Shooting Blanks - The Impotence of Financial Business Planning

"Over the next five years, our projected Internal Rate of Return will be 21.3%."

"We calculated an ROI of 12.63%"

"In the first three years, using conservative estimates, our sales are projected to be $82,300, $256,805 and $544,080"

I recently attended some presentations by business students, showcasing their business planning skills. The event was pleasant enough, but I see now where managers learn to shoot blanks when they're aiming at business targets. Whether entrepreneurs looking for investment capital, or managers planning improvement initiatives, the presenters always seem to make up a whole bunch of numbers, multiply them by a bunch of other guessed numbers, extend them five years into the uncertain future, and then state their financial projections to three decimal places of accuracy. The reliance on financial business planning is all-pervasive, and I've always felt a bit cynical about its usefulness.

I was pleasantly surprised to learn how recent the development of financial business management is. Prior to the 1950's financial data was rarely used to manage the day-to-day business and planning of operations. It was used extensively to keep score, but it's use was limited to reporting after the fact - to telling shareholders how the company actually did. That is what financial tools are really useful for; for counting the money, for reporting results to shareholders, for looking in the mirror to see what happened.

But I'm shocked by how many companies that are planning improvement efforts look at it primarily as a financial, cost-accounting exercise. The magic formula they use - Profit equals Revenue less Costs - leads to very straight-forward decisions that never seem to quite work out. Yes, this formula is true, but only for keeping score, not for planning. It's like carefully, precisely aiming at a target, but then being impotent to achieve the results and actually hit the target, because there's no bullet in our gun.

For example, to make more profit, an obvious method is to cut costs. But, of course, most costs are associated with some sort of purpose, some function. And, when you eliminate those costs, you also eliminate those functions. So, the company reduces the amount spent on new product development, cuts the number of staff in customer support, and eliminates a number of HR positions that had been dealing with internal conflict resolution, staff training and occupational health and safety. Things look good on the balance sheets for a few months, but surprise!, your products soon fall behind your competitors, your customers become unhappy, and staff conflict increases while safety and quality slip. And, the financial results don't meet up with what was expected from the simple financial planning formula.

The most solid way to improve the financial results is to continually improve the details of how we do what we do for customers. By improving the processes, the details of the daily work, we can reduce the resources required while improving quality, improving speed of delivery and improving employee engagement at the same time. This WILL produce more profit. This isn't rhetoric, this is a practical approach and a long-standing alternative to how to manage your business. Toyota (despite the recent witch-hunt), Scania and other industry-leading organizations, don't use financial accounting to manage their businesses as much as they use them to report the results.

If your attempts at improvement never seem to quite measure up, maybe you should start using different methods to achieve improvement. If you're shooting blanks, you'll never hit your targets, no matter how much effort you put into aiming.