OUTLINING YOUR

OPERATING PLANOPERATIONS

With major support from

the Kauffman Center

for Entrepreneurial Leadership

FastTrac PlanningWorkshop

™

Copyright 2001Kauffman Center for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation

ISBN: 0-944303-xx-x INSERT NEW NUMBER HERE

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted, in any form or by any means, electronic, mechanical, photocopying, recording, orotherwise, without written permission of the publisher.

FastTrac, FastTrac NewVenture and Take charge of your business are trademarks of the KauffmanCenter for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation.

NOTICE OF NONDISCRIMINATORY POLICY AS TO PARTICIPANTSThe Kauffman Center for Entrepreneurial Leadership admits participants into our programs withoutregard to race, color, age, gender, religion, sexual orientation, national and ethnic origin, disability andveteran’s status thereby permitting access to all rights, privileges, programs, and activities generallyaccorded or made available to program participants at the Kauffman Center. The Kauffman Centerdoes not discriminate on the basis of race, color, age, gender, religion, sexual orientation, national andethnic origin, disability and veteran’s status in administration of its educational policies, admissionspolicies, tuition assistance and other Kauffman Center-administered programs.

Printed in the United States of America.First printing

Visit our websites at:

www.fasttrac.org

www.entreworld.org

AcknowlegementsORIGINAL FASTTRAC PROGRAM AUTHORSEntrepreneurial Education Foundation

Courtney Price, Ph.D.R. Mack DavisRichard H. Buskirk, Ph.D.

PROJECT CONSULTANTDr. Sandy Dickinson

EDITORIAL TEAMKauffman Center for Entrepreneurial Leadershipat the Ewing Marion Kauffman Foundation

Judith ConeStefanie Weaver

Advant•Edge Business ServicesJodie Trana

Attorney & Counselor at LawDavid André

Nancy Allbee

GRAPHIC DESIGN TEAMLeslee Anne Terpay, Terpay Knowledge Resources

Ewing Marion Kauffman ............................................................................................................. 4History of the FastTrac Programs .............................................................................................. 5The Story of Social Entrepreneurship........................................................................................ 6Choosing a Business Workshop ................................................................................................. 9Exercise: Operational Plan ........................................................................................................ 10Background Reading: Operational Plan ................................................................................. 20

Table of Contents

The Kauffman Center for Entrepreneurial Leadership is a major funder ofthe FastTrac program. The Kauffman Center was created by Ewing MarionKauffman, a true entrepreneurial leader. Born into a modest home in KansasCity in 1916, he left as a young man to serve in the U.S. Navy. Afterreturning to his hometown, he took a job to provide for his family. Hebelieved that hard work; dedication to principles, and respect for othersformed the path to success.

With an initial investment of $5,000, Kauffman started a pharmaceuticalcompany in the basement of his house in 1950. First-year sales reached$36,000, and the company made a net profit of $1,000. During the years, heassembled a team and built Marion Laboratories Inc. into a diversifiedhealth care colossus with annual sales exceeding $3 billion.

Mr. K, as he was called, created the Ewing Marion KauffmanFoundation as an “uncommon philanthropy” whose mission is to helpcreate self-sufficient people in healthy communities and endowed it withmore then $1 billion.

In 1992, a year before his death, Mr. K created the Kauffman Center forEntrepreneurial Leadership, recognizing that the health of the economy isdependent on the ability of entrepreneurs to grow companies. He wasconvinced that the best way to help entrepreneurs is to identify and teachthe knowledge, skills, and values that contribute to entrepreneurial success.If entrepreneurs could learn how to develop successful companies, jobswould be created and the economy would be strengthened. This, hebelieved, would help the Kauffman Foundation achieve its mission of “self-sufficient people in healthy communities.”

Kauffman’s ability to learn from experiences and his reflections aboutwhat’s required to be a successful entrepreneur have provided a rich legacyof knowledge about entrepreneurial leadership, the importance of continuallearning, and the spirit of discovery.

The FastTrac programs are one part of a wide range of learningresources created by the Kauffman Center. These resources have beendeveloped by and with hundreds of successful entrepreneurs who haveshare their knowledge, insights, and stories so that others might learn fromthem. It is hoped that all entrepreneurs will find them useful as they work towrite their own entrepreneurial success stories.For more information on FastTrac go to www.fasttrac.org. For moreinformation about the Kauffman Center, go to www.entreworld.org or call(800) 489-4900.

Ewing Marion Kauffman

The FastTrac programs were developed and designed to train aspiringand existing entrepreneurs by offering a condensed series ofentrepreneurial training programs that culminate with the participants’producing a feasibility or business plan for their ventures.

To initiate the program, a one-day kick off seminar was held in 1986,in Los Angeles for minority entrepreneurs. From approximately 1900seminar participants, 63 highly motivated minority entrepreneurs wereselected to attend the initial FastTrac program.

In the spring of 1988, the Greater Denver Chamber of Commercesponsored a FastTrac 2 program for women and minority entrepreneurs.In the fall of 1989, the program was expanded throughout the state ofColorado with the support of the Colorado Governor’s Office of EconomicDevelopment.

In 1993, FastTrac entrepreneurial training programs expanded into 14western states. During that same time, the Kauffman Center forEntrepreneurial Leadership at the Ewing Marion Kauffman Foundation,piloted its first FastTrac program in Kansas City, Mo. The Kauffman Centerhas funded the Entrepreneurial Education Foundation, in Kansas City,Missouri, to disseminate the FastTrac programs throughout the UnitedStates. To date over 40,000 entrepreneurs have graduated from FastTracprograms throughout the nation.

In 2000, EEF moved to Missouri and was charted by KCEL tocontinue marketing and distributing the FastTrac Programs. At the sametime, KCEL established an in-house curriculum team to develop andenhance the FastTrac programs.

The Entrepreneurial Education Foundation is grateful to all of theorganizations that have provided funding, enthusiasm, andcommitment, as their support of these programs assists thousands ofentrepreneurs to build more successful companies.

If small business is the engine that drives the economy, then moresmall businesses and more successful entrepreneurs will impact thateconomy in positive ways. Because of the success and economicdevelopment achievement of its graduates, FastTrac programs areoffered in 36 states in the United States and three countries.

History of the FastTrac Programs

The Institute for Social Entrepreneurs defines social entrepreneur as“any person who uses earned income strategies to pursue socialobjectives, simultaneously seeking both a financial and a social returnon investment.”

Social entrepreneurship is a new word applied to an oldphenomenon: The Salvation Army has had thrift shops, museumshave had gift shops, for centuries. A new word, and a wide-spreadraised consciousness, is organizing the fragmented nonprofit sectorfor greater efficiency and effectiveness.

In recent years, more nonprofit organizations around the country aresuccessfully traveling down the road of social entrepreneurship —learning to operate in a more business-like manner, becoming moremarket-driven, developing earned income-generating programs,forming strategic business partnerships, and even spinning off for-profit ventures that feed their profits back to support the nonprofitmission.

Like their for-profit counterparts, nonprofit entrepreneurs are drivento control their own destiny. They leverage their organization’s corecompetencies to capture marketplace opportunity and createeconomic and social value for our communities.

Populations of people in need keep growing, and the social problemsthey face keep changing. Entrepreneurship meets several seriouschallenges faced by the nonprofit sector working to solve socialproblems:

1. Funding from traditional sources for nonprofits drastically declined— government spending down 23% per decade since the 1980s;corporate giving down 10% a year; individuals giving only 4% ofannual income now, compared to 7% in the 1980s.

2. Increased competition for shrinking pie: over 1 million nonprofitorganizations in the US, growing annually at a rate of 30%.

3. Traditional funders rarely make long-term investments – shiftingpriorities and restrictions often keep you from using funds where youneed them most.

4. Funders apply increasing pressure to measure outcomes anddemonstrate SROI (Social Return on Investment), rarely supplyingdollars to support such efforts.

Social Entrepreneurial Ventures Range a Gamut1. earned income-generating programs based on fees or contracts for

service (from recipients or 3d party payors)2. strategic business partnerships with for-profit companies3. spin off for-profit ventures4. social purpose for-profit businesses

The Story of Social Entrepreneurship

Stellar Examples – these nonprofits have gone all the way, establishingmulti-million dollar businesses to support their missions:

www.housingworks.org - thrift shops, coffee shops and bookstoressupport housing, healthcare, support services, advocacy, and jobtraining for people living with AIDs and HIV in NYC

www.greystonbakery.com - bakery, in partnership with Ben & Jerry’s,makes all the brownies that go into the ice cream, providing jobtraining and employment for hard-to-employ populations in Seattle

www.rubiconpgms.org - provides vocational rehabilitation andtraining for homeless clients and people living in poverty throughlandscape, bakery, and homecare enterprises in the San Francisco BayArea

www.bidwell-training.org , www.manchesterguild.org - guild mission toeducate and inspire inner-city youth and promote communitydevelopment through visual arts and jazz, conducts workshops,exhibitions and concerts; training center provides career pathopportunities in high-tech, culinary, and medical fields in Pittsburghwww.mdi.org - employment for people with disabilities in Minnesotain the manufacturing process, packaging, and assembly industry

Three Keys to Success1. balance mission and money goals, manage to the “double bottomline”2. understand that ventures launched by nonprofits face the samechallenges as for-profit entrepreneurs and demand the same businesscompetencies3. recognize that traveling down the road of social entrepreneurship is aparadigm shift in culture and mindset for your organizationResources for more information about the movement of socialentrepreneurship:

www.redf.org, www.svpseattle.org andwww.venturephilanthropypartners.org — build communities ofcontributors to nonprofits based on a venture capital model. a) makelong-term funding commitments, b) establish close management andtechnical assistance relationships c) build internal capacity andinfrastructure, d) focus on outcomeswww.socialentrepreneurs.org, www.socialent.org,www.communitywealth.com— consulting firms working withnonprofits to increase effectiveness and economic self-sufficiencywww.nationalgathering.org — organizing and enabling current andfuture social entrepreneurs to learn from each other

9Operations

FASTTRAC PLANNING WORKSHOP

Operations

Learning ObjectiveIn this session, participants will:� Outline an operational plan for their business to coordinate action

steps toward growth

Exercises� Operational Plan

Background Reading� Operational Plan

10 Operations

Receiving ordersWhat administrative policies, procedures, and controls will be used for receiving orders?

Explain how orders are processed after being received. Include a copy of the order form in theappendix. Describe what type of database will be created to keep track of customer information.

Billing the customersWhat administrative policies, procedures, and controls will be used for billing the customers?

Explain how billing procedures will be set up. Include the billing period, billing format, andthe like. Consider placing a copy of billing correspondence in the appendix.

Operational Plan

11Operations

Paying the suppliersWhat administrative policies, procedures, and controls will be used for paying the suppliers?

Identify procedures for controlling due dates on bills. List accounting and bookkeepingcontrols that are needed in addition to paying the suppliers.

Collecting the accounts receivableWhat administrative policies, procedures, and controls will be used for collecting the accountsreceivable? Will you have a separate collection department? Use a collection agency? Usefactoring?

Choose whether to collect, have a separate collections department, or hire a collections service.Consider using a collection agency and factoring to increase cash flow and reduce bad debts.

12 Operations

Reporting to managementWhat administrative policies, procedures, and controls will be used for reporting tomanagement?

Explain the communication process for employees to report incidents to management.Describe the format and schedule to be used for management meetings, who will attend, andhow often meetings will be held. List the types of reports to be used.

Staff developmentWhat administrative policies, procedures, and controls will be used for staff development?

Explain provisions for employee training, promotions, incentives. Choose among usingoutside consultants, providing in-house training, and inviting manufacturer representativesfor training. List the bonus systems you will use to motivate staff.

13Operations

Inventory controlWhat administrative policies, procedures, and controls will be used to control inventory?

Briefly describe the system used to establish inventory control. Select whether the system willbe manual or computerized. Identify at what point the use of technology will be cost-efficientto control inventory.

Handling warranties and returnsWhat administrative policies, procedures, and controls will be used for handlingwarranties and returns?

Explain the process for handling warranties and how returns are to be documented for propercredit. Identify a system to handle customer complaints. Also, identify how feedback fromcustomers will be used to improve customer service and product development.

14 Operations

Monitoring the company budgetsWhat administrative policies, procedures, and controls will be used to monitor the companybudgets?

Explain how often budget information is updated for review. Set up budgetary controls fortravel, phone usage, photocopies, supplies, car allowance.

Security systemsWhat administrative policies, procedures, and controls will be used for providing security forthe business?

Describe how you will protect customer lists and trade secrets. Describe the security availablefor the building and employees. Explain the procedures for protecting company files andbacking up computer information. Include plans of action in case of emergency: fire, tornado.

15Operations

Documents and paper flowWhat will be the flow of information throughout the system? What documents are needed toprepare for a transaction?

Diagram the flow of information throughout the system. List the documents needed to preparefor a transaction. Identify all the things that should happen to a transaction. Include examplesof such forms as invoices, sales tickets, and charge documents in the appendix.

Planning chart: Product/service development When will the product/service be ready to market?

Identify when the product/service will be ready for market. List all the activities necessary todevelop the product/service, the names of the persons responsible for each activity, andcompletion date. Outline the timing of events by month for a minimum of 12 months.

16 Operations

Planning chart: ManufacturingWhat is the production schedule?

Provide the production schedule. List all the activities that make up the production schedule,the names of the persons responsible for each activity, and completion dates. Outline thetiming of events by month for a minimum of 12 months.

Planning chart: Financial requirementsWhen will the money be needed?

List what type of money is needed to finance the project, who will provide the money, and thedate the money is needed. Consider listing the dates when payments will be made onfinancing, when dividends will be declared, and the like.

17Operations

Planning chart: Marketing flow chartWhen will the advertising be placed, brochures be developed, and the like?

List when marketing activities will be carried out, the persons responsible for each activity,and the completion dates. Outline the timing of events by month for a minimum of 12 months.

Planning chart: Market penetrationWhat is the schedule for market penetration?

List the activities for penetrating the market, who is responsible for each activity, and wheneach activity is to be completed. Outline the timing of events by month for a minimum of 12months. Include when you will handle sales-force training, sales-calls schedules, selectingdistributors, selecting manufacturers’ representatives, and any other pertinent information.

18 Operations

Planning chart: Management and infrastructureWhen will the management team be hired and in what order? When will the infrastructure beused and for what period of time?

List when management and infrastructure persons will be brought on board, who isresponsible for hiring, and for what period of time.

Risk analysisWhat are the potential problems, risks, and other possible negative factors that the venturemight face?

Design innovative approaches to solve these problems: sales projections prove wrong,unfavorable industry development occurs, manufacturing costs become too high, competitiondestroys marketplace (price war ensues), needed labor is unavailable, supply deficienciesdevelop, needed capital is unavailable, government interference arises, product/serviceliability occurs, problems with management or personnel arise, product/service developmenttakes longer than anticipated, union problems arise.

19Operations

Salvaging assetsWhat could be salvaged or recovered if any of the above risks do materialize and make theventure unsuccessful?

List what could be salvaged or recovered if any of the risk analysis events do materialize.Value the assets at what the banker/investor could sell them for within 30 days. Includepatents, inventory, accounts receivable, equipment, office furniture, customer lists.

20 Operations

Operational PlanThe key to successful venturing is making all the things happen that the

CEO has promised for the management team, investors, bankers, and boardof directors. The role of an operational plan is to unify a company to

accomplish all the necessary tasks that must be done in the necessary order.

The operational plan is an action document, incontrast to the business plan, which is essentiallyanalytical and contemplative. The chief executiveofficer (CEO) uses it to coordinate the efforts ofall phases of the enterprise toward achieving theventure’s goals for 12 months.

The key to successful venturing is makingall the things happen that the CEO haspromised for the management team, investors,bankers, and board of directors. The companymust be unified to accomplish all the necessarytasks that must be done in the necessary order.This is the role of an operational plan.Moreover, at the end of the fiscal period, howare the CEO and management team to beevaluated fairly and accurately without somebenchmark against which to measure theirperformance? The operational plan is such abenchmark.

At the start of the 12-month period, theCEO develops the operational plan, agrees toits execution, and then sets out to do the job.Each month, the operational plan is used tocompare the monthly performance against theagreed-upon targets. The operational plan isbased on hard, realistic, tangible, achievablegoals that must be reached if the company is toachieve its sales and profit objectives.

What a company accomplishes in the firstyear of operations directly affects what it willdo in each year thereafter. What it does in thefirst month affects each month’s operationsthereafter. Thus, the operational plan is acarefully written, concrete, monthly plan ofactivities for each unit in the company. Itshould leave no room for doubt in the mind ofthe CEO and the management team aboutwhat must be done each month of the year. Atthe end of each month, the CEO andmanagement team will know how they stand.

CEO ExcusesThe success of a company depends greatly onthe planning skills of the CEO. But many timesthe CEO has excuses for not writing theoperational plan. No excuse is acceptable.

CEOs tend not to write operational plans;either they don’t allocate the time or think thatconditions change too quickly. They think upnumerous excuses: “I carry all the ideas in myhead.” “My business changes too fast.” “Howcan I plan? My company venture is too small.”“When there are only a few employees, whywaste the time planning?” “As a CEO, I am toobusy to plan. I have to be everything from thejanitor to the sales manager.” “How can I planfor a year? I don’t know what will happen nextweek.” “I don’t want my managers to knowthat much about my company venture. I’m thedriving force.”

An attempt was made to convince a CEO ofa publicly held venture—who is anexceptionally bright and able driving force—toat least install some budgets as a beginning ofan operational plan. He kept insisting that hecould not plan operations because things weremoving too fast. The firm kept growing untilhe had to hire a financial officer. He was luckyto have hired a good one. One of the financialofficer’s first jobs was to install some goodbudgets. The company is now moving fasterand is much bigger and more profitable. Evensmall, fast-moving operations can and shoulduse an operational plan.

21Operations

The first timeThe first operational plan is the most difficultand takes the most time. Subsequent onesbecome significantly easier to write andimplement.

The CEO must train the management teammembers to provide the necessary informationto plan the company’s future. They must betaught how to do their own operationalplanning. This can be time-consuming and isnot without some distress. Many operatingmanagers resist formal planning. They do notwant their feet held to the fire by a documentto which they have agreed.

For example, a small cooling-towermanufacturer, which was a subsidiary of amuch larger company in another line of trade,had hired a new sales manager who previouslyhad been a city manager. A planning meetinghad been called by the firm’s five regionalmanagers. Sales were terrible. The subsidiarywas losing money.

Everyone has heard about sales quotas.They are a simple part of the sales-planningprocess. Nearly every sales manager assignssome sort of sales quota to the sales operatingunits in the field. This company had no quotas.A strong recommendation that sales quotasshould be set for each region was met withrebellion. The regional managers had an amplesupply of reasons why quotas were notneeded, would not work, and would be metwith resignations.

The regional managers were the crux of theproblem. The new sales manager wasintimidated by them. He was totallyinexperienced; thus, he was afraid of the fiveregional sales managers.

Instituting planning efforts the first timecan be very difficult. Much time is required forsetting up the planning apparatus because eachbusiness venture requires a little differentformat and planning process.

Change is constantRather than being an excuse for not creating anoperational plan, constant change is one of themajor justifications for using an operationalplan. Changes can be accommodated easilyand quickly in the operational plan. Aschanges occur, items are either added to orremoved from the plan. The impact of eachchange upon each item in the plan can beassessed formally, with little chance that someloose ends will be overlooked.

Most organizations recognize change onlyafter the end of the fiscal year, when theaccounting department gives out the reportcards. Then some drastic changes are usuallyforthcoming.

In the operational plan mode, changes arerecognized monthly and appropriate actionstaken. This applies to small and largecompanies. It is easy for the CEO to install anoperational planning system with a smallercompany. There are not as many people totrain. He or she does not have as manyactivities to forecast. It is good to get thesystem in place and working while thecompany is small, so it is in place when newpeople are hired as the business grows.

Controlled, planned growth seems to workbetter than uncontrolled, random growth.Many times, the successes of small companiesled them to disaster as they grew “too fast.”What is “too fast”? It is faster than what wastacitly planned. With sound operationalplanning, such small, rapidly growingcompanies will be less likely to get caught ingrowth squeezes. If a sales increase of 50percent is planned, the money and resourceswith which to finance operations at that levelmust be planned to accomplish that goal.

Fear of salary demands“Hey, the company is making a lot of money. Iwant some of it.”

Such logic is common. While the astuteCEO tries to avoid hiring people who thinkthis way, a good operational planning systemcan go a long way toward rationalizing thefirm’s wage structure. The plan shows howmuch money the company can afford to pay ifcertain results are realized. It can tie incentivepay to the achievement of the plan. Thus, theCEO can tell management team members thatif they do what has been agreed to, then theywill be rewarded accordingly.

22 Operations

Loss of power“It is my company and I’ll run it any way Iwant.”

Power is real. Many people relish it. Theyhold on to it tenaciously. They view theoperational plan as a bestowal of power oversubordinates. CEOs often want staff membersinvolved in the company to come to themcontinually for orders. Then they wonder whythey are so busy and why nothing happenswhen they aren’t there.

The operational plan directs eachorganizational unit’s work; thus it relegates theCEO to monitoring performance against theplan. It is a management style that differssignificantly from that of a one-person band. Butit is the only way in which a small firm canpenetrate that real, but invisible, barrier that seemsto block small firms from growing into big ones.

Security from employees leavingMany CEOs tend to fear that their staffmembers will quit and go with a competitor orstart their own businesses. CEOs rationalizethat if their management people discover howprofitable this business is, they’ll leave andstart their own. The CEOs think, “Why do I wantto provide them a road map for doing so? Whydo I want to develop their management skills?”

Yet one of the firm’s major assets is itspeople. Adept, able people get the job done.Businesses cannot grow without them. Yes,some employees will leave. That is inevitable.However, it is likely that fewer of them willleave a well-managed company in which theyare part of the planning process and haveavailable to them tangible evidence of theircontribution to the company’s good.Recognition of their efforts will more likely beforthcoming with a well-administeredoperating plan than without one.

Tax irregularitiesGames with tax authorities are not unknown.Some CEOs do not want their employees toknow all of the financial information becauseof the fear they could someday report them tothe authorities. Businesspeople who try toevade taxes are exceptionally protective oftheir financial information. They will opt to dowithout an operational plan because it requiresletting their managers know about the financialside of the business. This strategy is doublejeopardy.

Purpose of the Operational PlanA good operational plan should accomplishseveral major functions. The operational plan:■ Forces the CEO to plan the coming year in

detail.■ Provides a detailed road map for the

coming year.■ Communicates and coordinates activities.■ Provides a control and monitoring tool.■ Creates a peer-pressure management style.■ Facilitates managerial continuity.■ Shortens management meetings.■ Provides an objective evaluation tool.■ Provides information to infrastructure.

Forces the CEO to plan thecoming year in detailThe entire process starts with the CEO’srecalling the company’s overall goals. Then heor she formulates a list of very specific goalsthat must be met if the enterprise is to makesatisfactory progress toward its overall goals.Specifically, what must be done to stay ontrack?

There may be some slight changes in thecompany’s annual goals as the second-tiermanagers are brought into the process. Thesecan be easily accommodated. A CEO often sitsdown with the management team to discusscompany goals without giving sufficientthought to his or her own goals for the venture.This can be a mistake. The final goals may endup contrary to his or her desires and those ofthe corporation. After all, the CEO is thedriving force and should not be saddled withgoals with which he or she is not comfortable.When the CEO selectively ignores goals that heor she does not agree with, the team loses faithin the process. The goals become meaningless,and employees rationalize that the CEO isgoing to do as he or she pleases, so why thepretense of group participation?

Goals that are agreed upon must be met.There is no room for “window dressing” or“high hopes.” The organization must accept asdogma that the plan will be met, that the goalswill be achieved. Thus, team members cannotbe allowed to come to the meeting with theirown agendas. The discussion should start fromthe CEO’s agenda.

23Operations

Provides a detailed road map for thecoming yearMany managers come to work each daywondering just what they will do. They arereactive, responding to whatever fires areburning, rather than being active and makingthings happen.

The aggressive modern entrepreneurrecognizes that he or she is a driving force whomakes necessary things happen if theorganization is to achieve its goals. But there isalways a distance between where theenterprise is and where it wants to be. Atraveller doesn’t want to be sitting beside theroad somewhere in Virginia when he wants tobe in San Diego. A road map is essential.

And that is precisely what the operationalplan gives the CEO—a road map on how theorganization will move from where it is now towhere it wants to be by the end of the year. It’sa way for the CEO to say: “We want sales of$20 million, a profit of $4 million, and asuccessful introduction of our new line ofproducts this year; now, what must every unitdo to achieve those goals?” The procedure fordeveloping the operational plan forces eachoperating unit to consider in detail what itmust do if the company is to reach its goals,month by month. Each unit must promise thatit will be so far down the road by the end ofeach month.

Even with a detailed month-by-month roadmap, it must be recognized that there will bedetours. Things happen. Everything does notalways go as planned. Changes must be madeimmediately. For example, Steve Taylor of theXerox Venture Capital Group observed, “Yes,planning operations is good as long as the CEOand the investors recognize that, as they godown the road, some great opportunities areencountered that should not be ignored. Theyshouldn’t fall in love with an operational planto the extent that they ignore fortuitousdevelopments.”

Communicates and coordinates activitiesEverything must happen in a meaningfulsequence. Goods that are not produced cannotbe shipped. Goods that haven’t been soldcannot be shipped. Avoid advertising productsor services that are not available for sale.Production cannot be increased without hiringsome new people or buying more goods.

During the heat of battle, one of the mostdifficult tasks of the CEO is getting alldepartments pulling in the same direction. Anew product is in the development stage.Research and development (R&D) mustcoordinate with marketing to make certain thatthe marketers do not get ahead of themselvesand start selling before the product is ready. Yetmarketing cannot wait until R&D releases theproduct for manufacture, or it will take toomuch tool-up time to get the marketingmachine going. Some things must be in motionprior to R&D release. In the same vein,production must have some idea of when theproduct will be coming its way so that it canplan for its manufacture. This is calledcoordination. Often termed critical pathmanagement (CPM), these techniques are usedin the operational plan to accomplish it.

The CEO must have at his or her fingertipsmonthly information on how each departmentis progressing in its tasks related to preparingfor the new product or service. Who is fallingbehind? What roadblocks have beenencountered? Monthly management meetingsaddress the resolution of such problems. Butfirst the problems must be identified.Department managers may be reluctant tobring their deficiencies to the attention of themanagement group. The operational plan doesit for them. “Hey Joe, you were supposed tohave the package-artwork proofs ready for ourapproval this week. When will we see them?”

24 Operations

Provides a control and monitoring toolWith a written operational plan in hand, theCEO is better equipped to deal with eachdepartment daily. He or she knows what thedepartment should be doing, what shouldhave been done, and what should be talkedabout. And the CEO should know what thedepartment should not be doing. If he or shewalks into a department and there is somework going on that doesn’t seem to make sensein light of the plan, some questions may needto be asked. Or if the CEO knows that a certainlarge order is due to be shipped by the end ofthe month, yet it sits in the corneruncompleted, some action may need to betaken. Some stimulating questions need to beasked to find out what is happening.

After the CEO does this a few times,employees will learn that he or she is on top ofeverything that is going on. Thus, they are lesslikely to let things slip. Employees are trainedto be orderly or trained to be sloppy,depending upon management’s attention towhat goes on. If the CEO does not make aneffort to learn what is happening in the firm,the employees can conclude that he or she doesnot really care much about it.

Mack Davis recalls a problem he had asCEO of Synergetics International:

I would take my operational plan bookunder my arm, and each Monday morning Iwould walk around to each of mydepartments to talk to them about what theywere working on. I stressed at the time howimportant what they were doing was to thesuccess of the enterprise.

One morning, I went down to talk to thevice-president of production. I knew that oneof his tasks for the month was to test somereturned computer boards to find out whatwas wrong with them. We were gettingkilled with them in the field. I asked him,“How are we doing?” He said, “Noproblem.” So I went out to the testing area tovisit with the testing engineer and made thecomment, “Well, we should have theproblem of faulty computer boards solvedright on time. We’re in great shape!” He gaveme a funny look and said, “What are youtalking about? I haven’t seen any computerboards.”

The cat was out of the bag. The VP wasbehind in getting out shipments, so he wasignoring the computer-board testing. Yet

clearly on the operational plan for the monthwas that the prime goal for production wasthe resolution of the computer-boardproblem. Why ship out any more mistakes?A mistake had been made. It was right therein black and white, and he had signed off onit. No way could he wiggle out of it. If Ihadn’t had my operational plan book, thewhole problem could have escalated to whoknows where.

Creates peer-pressure management styleWhen the CEO critiques a subordinate, oftenthis is not taken well. The subordinate’sdefense mechanisms may go into full throttleto deny or transfer the blame. When the samemanager is held accountable by his or her peersfor the monthly performance of the operationalplan, the CEO seldom has to say a word.

The stronger managers will help theweaker ones develop, since they know thattheir own performance depends upon theperformance of all other managers in thesystem. Davis recalls:

We were coming to the end of our quarter.It was important to ship a lot of products ifwe were to meet projections. I went down tothe office one Saturday morning, and therewere eight of my marketers dressed in Levisdown in the factory, packaging products forshipment. I went over and asked themarketing director, “How come you’re doingthis?” He said, “If production is to achieve itsgoals, it needs some help. I’m not about to letany of our management team walk into ourmonthly meeting without having met itsgoals.”

One of the real joys of working with anoperational plan is that often you can just sitat the monthly management meeting and saynothing as the various management-teammembers judge themselves against the goalsfor the previous month.

In the first month at ZDC, another of myventures, there were 16 goals, of which 10were met. The second month had 15 goals, ofwhich 12 were achieved. When Icongratulated the management-teammembers on their achievement, theyconfessed that there was no way that theywere going to walk into the meeting to facetheir peers without having met their goals.

Davis discovered that peer pressure is fargreater than boss pressure.

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Facilitates managerial continuityPeople resign. People retire. People areterminated. Sometimes they are key managersin the company. Their replacements usuallyknow little about the situation. It takes a lot oftime, often critical time, to bring a newmanager up to speed. That training time isgreatly lessened with an operational plan. Anew manager can immediately see what hasbeen done and what needs to be done and cangain an overview of the entire operation bystudying the operational plan.

Shortens management meetingsMeetings have a bad reputation. They oftenramble on with little accomplished. A goodoperational plan goes a long way towardhalting such nonsense. It provides the agendafor the monthly meeting. How well did eachdepartment meet its goals? If not, why not?And what is going to be done about it?Everything is focused around the operationalplan: how well it’s being met and whatchanges need to be made in it.

Similarly, board of directors meetings areshortened and made more effective if the boardhas been furnished with copies of theoperational plan. The plan helps themunderstand what the organization has agreedto do and how well it is meeting the objectives.

Provides an objective evaluation toolThe work of each person must be evaluated ifequitable rewards are to be bestowed. But how,on what basis? Often rewards are a result ofprejudices, personal preferences, offhandobservations, or some other subjective factor.The operational plan provides an objectivebasis upon which to reward staff. Make a dealwith them. Execute the operational plan asagreed upon, and objectives should be met.Failure to meet the expectations in theoperational plan negates the agreement. MackDavis relates an example:

Often a worker would come up to me andsay, “I don’t like to work with my feet held tothe fire. I work better without pressure.” I say,“Fine, then you don’t like to be evaluated onan objective basis, so when it comes time toreward you, we’ll do it subjectively. You’ll getwhatever I think you deserve.” That alwaysgets the workers’ attention. They quickly getthe picture.

In this way, Davis stressed to his employeesthat the operational plan provides them withprotection. They had proof that they weredoing their jobs well.

Provides information to infrastructureEntrepreneurs give their operational plans tobankers, CPAs, investors, employees, suppliersfor credit, and potential distributors. They useit at every turn, and it works well. Thesepeople are impressed with this professionalmanagement approach. It illustrates that themanagers of this firm aren’t a group ofamateurs playing around in business. They areserious players who know where they aregoing. In sum, the operational plan can be usedto lubricate relationships with externalorganizations. The message: Get on boardbefore you miss the boat.

Bankers are particularly impressed. MackDavis relates an example of when he went tothe bank for a sizable loan to support his firm’sgrowth for the coming year. He took theoperational plan to the loan officer and walkedthe loan officer through the year step-by-stepand showed him why the loan was necessary.Davis then informed the banker that at the endof each month he would show exactly wherethe business was against the plan, not onlyfinancially but how it was achieving goals thatwould affect future financial needs. The bankerexplained that most people provided him withfinancial checkpoints but never gave him a toolwith which to monitor operations outside thefinancial arena. The loan was approved. Loanofficers should make it mandatory that allfirms requesting a loan provide an operationalplan. Then it could be reviewed monthly totrack the business’s progress.

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ContentThe operational plan should include the CEO’sresume, an organizational chart of keyemployees, corporate goals, financial data, anddepartmental planning formats. Each of thesections will be examined in detail, includinghow to prepare them, what they contain, andhow to use them.

CEO’s resumeWhile it might seem a bit presumptuous tobegin the operational plan with a statementabout the new venture’s driving force—theCEO—there are good and forceful reasons fordoing so. First and foremost, the outsidereaders and users of this document hold theCEO responsible for the execution of the plan.The banker does not look to the marketingmanager or the production head forexplanations. Not much money is borrowed onthe strength of the production manager’scredentials. The readers want to know a greatdeal about the person who is going to make allthese wonderful things happen. Who is thisperson? What reasons are there for believingthis plan? Do the credentials lead people tobelieve that he or she can accomplish the plan?So the operational plan begins with selling theCEO.

Second, when the plan is presented to otherpeople, the first sections of it—that is, themanagement team, the corporate goals, and theoverview of the financial section—must bepresented by the CEO. It is imperative that theCEO understand the financials inside and outeven though other professionals may havedeveloped them. If the CEO indicates theslightest ignorance about them, muchcredibility is lost. On the other hand, muchcredibility is gained if the CEO demonstrates anintimate knowledge of all aspects of thecompany’s financial performance. The resumesof each of the other key employees appear atthe beginnings of the sections of the plan forwhich they are responsible. To bunch themtogether destroys their effectiveness. Itoverwhelms the reader with resumes. Instead,good plan writing requires that the reader getonly what is needed at the time.

Organizational chart of key employeesThe readers want a cast of characters for thedrama that is about to unfold. The operationalplan should provide an overall picture of themanagement-team members and how theyrelate to each other via an organizational chart.

There may be some empty boxes becausesome players have not yet been hired. Still, thefunctions should be presented and the types ofpeople being sought to fill them, when theywill likely come aboard, and how much theywill probably cost should be indicated. Thereaders should be informed that the CEO iswell aware of the management needs and is ontop of the situation.

One banker related the following story.I was looking over this operational plan

and noticed that the company had nofinancial officer even slotted into theorganizational chart. I inquired about thevacancy and discovered that the CEO hadnot been giving any thought to hiring one.Since the firm was now big enough toafford one and certainly needed theservices of a good financial officer, I foundthe CEO’s attitude very disturbing. I hadto tighten the reins on our commitments tothe company, for I feared some financialcrunches down the line. The CEO was notmanaging his cash flow well. He neededsome serious help with it but was not eventhinking about this problem.

Corporate goalsWhile the goals for each company will varyfrom one another significantly, there are sixcommon areas that must be addressed: marketneeds, product needs, financial needs,operational needs, personnel needs, andinvestor and owner needs. Each of these isdiscussed below.Market needsMarkets need attention. They have needs; whatare they? Perhaps there are some markets thatneed more promotion. Perhaps there are areasin which distribution is spotty or inept. Whatnew markets have opened up that should beexplored? The list could go on at some length.All sorts of things take place each year in eachmarket that could affect the corporate goals.

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Product needsProducts require development. They needchanges if they are to remain competitive.What do they need? The goals in this areashould be clearly set forth. New product linesmay need some improvements based on earlycustomer feedback. Some R&D may berequired in certain areas. Perhaps the firmwants to examine some new technology. All ofthese things require goals for the technicalpeople; otherwise, the CEO will likely bedispleased with the output of the technical sideof the business. Some things will come out ofthe lab that are not in the game plan. Engineerslike to work on things they are interested indoing, and those things may not be the samethings the CEO wants done. The “techies” needto be accountable for things that they must dofor the coming year.Financial needsThe operational plan should target thecompany’s sales volume, gross margins, andnet profits for each division, product line, orbusiness unit in a statement such as “We willdo $20 million net sales with a 42 percent grossprofit and a 15 percent net profit after taxes.”Then those figures should be broken down bydepartments and staff members given dollargoals to reach.

Total goals should be set first, and then thedepartments can set their budgets based onthem. It is imperative not to try to build theoverall figures by compiling the budgets ofsubordinates. They are far too kind tothemselves. They should be told what the bigpicture is going to be, and then allowed sometime to figure out how they are going to reach it.

Gross margin targets are particularlycritical. A case could be made that they are farmore important than sales goals. Up to a point,would the CEO really care what the salesvolume is if he or she were handed a $10million gross margin? In their quest to makesales volume, many firms cut prices to theextent that the resulting gross margins will notallow a profit to be made. Remember—the keyto profit is gross margin, so a goal should beset for it.

The firm’s gross margin will establish thegoals that will drive the action plans of almostevery department. It affects product mixes,customer selection, product quality, expensebudgets throughout the venture, and the like.

Every increased dollar in gross margin willgo directly to the bottom line (assuming a staticexpense budget), but a dollar increase in salesvolume may result in only a 30 cent increase inprofits. Moreover, the costs of the sales increasemay exceed the results, while the costs ofgetting a higher gross margin may be slight.Operational needsAs the venture grows, it needs many things—new procedures, new control systems, and newequipment with which to implement them. It isgenerally unwise to wait until after the growthhas occurred to introduce new systems forcontrolling inventory or cash. The horse maybe stolen before the barn door can be locked.Plan for the barn and locks before the newhorses arrive, not afterward.

Often, the CEO, in his or her strategicplanning endeavors, overlooks the operationalplanning that must support the grandioseconceptual thinking.Personnel needsThe plan should address such matters assalaries, bonuses, incentive programs, newmanagerial positions that need to be filled,employees that need to be hired or terminatedunder the new plan, and employee-benefitprograms.Investor and owner needsWhat dividends will be paid? How will loansbe paid off? What securities will be sold? Whatsources of funds will be used to financeoperations? Any change in capital structureshould be set forth.

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Financial dataThe overall targets have been set. Projectedsales, gross profit, and after-tax profits havebeen determined. Now the department headsmust go to work. With those goals in mind, thehead of each organizational budgeting unitmust develop the plans pertaining to his or heroperation.

The documents that will be produced are asfollows:■ Department budgets for the year■ Staff projections by the month■ Capital expenditures and depreciation■ Cash flow projections for the year■ Profit and loss projections for the year■ Balance sheet projections for the year■ Five-year growth plan

In order to develop these documents, eachdepartment head must submit certain plansand projections for his or her unit.

There is a certain order of work that mustbe followed:■ Sales budget■ Production plan■ Expense plan■ Staffing plan■ Capital expenditure plan■ Five-year plan

After these plans are completed, it is easyfor the accounting department to develop thefinancial data.

Sales budgetThe sales budget or plan must be prepared bythe sales manager, who works in conjunctionwith the sales force and the head of marketing.It must be done in great detail, not in aggregatedollars. It does other people little good to betold that the new venture will sell $3 million ofgoods in January. What models, what sizes?Perhaps a monthly projection is too broad forsome operations. Weekly or even dailyprojections may be needed, based on the size ofthe venture. Thus, the sales manager must firstsubmit the sales plan before the others can gettheir planning under way.

Some of the questions that need to beaddressed: How are the sales going to be paidfor? What promotions will be forthcoming?What prices will be charged? What warrantiesare to be made? What return policies will berecognized?

Production planThe production plan takes the sales budget andfrom it plans what must be produced, when itmust be completed, what must be purchased todo so, and what must happen in terms ofpeople and resources to accomplish what isplanned. The production plans are a wealth ofcritical financial information. From them, thecost of goods sold is developed, along withinventory levels, payables, and product-costinformation. In turn, these figures are fed intothe projected financial statements.

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Expense planMost expenses are highly predictable and canbe furnished by the controller or chief financialofficer (CFO). The department heads budgetthe expenses directly connected with theiroperations. This phase of the operational planis perhaps the easiest to formulate. Naturally,expenses are related to sales volume. If salesvolume is planned to go up 30 percent,telephone costs will rise, and so will most othercosts. It costs money to do business, and themore business conducted, the more operatingmoney required.

Avoid the trap of thinking that mostexpenses are fixed, that is, not related to salesvolume. While they may not vary directly withsales, they do vary. Even the copy machinecosts will rise as activity levels increase. Manyexpense plans assume a level amount ofmonthly expenditures for many generalexpenses, such as telephone, postage, supplies,when, in reality, they go up with volume.

The wise CEO will not accept mere dollaramounts for these expenses. Each must besupported with an explanation of how theamount was derived. What were theassumptions? Employees cannot useunsupported numbers. If that happens, thenthe entire process becomes wishful thinking,instead of careful planning.

Staffing planThe CEO sets the salaries and the incentive andbenefit package for the department heads inconjunction with the human resourcesdepartment. The department heads shouldhave input on the people who report to them.However, the CEO must make certain that theplans are in line with one another. Troublearises when one department head is able toobtain better salaries for staff than others. Thehuman resources department will strive toensure internal pay equity.

While larger firms have human resourcesdepartments that are involved in pay equity,the management of small and moderately sizedcompanies must perform these functions forthemselves. Fortunately there is often muchvirtue in doing so. For one thing, employees

clearly recognize who is paying them. Thepower of the department heads is enhanced ifthe staff members know that payrecommendations begin and stop with theirsupervisors.

Since payroll costs are usually a substantialportion of a department’s total costs, it makesthe manager sensitive to the number of peoplehired and their salaries. Managers know thatholding the line on these costs is critical if thebusiness is going to be able to achieve its goalsin the total financial plan. It is all too easy for“budget hogs” always to be pressing for moreand more people to get the job done. “We needmore people if we’re going to get out the workon time!” The typical response is, “OK, hirethem if they are in your budget! If they’re notthere, then you have a problem.” Naturally,each of the department budgets should becarefully studied and modified by the CEO andfinancial department, in concert with thedepartment manager, to force it into alignmentwith all other departments in the venture.Remember, however, that not all firms requirethis degree of coordination, especially if theventure is relatively small.

The first staffing-plan submittals arefrequently greatly overestimated. So a lot ofgive and take is necessary in the salary-settingsessions. The entire process works best if eachdepartment head really feels that he or sheformulated the staffing plan. Thus, each ofthem must sign off on whatever is finallyagreed upon. If the CEO dictates a staffing planthat department heads consider totallyunreasonable or impossible, then many of thebenefits of this process are lost. Thedepartment heads will no longer feel muchobligation to meet the staffing plan. Indeed,they may harbor a secret desire to prove to theCEO that the projections were wrong. Thedepartment heads will want to prove that theywere right and that the boss does not knowwhat the real world is like.

Some organizations go to great lengths tolet the department managers suggest salaryincreases and incentive systems for theirpeople. This makes a lot of sense. Oneperplexing phenomenon often observed is thetendency for insisting that all employees in the

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organization be subject to the samecompensation structure regardless of therealities of their work. However, it is close toimpossible to motivate sales representativesthe same way a production worker ismotivated. How can an office worker or theshipping clerk be motivated? It is best to let thedepartment heads develop their own incentivesystems as long as they stay within theconfines of the overall payroll budget for theirdepartments. Sometimes firms need creativehuman resources professionals to assist indevising a workable compensation andincentive system that will maintain pay equitywithin the corporation but still will offer theneeded incentives to the management team.

One approach is to divide the payrollbudget into two different funds—one for theregular salaries and the other for the incentiveprogram. A strong case can be made thateveryone should get some reward if thedepartment meets its budgets. Perhaps otherrewards should be forthcoming if the venturemeets its total plan for the year. As the yearprogresses, this section proves of great value tothe manager in dealing with special requestsby the department managers, such as, “I needto give Mary another $200 a month.” Themanager looks at the operational plan book,and if the money is there, fine; if not, “Where isthat $200 going to come from? It is not in yourbudget.” The manager has a problem for whicha solution must be developed lest the budgetbe rendered a foul blow. While many managersexpress the belief that staff members are themost valuable asset, few take the time to planfor their care and feeding.

A well-presented staffing plan answers oneof the investor’s biggest fears—inflated salaryexpenses. Investors have been victimized in thepast by managements that took the money andthen paid themselves high salaries to thedetriment of the enterprise. For that reason,most outside investors require caps on wageand salary plans. Management does not get itsrewards until investors receive theirs.

The monthly staffing plan gives investors aquick look at how lean the company is runningas well as a way to check monthly to see if thefirm is overspending its budgets. Venturesoften require that a few people do a lot if theventures are to succeed.

Capital expenditures planAs new projects are undertaken, additionalequipment and facilities may be needed. Asventures grow, they usually need additionalstaff, space and equipment. Old equipmentwears out and requires replacement. Thedepartment managers should relate theiroperational plans to their needs for additionalequipment and facilities.

Unfortunately, many department managersdo not believe that capital expendituresdirectly affect the profitability of a company toa significant degree because their costs aredepreciated over a span of years. Suchmanagers do not understand the financialreality of cash flow accounting. All capitalexpenditures not financed over time aredirectly subtracted from the firm’s cash flowprojections.

There are CEOs who believe that all capitalexpenditures should be treated as directexpenses lest their impact on the firm’s cashposition not be clearly appreciated by theoperating people. One CEO said, “Myengineers are equipment crazy. They alwayswant to buy the latest doodad that hits themarket. When I scream about the costs, theymumble something about all the money we’llmake depreciating the stuff. They just can’t getit through their heads that when you spendmoney on something, it comes out of the cashaccount, and it doesn’t really matter what youcall it.”

Before the cash flow impact of the capitalexpenditures plan can be determined, thefinancial department must decide how theequipment will be acquired: outright purchase,installment purchase, or lease. Much leasingtakes place solely for cash flow reasons.

Then, the CFO must prepare a detaileddepreciation schedule on both the new and oldequipment. Bankers are prone to request a lookat it to see if the firm’s profit and lossprojections are realistic. After all, if a CEOwanted to make a company look moreprofitable than it really was, unrealistically lowdepreciation rates could be used to accomplishthis.

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Five-year planCEOs decry the difficulty of planning even oneyear ahead, let alone five years. Who knowswhat will happen five years down the road, sowhy prepare plans? The reason is thatinvestors, banks, and boards of directors wantthem. It gives them some comfort to think thatCEOs are looking ahead as they should and notoperating daily by the seat of their pants.Moreover, investors and banks want a five-year plan with which to evaluate the firm’sability to pay off its debt or liquidate someother obligations. The investors want to seewhere it will make their money. So the five-year plan is a dream; give them a dream.

The first page of the five-year plan containsthe assumptions underlying its projections:What is going to happen to the new venture’smarkets? And how about industry trends,competition, management requirements,financial needs, projected after-tax profits?

The second section presents the yearly cashflow, profit and loss, and balance sheetprojections.

All the separate plans should be deliveredto the financial department so they can betotaled up. After the shock of seeing the totals,the reality of adjustment sets in. It is time formeetings with each department head that willultimately end in a realistic set of plans that fitsinto the overall corporate goals.

It would be easy just to slice the plans up tomake them fit into the corporate reality. However,much damage is done by such measures. First,the department managers conclude that it isfoolish to waste their time on the planningprocess if the end result is really determined by aquick CEO flick of a pen. “Why should I spendtime on this game, when the CEO is going to giveme what he wants to in the end? Let’s all savetime—tell me what I have to spend.”

Second, real damage can be done tooperations by budget cuts done by CEOs whodo not know the realities of the department’sneeds. What does it really take to get the jobdone? The manager on the spot should be theone to know what can be cut and what shouldbe left alone.

Third, the department managers are let offthe hook. “I didn’t see the budget. You did. Itold you it couldn’t be done. You wouldn’tbelieve me. See, you were wrong.” Thoseusually unspoken thoughts predominate thedepartment managers’ minds. Indeed, some ofthem may subconsciously set out to prove theCEO wrong. They will work hard to make thebudget not work.

It’s the CEO’s job not to let the financialdepartment perform the budget negotiatingwith the department heads. The results may becounterproductive to company goals. Bear inmind that most operating people arenearsighted. They don’t look very far down theroad. Financial departments have not beenfamous for their vision.

Horse trading will occur. “I’ll not go to fivetrade shows, but you can’t stay in $300-a-nighthotel rooms.” The CEO should let themanagers meet and pound out the costs. Butthe CEO, not the financial department, must bein control of the final result.

Goals should not be set in concrete. Theyshould be realistic. Sometimes after many cutsof the budget, it still won’t fit into thecompany’s goals. The projected profit cannotbe reached. The goals may need to be revised.They were unrealistic.

The end result of this process iscommunication. While the focus has been ongenerating numbers, the real process has beendealing with communications. Each member ofthe management team who participates in thisplanning process comes to understand theworkings of the company and how everythingfits together. All learn about the otherdepartments. They learn how to work with theother people on the team. So it should be ateam project.

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Department planning formatsThe operational plan for each department isestablished for the year by months andincludes the following:■ Resume of department head■ Assumptions on which the plan is based■ Monthly action sheets■ Project-planning detail sheets■ Department head signature

Marketing department planning sheetscontain additional detail of sales forecasts foreach product both in units and dollar volume.Often price forecasts are critical.

Resume of department headThe qualifications of the department heads areas important as those of the CEO. After all,they are the people who really will do thework. Outside readers such as investors wantto know about the people who are to do all thetasks presented in the plan. All the fine plans inthe world will not become realities if thepeople who are charged with doing the tasksare not able to perform.

Assumptions on which the plan is basedEvery plan is based on assumptions, eitherexplicit or implicit. If assumptions arerecognized and recorded, they are explicit. Ifthey are not recognized, they are still there butare implicit in the venture. Implicit, orunrecognized, assumptions can cause muchmischief in management. The availability ofsufficient money might be implicit in a plan;subsequent reality might disclose a shortage offunds on which to operate. Thus, the planbecomes fiction, for the reality of the basicassumptions was not tested. They were notmade explicit.

Moreover, people reading the plan will notknow most of the assumptions that operatingpersonnel take for granted. So the plan mustbring out the framework under which the firmoperates. While the overall company goalsoperate under its general assumptions, eachdepartment functions with its specific set ofassumptions. For example, the CEO andmanagement team may assume a revenue flowof $50 million in the company’s goals, but themarketing department may supplement thatgeneral assumption with some specificassumptions:

■ Continued market acceptance of product.■ No unusual competitive activity.■ Price stability.■ No strikes in customer plants.■ No product-liability suits.■ Two new market areas will be developed.■ One new product will be introduced.■ Two old products will be dropped.

Monthly action sheetsFirst, what are the department’s goals for themonth? What does it intend to accomplish bythe end of the month? Often these goals arerepeated each month. For example, perhaps themarketing department intends to add one newdistributor each month.

The goals cannot be vague; they must bespecific. “To increase sales volume” is anunacceptable goal. The goal should be stated:“Sales will be increased by $200,000.”

For example, one venture had a marketingVP who was young, aggressive and impatient.Rick wanted to conquer the world in a day.When he turned in his first plan, he had listed45 goals, all sound and needed. The CEO toldhim to go back to his office and list them bymonth, giving how much time it would take toaccomplish each goal. He said, “Don’t forget,Rick, you’ve got to figure in your vacationtime, holidays, and unforeseen sick leaves.”Five days later Rick returned with thestatement, “I’ll have to work 23 hours a day,seven days a week, 52 weeks a year to do allthis.” He got the point.

The CEO then said, “Now, Rick, go backand select only those goals that provide themost results to enable us to reach our goals.”Many things are worth doing, but they don’treally provide that much to the bottom line.The saying is, “You are looking for the mostbang for your buck.”

Rick reappeared later with 14 goals alldirectly related to the goals of the company forthe next year. The lesson is: Let departmentheads go through the exercise of pruning theirgoals. The CEO should not do it for them.

Second, the projects for the month must beidentified. A project is a specific activity to becompleted. It has a beginning and an end. Thisis in contrast to the unit’s normal, routineoperations of getting out the business,

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whatever it may be. Each department headshould think in terms of projects that need tobe accomplished if the goals are to be reached.Each project must be goal related.

The manager must learn to think in termsof isolating each goal and then itemizing theprojects needed to accomplish it. For example,if sales are to increase by $200,000, whatprojects must be completed for that to happen?Perhaps a new advertising agency must beselected, a new distributor picked, and twonew sales representatives hired.

Managers must understand that many oftheir projects are intertwined with those ofother departments. Marketing cannot proceedwith its project of testing the marketacceptance of a new product unless R&Dcompletes the scheduled prototypes.Everything must mesh together.

Third, the costs of the projects must berecognized. Each project must be priced. Howmuch will it cost to complete? Not only mustall expenses be recognized, but also any capitalexpenditures must be itemized. It is easy to listall sorts of needed projects, but many of themmay cost more than they are worth. A cost/benefit analysis should be explicit.

Make certain that all such costs are fed backinto the financial plans and are approved bythe financial department. There is no sense instarting a project requiring an expenditure ofmoney if the funds are not available. Eachproject must be funded before it is started.

Project-planning detail sheetsA sheet for each project should reflect thedetailed planning for each project. It states thefollowing:■ Objective■ Specific activities required■ Completion date■ Personnel responsible■ Detailed breakout of costs■ Detail of capital requirements

Department head signaturesAll staff members must sign off on their workso they can’t claim later that theymisunderstood what was expected of them.They made the plan and agreed to it. Suchidentification works wonders with their senseof responsibility for the plan.

Common MIstakesSeveral common mistakes related to new-venture goals occur; they are related to faultyassumptions, insincerity, vagueness, long-range dreams, too many goals, unobtainablegoals, and too rapid growth rate.

Assumptions. All plans are based on a setof assumptions as to what the future holds andwhat realities will exist within which the CEOmust operate. Most assumptions are implicit.They are there but lie unrecognized. However,if the assumptions are faulty, goal setting willalways be faulty and misleading.

Insincerity. Sometimes managementmembers set forth goals that they well knowcannot be achieved. “Sales will be $100 millionby 2002.” They will be delighted if revenuesreach $20 million by then and will be lookingto sell out if that happens.

If a goal is set, it should be meant. In otherwords, it will be done. The organization shouldbe informed and should understand that thegoals are serious enough matters not to betaken lightly. They are commitments.

Consequently, goal setting is not a frivolousactivity undertaken to pacify outside parties. Itis not window dressing. Indeed, a managementteam that sets unrealistic goals or ones that areobviously insincere will be severelydowngraded in the eyes of its superiors.

Vagueness. “We will increase sales.” Great.How much? A goal must be specific.■ “We will have the best service department

in the industry.” What does that mean?How can it be measured?

■ “We will have lower expenses thanindustry standards.” It must have somenumbers.

■ “Our goal is to sell 20 percent of the totalmarket.” It should specify dollars.

■ “We will improve the employee-benefitprogram.” How will this be done?Most company goal statements suffer from

a terminal case of vagueness. They are sovague that there is no way to evaluate thesuccess in achieving them. Is there a reasonwhy management makes them vague? Afterreading the company goals, there should be nodoubt in the readers’ minds exactly what theorganization plans to accomplish during thecoming year.

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These goals are the guideposts that alldepartment heads use to develop their actionplans. If they are given vague goals, vagueaction plans will result.

Long-range dreams. Commonlyencountered long-range goals (aka dreams)should not be confused with operating goals.The goals being described here are real one-year goals that must be achieved if the newventure is to reach its long-range goals,whatever they may be. “We will expand ourinternational business over the next fiveyears.” What will be accomplished during thenext 12 months to do this? Instead the goalshould read, “Establish distribution in China.”

Too many goals. “The Christmas tree” orwish list of goals has something on it foreveryone. Such lists are almost endless. Theyare most certainly useless. A statement of goalsfor a steel prefab panel company includedmore than 172 specific goals. These coveredsuch areas as increasing the customersatisfaction index, reducing invoice cycle timeby nine days, reducing shipping damage to thepanels by one-fourth, improving employeesatisfaction by two points, reducing employeeturnover, increasing market share by 7 percent,moving into two new West Coast territories,adding three new departments to manage newproduct development, and an additional 164goals. The list of goals had no prioritization, noimplementation plan, and no individualassigned responsibility for each goal. The list ofgoals should be focused on critical success

factors, and be realistic and achievable. It isbetter to have a short list that can be achievedrather than a long list that accomplishesnothing.

Unattainable goals. What is the value of agoal that cannot be reached? Some CEOsbelieve that by giving people high goals, onesbeyond their grasp, they will be bettermotivated. Experience indicates otherwise. Thesales representative whose quota isunattainable rejects it and goes about businessas he or she wants. If the management teamrejects the company goals, the entire planningprocess will crumble. Team members mustaccept the goals as theirs. The managementteam must believe that goals can beaccomplished with a reasonable amount ofeffort.

A manager of a women’s wearmanufacturer complained that the sales goalshe had been given for the year included theusual 10 percent increase in volume that hadbeen the case for the previous 10 years. Therewas one hitch. The economy from which thecompany had obtained its revenues was interrible shape. Sales were down 15 percent. Thepeople revolted and rejected the goals. Therewas no way to reach the impossible goal.

Instead, management should haveapproached the year with the attitude, “Weknow it’s going to be tough, but let’s just try tomaintain what we’ve been doing in salesvolume but decrease our expenses by 1percent. Now give us some solid action plans

Common Mistakes to Avoid When Writing the Operating and Control Systems Plan

■ Inadequate system of accounting, failureto keep important business records

■ Failure to establish procedures that willproduce accurate records for the IRS

■ Not having adequate inventory controls■ Failure to develop policy-and-procedures

manuals in operating the business■ Failure to establish security systems to

protect such critical assets as trade secretsand customer lists

■ Failure to identify and prioritize majorgoals

■ Failure to identify responsibilities of keymanagement team

■ Not developing a contingency plan whenschedule cannot be met

■ Failure to identify uncontrollablevariables

■ Failure to establish procedures that traceand control the flow of cash

■ Failure to maintain control over accountsreceivable

■ Not developing a contingency plan whenschedule cannot be met

■ Failure to review and revise scheduleperiodically when conditions change

■ Failure to identify key goals and to allowenough time to accomplish them

35Operations

to reach this goal.”Too rapid growth rate. Rapid growth can

cause serious problems. Often the totals set,while attainable, are too rapid for the good ofthe venture. Not only is too much pressureplaced on the entire organization, but also therate of growth may be institutionalized to anextent that it cannot be economically modifiedwhen the need arises, when the growth ratesignificantly tapers off.

Often the ambitious driving force, in thedesire for quick success, builds a “house ofcards,” a firm without a foundation.

Mack Davis relates:We had identified a huge market for one of

our products in the power industry. I waseager to capture this volume as soon aspossible, since we were planning a public stockissue, and such sales would have greatlylubricated the deal. The one drawback wasthat we knew it took about nine months tonegotiate a deal with power companies. I hadthe notion that by throwing a lot of dollars intoselling them, I could force a rapid rate ofgrowth in this market niche. Thank goodness Ihad an astute product manager. He convincedme that while the market was available, if wewere to try to penetrate it that rapidly, wewould not only fail but would likely ruin themarket for future development. So my year’sgoal for that product manager was for him tocontact four electric-utility companies eachmonth to start the sales cycle with them. Twoyears later the company enjoyed a very nicemarket with them. During the year of salescalls, engineering and production had time todo their jobs properly, so our quality controlwas in place and working.

Sequencing the PreparationThe management team should first meet todiscuss the company goals for the coming year.This often can be done better at a weekendretreat than at the office, where ongoing workflow can be interruptive. This should be abrainstorming meeting at which staff membersshould have freedom of thought to gowherever they want. Allow at least a week forthe group to reflect on the session beforeassembling the members again forcrystallization of their ideas into a set ofcompany goals for the year.

Second, preparation of the financialsshould be started. The department headsshould meet with the financial department toprepare the first-draft budget, staffrequirements, and the capital expendituresneeded for the coming year. The CEO shouldmeet with the human resources department toprocess the staffing requirements and preparethe incentive programs for the departmentheads. The CEO should then meet with thedepartment heads to work with the first draftof the budget. The meetings should continueuntil the budget is completed.

Third, the department planning formatsshould be developed by the department headin alignment with the budgets that wereapproved. A group meeting of all departmentheads with the CEO and the financialdepartment should be held to ensure that allformats properly dovetail and that everyoneknows what the other person is doing.

Finally, a meeting should be scheduled forformal approval of the final draft of the plan, atwhich time everyone signs the document. Nowthe plan is ready for presentation to the boardof directors. Each department head shouldmake a presentation of his or her plan beforethe board.

36 Operations

Using an Operational Plan BookThe time and effort spent developing theoperational plan book was not just for windowdressing to placate the investors, bank, andboard of directors. It is not a document that,once done, is put on the shelf so it can beshown to others. It should be used daily.

The CEO should meet with the financialdepartment prior to each monthlymanagement meeting with the departmentheads to compare actual dollar performancesagainst the projections in the plan. How are wedoing? Who is meeting their projections? Whois not? Where are we having trouble? How badis it?

Big deviations from projections, both oversand unders, should be examined. A marketingmanager who planned to spend $50,000 foradvertising in the month but who has spentonly $2,000 is signaling that some trouble hasdeveloped. What is holding up theadvertising? It is not so much that the lack ofadvertising is important but that the reason forits delay may be serious.

Many department heads do not like tocome forward with bad news. Moreover, theworse the news, the more reticent they may beto come forward. Some may try to concealdisasters as long as possible, hoping thatsomehow they can get out of the mess. Often,the only way to detect the problem in the earlystages is by discovering some derivativeexpenditure that is out of line.

Before meeting with the department heads,the CEO should research with the financialdepartment the reasons for the identifiedtrouble spots, and ask about what has beencharged to each of the troubled accounts.Sometimes it is merely that something has beenwrongfully charged to it, or some otherexplanation emerges. Few things lessen thestature of the CEOs and their eventualeffectiveness more than to continually confrontdepartment heads with implicit charges thatsomething is wrong in their departments onlyto have the department heads easily proveotherwise. Eventually, if the CEO is continuallyshown the error by subordinates, he or she willshy from ever questioning their performance

for fear of being proven wrong. It is importantto be certain of all data before questioningothers.

Look for trends! Suppose the telephonebudget has been running 20 percent overbudget for the past two months. Pull the billsand examine them. An unusual number of callsto Atlanta to a number that seems familiar isdiscovered. Oh yes, the new distributor hasbeen contacted. Certainly, the phone bill willgo up as operations are expanded. So what canbe done? The telephone budget can beincreased 20 percent to allow for the increasedactivity in the Southeast. That makes sense.Unfortunately, what some CEOs do is enter themeeting improperly informed. They yell abouthow high the phone bills have been and thatexcessive phone calls must be stopped rightaway to get the budget back in line. Sometimesthis is not a possible solution.

Budgets are in continual flux. Theyconstantly change as conditions change. Thus,they need continual review. It is mostimportant that budgets be quickly reevaluatedif sales fail to meet projections. The whole ideaof budgeting is to keep revenues and costs inproper ratio. And never forget, revenues aresupposed to exceed costs.

Now the CEO is ready for the monthlyreview meeting, which he or she shouldmonitor. The responsibility is to make certainthat each department has achieved its goalsand completed its projects according to plan.As the department heads review their plans, ifthey have not performed according to plan,then everyone must discuss whether thesegoals or projects are worth doing. If not, theyshould be forgotten. If so, then they should berepositioned within the future plan.

As one department changes its plans, otherdepartments may have to change theirs. IfR&D has not yet finished with a new product,production and marketing will have to movetheir plans back for that item. Thus, it can beseen that the failure of one department makeslife even more complicated for everyone in thegroup. People who do not do what theypromised to do quickly become unpopular.Peer pressure can be great, evenoverwhelming. The department heads feartheir peers more than they fear the CEO. Theyhave to deal daily with peers, but they can hidefrom the CEO.

37Operations

If the CEO and the management team failto meet monthly to check the progress of eachdepartment in meeting the plan and makeappropriate changes in it, the operational planwill self-destruct in a few months. A lot ofwork will have been done for nothing.

At the end of each monthly meeting,weaknesses both financially and operationallyhave been identified. Those trouble spotsshould be closely monitored during the comingmonth, and the CEO must work with thedepartment heads who have not performed upto plan. The efficient CEO working with anoperational plan spends time working with thecritical factors. The CEO who does not have agood operational plan tends to work with thebusiness as a whole and does not know how topinpoint the trouble areas.

ConclusionThe operational plan is a carefully written,concrete, monthly plan of activities for eachunit in a company. It is the instrument the chiefexecutive officer uses to coordinate the effortsof all phases of the enterprise toward achievingthe venture’s goals for 12 months. Theoperational plan is not a document that is donejust to be shown to others. It should be useddaily.

The role of an operational plan is to unify acompany in order to accomplish all thenecessary tasks that must be done in thenecessary order to achieve success. It is basedon hard, realistic, tangible, achievable goalsthat must be reached if the company is toachieve its sales and profit objectives.

Each month, the operational plan is used tocompare the monthly performance against theagreed-upon targets—to answer the followingquestions: How are we doing? Who is meetingtheir projections? Who is not? Where are wehaving trouble? How bad is it? It should leaveno room for doubt in the minds of the CEOand the management team about what must bedone each month of the year.

Moreover, at the end of the fiscal period,how are the CEO and management team to beevaluated fairly and accurately without somebenchmark against which to measure theirperformance? The operational plan is such abenchmark.