There are many alternative pathways to approach the issue of planning to grow your revenue and your profit. We make suggestions here on some of the philosophical issues you might want to consider. These will let you tailor your growth planning to suit your comfort level. This is part of our Boost Your Revenue and Double Profit in a Year series (DP365). It is a Yellow Belt (beginner) level Program.
Planning for Profit needs to take into consideration what you are going to be personally comfortable doing. If you set a plan that you are uncomfortable with, you are going to consciously, or unconsciously, hold yourself back from commitment. Simultaneously you will increase your stress level; not a desirable outcome.
There are many many ways of planning from growth. You should pick the path that you find most satisfying. At the end of the day, working in your business should be fun; or a close approximation!
In this article we discuss:
- Incremental or breakout growth approaches
- Structured or ‘take it as it comes” approaches.
- how can can arrive at the best way forward for you
Bang or Whimper Profit Targets
There are several approaches to choosing a growth target for your business in DP365.
Whatever Happens Approach
We are guessing that most businesses take a cautious budgeting approach to increasing their profit.
In fact, many don't have a target figure in mind at all.
Whatever happens is whatever happens.
We have been guilty of doing this many times in the past.
There is nothing wrong with the approach but DP365 is not really geared for this approach.
However, the Profit Savvy Knowledgebase can act like a business smorgasbord for you.
You can pick and choose among the articles to help you address any issues of concern as they come up.
In case we can convert you to a more assertive approach, read on!
Of those that do have a planned growth target, many forecast a (say) 10% growth in profit and then all the other components of the Business Plan fall out underneath to achieve that 10%.
This might be called incremental improvement or, less kindly, "creeping incrementalism".
It is pretty much like a caterpillar crawling along a leaf, lots of legs moving in unison for a comparatively small amount of gain in geography.
Throughout Profit Savvy, we talk-up the incremental improvement approach by its common term Kaizen (see Kaizen article) - which means continuous improvement in Japanese.
So it would be a bit hypocritical of us to imply this not a worthwhile strategy.
We think though that is a matter of degree. Ten percent growth might be way less than what you can achieve. Kaizen improvements of 40-50% are common in the first Kaizen rounds.
Contrast this with a Breakout Strategy.
Under this method, you aim for some "outrageous" and distant goal and then set all the components of your business to focus on achieving that goal. We might think of this as a "grasshopper" strategy; one leap and you cover a lot of ground.
If you are reading this article in association with one of our Double Your Profit strategies, you are already thinking of going for 100% improvement rather than just 10% (Double Your Revenue Double Your Profits in a Year (DP365) article).
Ironically, with careful planning and forethought, improvements of 100% are possible and certainly 50% even more so. Settling on 10% can really be a cop-out / compromise.
No matter what planning approach you take, an element of “stretch’ in your estimates is always positive.
If you and staff know that a target is easy to reach, there is no real need to try hard to get it.
Because of this psychology, you are likely to fall short of even these "easy" goals. Random events can easily upset the plans and cause you to undershoot.
It is far better to set “stretch goals” that, in your mind, you have about a 70% probability of reaching. These will “stretch” the team and are therefore more likely to have a better than expected outcome.
They give the whole team something to shoot for. Hence our stretch goal to Redouble your Profit in a Year; a goal of 100% improvement.
There is some goal setting homework for you at the bottom of this article.
There are two general routes we might take towards a rapid improvement in our profit.
One we will characterise as the Wild Fire approach and the other as a Controlled Burn.
Wild Fire is a largely out of control bush fire that is very difficult to manage and will go pretty much wherever it decides it wants to go. Because of its unpredictability, the outcomes are difficult to know in advance.
The Controlled Burn bush fire, on the other hand, is carefully managed by the Fire Brigades. It burns when, where and for how long the Fire Brigade determines. Because it is much more manageable, the outcomes are far more predictable.
In our fast growth strategies (see DP365 leader article) we are going to take the Controlled Burn approach but it is worth commenting on some of the Wild Fire approaches and the problems that they have.
There are several different Common Wildfire planning approaches that we will discuss here along with some of their advantages and disadvantages.
Path of Least Resistance
The Path of Least Resistance to planning for profit is, by definition, the easiest route to take. The business will be guided by whatever activities towards creating profit are the easiest to do.
The advantage of this approach is that it is the easiest route and therefore will take the least amount of effort and resources.
The principle disadvantage is that there is no guarantee that the Path of Least Resistance is either the most profitable or the most efficient of the several different planning paths.
More resistance in some parts of the business will not let them grow as fast as the path of least resistance, therefore, overall growth is very unpredictable and uneven.
If we were talking about a bicycle trip, the Path of Least Resistance is the equivalent to taking a flat, bitumen, road. It involves the least amount of effort on the bicycle.
Path of Maximum Potential
The Path of Maximum Potential is the one likely to have the biggest outcome. In this instance, the desired outcome is Maximum Profit.
The advantage of this approach is that it makes a lot of sense to pursue this path.
What is not so clear - is this the fastest path to the desired destination and will there be sufficient resources available to reach Maximum Potential.
With our bicycle analogy, we might consider this the plan to cover the most distance. We are not sure if it is the fastest way to cover the distance, or for that matter, the easiest. We just set out to go as far as possible.
The Path of Maximum Interest
The Path of Maximum Interest means that you, as a manager, follow a direction for growing your business that you find the most interesting/enjoyable/satisfying.
There is no guarantee that this pursuit of something that "turns you on" will be the most profitable outcome (unless, of course, you enjoy making a profit!).
With our bicycling analogy, this is the equivalent of taking the scenic route.
Path of Fastest Progression
The Path of Fastest Progression will get us moving as fast as possible in some direction.
What is not so clear - is the fastest direction also the most profitable direction? We might find ourselves going at breakneck speed but up a profit blind alley. All the time and energy might be largely wasted.
With our bicycling analogy, this is equivalent of going downhill - any hill - it doesn't matter as long as it is steep so that we go really fast.
In many businesses, planning for profit is largely unstructured; profit just happens.
For those businesses that are a little more organised. they may focus on one of the Wildfire approaches above and launch themselves into one of these Wildfire planning strategies that most takes their fancy.
The consequence of this approach to planning is that you will not know how far you will get towards maximum profit.
You will get a profit but you will not be clear in your mind if it was the maximum profit you might have otherwise got, or indeed, whether it is even a satisfying profit increment.
You will be measuring profit in hindsight. You will only know what it is after the event and it is too late to do anything about it.
Unfortunately, many many businesses run this way. They only find out what profit was made when they get the annual tax accountant’s report; several months after the end of the financial year.
It is the “fingers crossed” approach to planning for profit.
You have probably guessed by now that we are not big fans of this unstructured Wildfire Planning approach.
Let’s move on to the approach we prefer.
In contrast to the Wild Fire approach to Profit Planning, the Controlled Burn approach sets out with an objective or endpoint in mind.
In the case of Bush Fire Management, it is to burn a certain amount of area that is deemed to be a fire risk when the weather heats up. By burning it in the cooler time of the year and under controlled circumstances that fire risk is avoided later in the warmer months.
In our Controlled Burn analogy, we set out with a profit endpoint in mind and then adapt the business to meet that destination. In our Double Revenue Double Profits in One Year (DP365) article, the destination is to do just that. Double Revenue in a way that permits us to Double Profits and we set a time frame of one year.
The great thing about this approach compared to the Wildfire approach, is that we know exactly how much profit we expect to earn in advance.
Sure, we can be almost 100% certain we won’t hit it spot on. In fact, we will likely fall short because we will have an element of ‘stretch” in the goals. But at least we are taking some control over our destiny; unlike the Wildfire approach.
Read our Endpoint Business Planning article for more on this approach.
Business can be stressful enough without loading yourself up with ambitious targets if they keep you awake at night.
Ironically the more ambitious targets, when combined with our Controlled Burn approach, will have more certainty about them than the Wildfire approach where you don't really have any idea what the outcome will be. So you worry a lot about what is happening and going to happen.
Another good thing about Controlled Burn is that, if things get too fraught, you can lower your sights and everything in the plan falls into place at the lower lever. With Wildfire planning, you have very little idea what will happen if you slow down because all the moving parts of your Plan are not connected – you really have no plan.
On the other hand, the controlled burn approach means that you are probably going to have to me more disciplined in what you do and there will probably be a lot more material to read and absorb as you work though developing your approach to taking your business forward. This is, quite understandably, not everyone's "cup of tea". In particular, if you were keen to finish up with school back in the day so you could get out and start and run your business, the thought of getting homework again may not appeal.
Neither approach is right or wrong. We are just keen to have you make an informed decision on how to progress towards increasing your profit.
There is some suggested homework on this topic for you at the bottom of this article.
While all this is still fresh in your mind, make some decisions on the following and write them down in a document that will evolve to be part of your plan for growing profits with DP365.
There are no right answers here!
We are just hoping to to get you focused on what you want to commit to going forward.
- what sort of growth do you want to aim for during the year? Whatever happens or a 'safe' small increment like 10% or 'one giant step for mankind' like 100%. Whatever you want is fine. Don't be tyrannized into a goal you don't think is possible; because you will be right in the long run.
- Do you want to follow the discipline of the "controlled burn" approach which will need you to do more through planning or would you prefer to use your own discretion about what business activities you do and when?
One option is
Profit Savvy has a fork in the road for you here depending what you decided with your homework.
In this article, we talk about slow incremental improvement versus a breakout approach to profit. Many businesses limit themselves to the incremental approach through either not realising that a breakthrough approach might be possible or not being confident that they can reach it.
We have also shown that planning strategies that start from a point of origin and do not have a clear point of destination (Wildfires) will achieve uncertain results. On the other hand, with our top-down Controlled Burn approach we clearly know what the destination is and now we can work out a route to get to it.
We think that the Controlled Burn strategy is a far better way to boost your profitability as rapidly as possible.
But, at the end of the day, you should choose a planning strategy that suits you personally.
DP365 is designed to help you towards stretch goals like 100% growth. But the entire Profit Savvy Knowledgebase is at your disposal. So, if you want to choose your own route and goals, you can treat us like a business smorgasbord and pick and choose what you want to digest.