Mid-year adjustments to business plans help many companies improve their tactics while remaining true to long-term objectives. Some businesses have only off-the-cuff approaches to adjusting business plans. Better is a more structured approach, one that gives management plenty of flexibility and focuses concentration on the right levers of profitability.
Most of us look at mid-year financials in terms of what’s on target and what’s off. When variances are small, they are ignored as the plan is working.
Large variances sometimes lead to personnel or policy changes, and here it’s crucial to identify why the variance exists. Variances fall into three categories:
- External conditions different from plan
- Internal results different from plan
- Previous decision to change plan
Identifying which category a given variance falls under is crucial. For example, suppose that sales in the southeast region are below target. Before blaming the regional sales manager, assess external conditions. Did the economy weaken in the region? External changes also include technology, social attitudes, government policy and competition. Depending on the particular measure, one or more of these issues might have caused the variance. Sacking an experienced sales manager because the local economy tanked will further weaken sales and profits.
Positive variances deserve almost as much attention as negative variances. If sales run substantially higher than expected, understanding the cause helps answer key questions: Should we increase production plans for the rest of the year? Should we increase the advertising budget? Is the sales manager ready for greater responsibility, or did she just ride a surging economy?
Internal conditions different from plan can reflect employee performance variations. Maybe the sales team did a crackerjack job, or perhaps the customer service group helped increase repeat sales. Finding the right employees to praise or support will improve future results even more. A downside example is a revenue decline that is not the sales team’s fault, but a result of the production crew being unable to meet plan.
The third category of variance is due to a change that was already made to the plan. A new opportunity that is spotted in February justifies pushing aside other projects that had been in the plan. Ideally, the plan would have already been updated, but that’s not always the case. The mid-year adjustment is a good time to do that.
Every business plan reflects a tension between planning and flexibility. “Plan your work--work your plan” is famous advice from Norman Vincent Peale. The wisdom is illustrated by the many failures due to “chasing rabbits” or being distracted by things crossing the desk. However, slavish devotion to a plan may cause missed opportunities or even fatal pursuit of a flawed strategy. So business leaders need to find the balance. The best way is to make all changes to plan explicit. Don’t be a slave to the plan, but don’t ignore it. When a new opportunity or threat arises, deliberately consider how that relates to the overall plan. A variance that arises from a thoughtful change in strategy is fine.
The economy is my favorite driver of business, though not the only driver. Many business leaders scan a variety of news sources and form a gut opinion of where the economy is going. That process cannot be duplicated easily in a mid-year adjustment. News headlines are often sensational, so I recommend developing a dashboard of economic indicators. When it’s time to look at how the plan is faring mid-year, it’s easy to roll down the list of indicators and see how the assumptions are holding out.
Mid-year reviews should improve business practices, and they do when structured well.
