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Action Articles for Business Owners

Planning

The Case for Planning

September 05, 20232 min read

Don't Under Estimate the "Value" in Planning. 

If a change has occurred since the classic, and often referenced Business Horizon study in the 1980s, it is not the fundamental finding. If anything, the faster pace of change and the ready availability of information could increase the variances shown in the study.

          The study reviewed six industries over a period of approximately ten years. The study left no doubt about the benefits of planning… planning of all types. The study results of planning vs. not planning are shown below:

                                                    Benefit of                       Benefit of

                                                    Informal                           Formal

Statistic Measure                  Planning                          Planning

Sales Increases                          +52%                                +75%

Earnings Increases                    +40%                                +84%

In terms of performance a mid-sized company at the end of the study period with (a) no planning, (b) informal planning or (c) formal planning would be as follows:

                                                                   Sales                           Earnings

(a)     No Planning Baseline                10,000,000                      1,000,000

(b)     Informal Planning                     15,200,000                      1,400,000

(c)     Formal Planning                        17,500,000                      1,840,000 

The increased value of the business is significant. With the benefit of formal planning the value of a business could easily be over twice that of a company without these benefits. On a linear basis the selling price for your business should be 1.84 times higher, but the improved revenue and earnings growth rate would have an additional positive effect on the price achieved in a transaction.

In this over simplified example the sale price for the business could be potentially increased from $5,000,000 to $10,000,000. Clearly, the time and effort necessary to implement a sound planning system can create huge financial benefits when the business is sold. There are also the near-term benefits of creating a more easily manageable business, improving annual cash flow, and consistent year-to-year wealth creation.

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Richard Mowrey

WSJ and USA Today Best Selling Author

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