How to Make Planning for Next Year Profitable

BY BILL FOTSCH, FOUNDER, ECONOMIC ENGAGEMENT

If your business operates on the calendar year, the beginning of harvest is when your company actually plants the seeds for next year. It's planning season. In some meeting rooms, the phrase alone brings conversation to a halt. Preparing the annual plan can eat up time and produce little benefit. There's usually fallout, too. When it's time to strategize, the senior team sequesters themselves to some offsite retreat for a couple of days. Everyone else is left to do the work, and to roll their eyes about what "planning" really means. Short-term, it's fruitless. Long-term, it's futile.

But it doesn't have to be this way. You can take three specific steps that will form the basis for a strong plan for next year and improve profits for this year.

1. Get input from your most valuable customers.

The purpose of every company is to serve customers--and to do so profitably, so that you can continue to serve customers. To serve anyone well, you need to know what they value. So how do you find out? Frankly, you ask them. And then you listen, as we detail in our article, What Are Your Customers Thinking Right Now?  If you don't ask them, you'll never know.

The good news is that you'll get just the right information to focus your plans on what your customers value--on what drives the value of your company. The great news? Just by asking customers what they really care about, your relationship grows, as does the chance for repeat and referral revenue. Short-term and long-term wins.

One note: While the purpose of every company is to serve customers, not all customers are equal in terms of their value to you. So before you pick up the phone, sort your customers by relative size profitability. With one Chicago-based tool manufacturer I work with, the margins on products varied from 70% on the high end to -10% on the low end. (Seriously, -10%. This isn't a step you'll want to skip.)

Try to gain some understanding of why these profitability margins are high or low. In the case of the tool manufacturer, we came to understand that certain products suited their production capabilities better than others. We combed through all five of the company's product lines to determine which specific products fit especially well, then pointed all our sales efforts toward those high-profit product lines for the next year.

This also revealed an opportunity to improve short-term results. We immediately instituted a minimum margin requirement of 10% on all products, ridding us of negative margin products immediately. Then we compared low-margin jobs to similar high-margin jobs and corrected the pricing by raising it. Finally, we recognized that we were underestimating the costs of small product orders. Each small order required design, scheduling, shipping, billing, and tracking payment--none of which were covered by our pricing system. So we added an order processing fee. No sense in subsidizing small jobs. In the end, the long-term planning efforts around customers drove plenty of short-term profits.

2. Get input from your trusted partners (your employees).

Annual planning asks you to look at the big picture, and it can be a lot to consider at once. But there's someone at your company who is deeply familiar with each individual aspect of your business. And they want to be heard. Again, it's as simple as asking: What is the greatest improvement opportunity our company faces in the next year? Notice these questions are the questions you would ask partners, bearing no relationship to most employee engagement surveys.  The added benefit is that improvements will be consistently more effective if the idea comes from the employees.

When I was working with Southwest Airlines about fifteen years ago, we asked pilots for feedback on saving fuel, which was particularly expensive at the time. In what became known as "Plane Smart Business," we captured and shared their input. Pilots were thrilled with the individual recognition and team learning. Not only did SWA adopt approaches that the management team had never considered, but pilots were able to implement some changes quicker than if they'd been handed down from upper management.

Getting pragmatic feedback from employees on how to better serve customers profitably can be powerful for planning purposes. But don't be surprised if employees begin implementing their ideas right away. The uptick in engagement should be just as swift, with benefits that last well beyond next year.

3. Get input from benchmarking. 

Comparing your company to others is a great way to find opportunities for improvement. Some industry associations and accounting firms provide benchmarking opportunities. In collaboration with Inc., we provide a benchmarking tool that determines where you stand in terms of Economic Engagement, which research has shown enables top quartile companies to have double the profitability of their peers. This article provides more details of the research: A Key Strategy to Double Your Profitable Growth  We recommend taking 10 minutes to fill out the survey by clicking on this link (there is no cost). Think of it as a diagnosis.

Once you see your strengths and weaknesses, you can make plans accordingly. There's nothing stopping you from taking the first step before the next year starts. And there's certainly no reason your planning efforts can't be profitable.

Photo credit: Getty Images.