a lack of focus can prove fatal to the enterprise.

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