Strategic Planning: An Effective Tool in Aligning Personal and Business Plans
- Keywords:
- strategic planning
Most for-profit enterprises are operated with shareholder wealth creation as one of their primary goals. For most business owners, the stake in their business makes up the single largest, and most important, asset on their personal financial statements. As a result, when a business owner is developing personal wealth plans, ensuring the business can accommodate those plans is essential, and planning must be integrated.
The Need for Strategic Planning
Businesses face ever-changing market dynamics and risks, and managers must balance organizational needs with the personal desires of owners. This requires a strategic plan that complements the owner’s personal wealth plan while ensuring the business continues to thrive in rapidly changing business environments. The strategic plan is an essential tool that managers can use to navigate this complexity and mitigate unforeseen risks along the way.
Strategic planning not only provides a roadmap for moving a business forward, it also aids leadership in identifying potential future market disruptions and planning proactive responses. It helps ensure that the underlying business continues to deliver the necessary performance to accommodate the personal plans of ownership.
For example, a dramatically changing tax environment would have significant ramifications for both the owners of a private business and the business enterprise itself. Those who anticipate and plan for prospective future states (both as an individual and an enterprise) are more likely to make swift and decisive decision making that yield optimal outcomes.
Developing Your Plan: Define Goals and Tactical Approaches
A hallmark of sound strategic planning is clearly defined and measurable goals and objectives. In closely held, individually owned or family-owned businesses, strategic planning goals should be narrowly focused on business outcomes, but with careful consideration paid to personal wealth plans. Business goals should complement the goals set out in the owners’ personal wealth plans.
For example, in the current environment, goals might include:
- Minimize tax obligations
- Ensure uninterrupted supply of raw materials
- Enhance operating margin by 300 basis points
- Create borrowing capacity for future strategic needs (growth, monetization or ownership transition)
- Penetrate a new geography or product line
Once goals are clearly defined, tactics can be developed to achieve them. For example:
- Minimize future tax obligations by accelerating future distributions using a $20 million dividend recapitalization at today’s lower tax rates
- Ensure uninterrupted supply of raw materials by using current cash and borrowing capacity to vertically integrate the supply chain, yielding enhanced operating margins of 300 basis points and shifting the power dynamic in the industry
Think of goals as the destination and tactics as the roadmap to get there. The more detailed the roadmap, the less likely you’ll get lost along the way.
Plan for Future Uncertainty
A strategic plan defines the current state of business goals and objectives, as well as detailed plans to move toward those goals. However, with today’s market uncertainties, real value comes in preparing for what could be on the horizon—giving operators a roadmap to address a dynamic environment with confidence.
This is where scenario development is critical. While contingency planning defines the organizational response to a change in one variable (for example, a competitor’s new product launch), scenario development defines the response to a broad set of market changes—a different state of the world. Effective planners often develop numerous potential scenarios and create responses to each. Think of it as “war gaming” for a business. Likely none of the scenarios will play out exactly as contemplated. However, the planning process requires managers to build a strategic “toolkit” that is flexible and adaptable as market dynamics unfold in unexpected ways.
Understand and Plan for the Resources You Will Need
A plan is only as good as your ability to execute it. Along with the creation of a strategic planning document, you will also need to undertake a critical review of your company’s resources and capabilities to ensure the plan is actionable. In most organizations, this will involve a review of your company’s internal assets, both human and physical, as well as an assessment of external support resources and partners.
Build a Planning Team
Creating a strategic plan should involve partners both internal and external. Effectuating the plan requires institutional buy-in—involving key internal business managers builds consensus and gives stakeholders an opportunity to raise concerns.
Additionally, a selection of trusted external advisers can play an important role. Relying on advisers who are aware of financial tools, legal or tax structures or best-in-class planning ideas can unlock considerable value.
- Commercial Banking Advisers: Having strong financial support in place is critical to the success of a strategic plan. Financial planning allows a business to act quickly when an opportunity presents itself and prepare for ownership’s personal goals (such as acquisitions, returns of capital, or shareholder buyouts).
- Accounting and Tax Advisers: As the market evolves, so will the need for increasingly sophisticated support from both accounting and tax perspectives. For many business owners, the dynamics relating to tax planning for both business and personal finances are inextricably linked.
- Legal Advisers. It is important to work with trusted, strategically minded outside legal advisers. We recommend forming a relationship with a multidisciplinary law firm so you can draw on subject matter experts when needed.
Keep an Investor Mindset
When developing a strategic plan, it’s important to evaluate the financial profile and future potential of the business with an investor’s mindset. Given that owners and/or management may have a substantial amount of personal net worth invested in the business, the financial returns implied by the strategic plan should be evaluated like any other asset in which those individuals might invest.
Ask if returns are adequate, both for the individual risk, and as compared to potential returns from other investment options. If these returns are deemed inadequate, how can the strategic plan be altered to enhance those returns? Can it enhance growth or expand margins? Is diversification a better option? Is the right capital structure in place? Ultimately, if the implied risk-adjusted returns from a business are less attractive than other alternatives, consider whether it makes sense to diversify overall individual investments.
The Essential Plan
In times of uncertainty, a flexible strategic plan provides a guidepost to management, ensuring clear decision making. If done properly, the plan aligns the goals of ownership with the actions of management. It forces planners to confront possible market conditions and builds in flexibility to respond appropriately. It ensures proper resources and advisers are in place to position the business for success in rapidly changing environments.
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John Chalus and Bob Harrod
Most for-profit enterprises are operated with shareholder wealth creation as one of their primary goals. For most business owners, the stake in their business makes up the single largest, and most important, asset on their personal financial statements. As a result, when a business owner is developing personal wealth plans, ensuring the business can accommodate those plans is essential, and planning must be integrated.
The Need for Strategic Planning
Businesses face ever-changing market dynamics and risks, and managers must balance organizational needs with the personal desires of owners. This requires a strategic plan that complements the owner’s personal wealth plan while ensuring the business continues to thrive in rapidly changing business environments. The strategic plan is an essential tool that managers can use to navigate this complexity and mitigate unforeseen risks along the way.
Strategic planning not only provides a roadmap for moving a business forward, it also aids leadership in identifying potential future market disruptions and planning proactive responses. It helps ensure that the underlying business continues to deliver the necessary performance to accommodate the personal plans of ownership.
For example, a dramatically changing tax environment would have significant ramifications for both the owners of a private business and the business enterprise itself. Those who anticipate and plan for prospective future states (both as an individual and an enterprise) are more likely to make swift and decisive decision making that yield optimal outcomes.
Developing Your Plan: Define Goals and Tactical Approaches
A hallmark of sound strategic planning is clearly defined and measurable goals and objectives. In closely held, individually owned or family-owned businesses, strategic planning goals should be narrowly focused on business outcomes, but with careful consideration paid to personal wealth plans. Business goals should complement the goals set out in the owners’ personal wealth plans.
For example, in the current environment, goals might include:
- Minimize tax obligations
- Ensure uninterrupted supply of raw materials
- Enhance operating margin by 300 basis points
- Create borrowing capacity for future strategic needs (growth, monetization or ownership transition)
- Penetrate a new geography or product line
Once goals are clearly defined, tactics can be developed to achieve them. For example:
- Minimize future tax obligations by accelerating future distributions using a $20 million dividend recapitalization at today’s lower tax rates
- Ensure uninterrupted supply of raw materials by using current cash and borrowing capacity to vertically integrate the supply chain, yielding enhanced operating margins of 300 basis points and shifting the power dynamic in the industry
Think of goals as the destination and tactics as the roadmap to get there. The more detailed the roadmap, the less likely you’ll get lost along the way.
Plan for Future Uncertainty
A strategic plan defines the current state of business goals and objectives, as well as detailed plans to move toward those goals. However, with today’s market uncertainties, real value comes in preparing for what could be on the horizon—giving operators a roadmap to address a dynamic environment with confidence.
This is where scenario development is critical. While contingency planning defines the organizational response to a change in one variable (for example, a competitor’s new product launch), scenario development defines the response to a broad set of market changes—a different state of the world. Effective planners often develop numerous potential scenarios and create responses to each. Think of it as “war gaming” for a business. Likely none of the scenarios will play out exactly as contemplated. However, the planning process requires managers to build a strategic “toolkit” that is flexible and adaptable as market dynamics unfold in unexpected ways.
Understand and Plan for the Resources You Will Need
A plan is only as good as your ability to execute it. Along with the creation of a strategic planning document, you will also need to undertake a critical review of your company’s resources and capabilities to ensure the plan is actionable. In most organizations, this will involve a review of your company’s internal assets, both human and physical, as well as an assessment of external support resources and partners.
Build a Planning Team
Creating a strategic plan should involve partners both internal and external. Effectuating the plan requires institutional buy-in—involving key internal business managers builds consensus and gives stakeholders an opportunity to raise concerns.
Additionally, a selection of trusted external advisers can play an important role. Relying on advisers who are aware of financial tools, legal or tax structures or best-in-class planning ideas can unlock considerable value.
- Commercial Banking Advisers: Having strong financial support in place is critical to the success of a strategic plan. Financial planning allows a business to act quickly when an opportunity presents itself and prepare for ownership’s personal goals (such as acquisitions, returns of capital, or shareholder buyouts).
- Accounting and Tax Advisers: As the market evolves, so will the need for increasingly sophisticated support from both accounting and tax perspectives. For many business owners, the dynamics relating to tax planning for both business and personal finances are inextricably linked.
- Legal Advisers. It is important to work with trusted, strategically minded outside legal advisers. We recommend forming a relationship with a multidisciplinary law firm so you can draw on subject matter experts when needed.
Keep an Investor Mindset
When developing a strategic plan, it’s important to evaluate the financial profile and future potential of the business with an investor’s mindset. Given that owners and/or management may have a substantial amount of personal net worth invested in the business, the financial returns implied by the strategic plan should be evaluated like any other asset in which those individuals might invest.
Ask if returns are adequate, both for the individual risk, and as compared to potential returns from other investment options. If these returns are deemed inadequate, how can the strategic plan be altered to enhance those returns? Can it enhance growth or expand margins? Is diversification a better option? Is the right capital structure in place? Ultimately, if the implied risk-adjusted returns from a business are less attractive than other alternatives, consider whether it makes sense to diversify overall individual investments.
The Essential Plan
In times of uncertainty, a flexible strategic plan provides a guidepost to management, ensuring clear decision making. If done properly, the plan aligns the goals of ownership with the actions of management. It forces planners to confront possible market conditions and builds in flexibility to respond appropriately. It ensures proper resources and advisers are in place to position the business for success in rapidly changing environments.
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