Planned Performance
by Ronald C. Lazof

Achieving Planned Performance is all about: a) first setting a company's stakeholders' expectations; b) and then meeting those expectations. The expectations of the company's stakeholders can be best managed by providing them on a timely and continuous basis with tailored, reader-specific budgets, forecasts, and estimates which are solidly based, reasonable, achievable, and appropriate.

It is no longer enough to be profitable and have positive cash flow to be adjudged successful! Indeed profits and cash flows which are not consistent from period to period and in conformity with predictions, estimates, and budgets are not even minimally acceptable!

Lenders, creditors, vendors, employees, customers, and shareholders, all of the company's stakeholders require the company to perform within a narrow band of predetermined expectations. Failure to fall within the band of expected performance can, and will, result in:

  • reduced access to funding both debt and equity;
  • loss of employee morale and de-motivation;
  • loss of customers and suppliers; and
  • shareholder revolt.

The company's first and best opportunity to meet performance expectations is in the setting of those estimates, forecasts, and budgets which together give rise to stakeholder expectations. Then, when the company executes on the communicated plans and meets or exceeds its stakeholders' expectations it will have delivered Planned Performance!

Unless otherwise pre-warned, lenders expect profits, positive cash flow, growth and debt reduction. Employees expect increased wages and benefits as well as stable employment and growth. Creditors and vendors expect payment within invoice terms and growth. Customers expect timely and complete delivery of services and products with increasing value and quality at appropriate pricing. Shareholders expect the continuance of the business enterprise and increasing shareholder value.

One of the ways in which a company's executives can manage its stakeholders' expectations is to promise less and perform more. Exceeding a company's stakeholders' expectations is the cardinal rule of achieving Planned Performance, and the best way to ensure its achievement is to promise less and perform more. This does not mean that we advocate "sandbagging" the company's stakeholders. It does mean that we advocate a conservative approach to the creation of stakeholder expectations.

Budgeting is a tool for performance assessment as well as a model upon which expectations are, in part, based. Having a budget does not mean economizing on expenditures any more than being on a diet means reducing caloric intake although in common usage many would ascribe to these definitions. If the company does not have a budget and use it frequently, at least monthly, to analyze its performance by variance or exception analysis or both, its management will never develop a deep understanding of the financial inter-relationships of each constituent line item (expense) on its operating statement with each other expense item and with the company's top line revenue, and rate of growth. An expense item that has an underexpenditure to budget is, or should be, of equal concern to one that has an overexpenditure to budget. In each case the absolute, positive or negative, actual to budget dollar variance must be analyzed and explained. Then causes must be determined, plans developed, actions taken and feedback again collected to get back "on plan." If the budget is proven by performance to be inappropriate or no longer achievable, management then has the opportunity to modify the plan forecast to be more reflective of current actual market conditions.

When setting the company's annual and monthly budgets we recommend that the company apply both a top down and a bottoms up methodology. Then compare the results of each and reach a company wide consensus at what is achievable with at least an 80% confidence level. The use of the statistically significant concept of a confidence level indicates that within a narrow band of deviation a given result will have a specified probability of success. For example, a budget will have an 80% confidence level of being achieved at specified dollar and unit volumes, plus or minus, 5%. Since budgets of necessity deal with future events and unknown and unknowable market conditions, the setting of a confidence level for their achievement cannot be a purely statistical exercise, but will of necessity, involve management's best judgements in the light of their intelligence, market experience, and knowledge.

A bottoms up budget is one which starts by analyzing the expected unit volumes of each product and service which the company offers, in each marketing area, by each sales representative, to each known or expected customer or client. The process which should involve every member of the executive, sales and marketing teams should be started no later than the company's third business quarter for application to the company's next succeeding annual period, and it must be completed early enough to allow the company to prepare and implement the resource reallocations that will be required prior to the start of budget period in order for the company to get a running start at meeting the plan on day one. The process must require not only numerical responses, but also well reasoned written explanations for market conditions, applicable by geographical area or identified customer or customer class for the current year to date taking into consideration seasonal variances and exceptions as well as planned unit, dollar volume, and pricing adjustments for the budget period.

Once the unit sales budget is delivered by geographical area, product, service offering, salesman and customer, it can be rolled up into an expected top line in units and then priced at both current and expected pricing to provide a first look at the new budget year. This projected top line can then be provided to the accounting department to create a tentative budget with the application of existing fixed costs and variable costs applied to the indicated unit volumes, with the resultant bottom line being available to management as a first look at next year's prospective budgeted results.

Unlike a bottoms up approach to budgeting, a top down approach starts with a management determination of what next year's bottom line should look like to meet the existing or current financial expectations of the stakeholder group. By management communicating continuing expectations of the company's stakeholders in a clear manner in numerical form accompanied by an explanatory text to the accounting and finance staff, a second, or top down, view of next year's budget can be developed. These budgets when analyzed and synthesized will form the basis for an internally negotiated consensus budget.

However, the task of budget creation is not finalized until the budget is both communicated to and accepted by the company's stakeholders as reasonable, achievable and appropriate. It is reasonable if all of the requirements for successful achievement, adequate capital (debt and equity), staffing, equipment, facilities, vendor capacities, quality standards and identified current and prospective customers are, or will, with at least eighty percent certainty (level of confidence) be available. It is achievable if reasonable and the stakeholders consent and buy in to its success without condition. Where participants state conditions or "buts" each must be heard, discussed, analyzed, and incorporated, if valid, into the budget. Remember, there is an important distinction between just listening to a communicated thought and really hearing the thought. If the company's stakeholders can devote the time and care to comment, management must devote the time and equal care to hearing, understanding, and thinking about the stakeholder's comments.

The budget will be appropriate if it is reasonable, achievable, and consistent with the corporation's long term vision statement and quality and market objectives. Once the company's budget is established, its actual performance must be compared on at least a monthly basis to its budgeted performance with all variances (positive and negative) being explained. These explanations should then be transformed into an adjusted budget or forecast of performance for the balance of the budget period. The forecast not only provides an updated view of the company's expected Planned Performance for the current period, but when compared to the budget a tool for validating and modifying, if necessary, the budgeting process itself. When both the actual to budget and forecasted performance are promptly and continually communicated to the company's stakeholders, their expectations of the company's performance will be adjusted and the surprise factor which is so deadly to stakeholder confidence will be diminished.

The company's budget for the ensuing year should not be changed. The budget will form the basis for assessing how susceptible your business is to periodic prediction as well as serving as a basis for performance evaluation. However, once the company has completed a single month of actual performance the company's monthly financial performance evaluation packages, which in various and appropriate levels of detail should be provided to the company's stakeholders, should include the budget with the actual to budget variance analysis, and the forecast for the current year. The forecast will, or course, consist of the years actual to date performance plus an updated budget forecast based on current market conditions for the balance of the year.

Just as budgets are differentiated from forecasts so are estimates differentiated from forecasts. We believe that the more remote in time, the more fallible and uncertain the performance or said another way, the lower the confidence level of the predicted result. As we insist on an eighty percent confidence level for a budget, we do not believe it to be appropriate to refer to any performance more than twelve (12) months in the future as a budget, as to do so would raise the stakeholders' expectations beyond that which is reasonable. In other words, we do not believe an 80% confidence level is achievable for any performance more than one year in the future. Hence the term estimate.

It is important not to unreasonably raise stakeholders' expectations of future performance by delivering overly optimistic budgets, forecasts, or even estimates. However, if estimates clearly are understood to have a lower confidence level than forecasts, and forecasts a lower confidence level than budgets, the delivery of long term, more than one year in the future, estimates should not unduly or unreasonably raise stakeholder expectations.

We believe planned performance requires the creation, use, and communication of a five year forward vision reduced to numbers, accurately adjusted to conform with both the company's budget and updated forecast accompanied by a detailed written explanation of market conditions, the company's market approach, and all other relevant factors. This estimate becomes the foundation upon which the business' financial, sales and marketing, process, operational, capital, employee base, and other models can be constructed and tested. Each functional model once constructed then becomes a tool for use in the operation of the business to test the feasibility of alternative options, plans, and visions against the company's stakeholder objectives, and each in turn becomes a component of Planned Performance.

Managing a business consistent with the concept of Planned Performance requires a high degree of discipline and focus, but we believe that the rewards provided by continuously meeting stakeholder expectations increases access to funding, employee morale and participation, satisfied suppliers and happy customers, and makes the effort well worth the investment.

Ronald C. Lazof currently serves as a managing director of Prism Advisors, LLC, a management advisory and consulting organization. Prism focuses its attention on the entrepreneurial, emerging growth and mid-sized privately held corporate markets. Mr. Lazof served as President and Chief Executive Officer of Behr Process Corporation from 1996 to August 2001, playing a key role in the company's move from a private family held business to a publicly held multi-plant manufacturer and distributor of paints and coatings. Contact Ronald by e-mail: and visit .

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Copyright 2002 by Ronald C. Lazof. All rights reserved.

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