We are now over a quarter into the new year. Like many companies, you may find yourself falling short of plan. That doesn’t mean the budget has all the sudden lost its value. It can be your best friend. This is not the time to panic. We see far too many business owners making reactive decisions to address performance misses, that either don’t have the desired impact or cause longer term damage. Don’t make that mistake. Take these steps instead.
First revisit the assumptions – are there any obvious flaws in hindsight? Where are you relative to the prior year? Was the plan based on repeating past levels of growth. Was the plan too aggressive? What learnings can be gained from this new look?
Once this valuable context is in your hands, a very powerful tool is the gap analysis. Done right, it can be an invaluable decision-making tool and drive improvement in the bottom line. By exploring the current state and understanding the gap to reach the desired state, businesses can take proactive actions in response. While on the surface, this is a very simple concept, the process to generate the right outcomes is critical. Here are a few keys for success:
What is the impact of sales going forward? What costs are directly tied to sales, that will move up and down as sales follow suit? What does the business look like at a lower sales level for the year? Could you accelerate sales at a lower margin? Or are lower margins just a reality for the business? Understanding the impact of sales changes on gross margin dollars is the tip of the spear as the analysis almost always starts at the top and funnels down from there. Could simply generating more sales in the rest of the year realistically get the business back on track? Maybe, but leadership teams can place too much confidence in the “we’ll just sell more strategy”.
Unless very confident, the answer also lies in costs. Understand controllable costs in the business. Costs like hiring, marketing spends, travel and entertainment, costs tied directly to sales, for example, are costs that can be modified to address a portion or all of the identified gap. What costs are controllable in your business? How much do they move the needle? What would the impact be of cutting these costs? If your gap is small, it may not make sense to cut if it risks future growth. It may just mean future planned spend is curtailed. Large gaps would warrant steeper cuts. What is essential is understanding the potential impact on top line, bottom line and future growth, using that lens to evaluate a decision.
Understand your overhead spend. While potentially a subset of controllable costs, overhead warrants its own analysis. How much more sales can your infrastructure support? Do you need to make additional investment to grow? Are you already at an overhead capacity? Planned investment may or may not need to be spent, which can greatly impact the numbers needed to shrink a gap.
The above items are good examples of variables that materially drive outcomes in planning. Set up a forecast framework that allows you to easily manipulate those variables to understand possible outcomes. While daunting on the surface, the simple reality in our experience is there are likely 5-8 categories that are really going to impact results materially. Focus energy and the what ifs there. The goal here is not to get the “new right answer”. The goal is to understand what the business could generate in income if you go down door #1, door #2 or door #3. This will lead to the confidence needed to drive the business forward, even if the performance to date is below expectations.
Perhaps decisions are made to discount product to drive sales, to pause planned investments, to actually cut payroll and marketing or all of the above. It could also mean simply accepting lower results and take the longer view. What are the options in your business to address the gap? With a proper gap analysis, you can confidently answer that question.
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