” If You Don’t Know Where Your Going, You’re Probably Not Going to Get There.”
(An Ancient Chinese Proverb)
As we have discussed over the past two weeks, the reason most construction company CEOs resist engaging in formal strategic planning is that they believe the process is artificial, inappropriate for their size firm, and an inflexible discipline.
“Strategic planning, both short-range and long-range is not addressed in any formal way by many contractors. That’s not to say contractors don’t express their objectives and the plans they have to achieve those objectives. What it means is they don’t have a written guide. They know their objectives but have no detailed plan to achieve them.”(Managing the Profitable Construction Business, Thomas C. Schleifer, Ph.D., Kenneth T. Sullivan, Ph.D., John M. Murdough, CPA, Wiley, 2014, pg.144).
Permit me to add a further insight– If you don’t let everyone else in your company know where you’re going, they won’t end up going with you. In order to enable and motivate them to follow, you must communicate not only whereyou intend your company to go, but howyou will all get there together, and whyyou want to go there.
A Failure to Communicate
The real omission in the construction industry is not a failure to plan, but a failure to communicate the plan to the only people who can execute it. The mistake that most construction company CEOs make is…they believe because their plan is clear to them, it is clear to everyone else. Nothing could be further from the truth.
Even if the planning process occurs in your head, and you do know where you’re going, if you don’t communicate with your company they will not know where you’re going or how you intend to get there. Strategic planning in the construction industry is about formalizing and communicating the plan that the founder or CEO has already formulated in his mind.
The formal strategic planning process is the only sure way to clearly communicate the short term and long-term goals of the company to all employees. It is, in fact, the essential first step in team building.
Writing the Plan
The process of communicating your goals and intentions to your employees usually begins with formulating a projection.
- The Projectionis a financial tool that is used to explore alternative versions of the company’s future in numbers. Projections can be built on a profit basis and this profit projection can be converted to a cash flow projection. Projections are often done under a variety of “what if” scenarios such as best case, worst case, and most likely case. Projections can and should be used to test various ideas and plans on paper before actually implementing them. The projection is created by assessing the following factors:
- Financial and operational capacity
- Market Conditions
- The most likely version of your projection becomes your Forecast. The forecast is essentially a prediction that informs your employees where you intend the company to go. Once settled on, the projection the company is going to use (actually it’s a forecast now) it can be used as a budgetby adding sufficient detail in the expense areas.
- Budgets are a refined form of forecasts, used for control purposes by establishing specific financial goals that people will work to achieve. The budget communicates howthe company will achieve its common goals.
- Because in construction it is possible to earn big profits and still run out of cash, it is wise to create a cash flow projection alongside a profit budget.
Where, How, and Why
The most effective strategic plans communicate the why to all employees – “What’s in it for them”. Bonuses, promotions, raises, and expanded benefits should all be integrated into achieving the company’s objectives. (“Management by Objectives”was first outlined by management guru Peter Drucker in his 1954 book and is still a critical part of any effective formal strategic planning process.)
Including your key employees in the planning process and communicating the company’s plan to all stakeholders is just common sense. Don’t let old unexamined “beliefs” prevent you from taking this critical management step. I will discuss strategic planning techniques in more detail during 2020, and you can find more detail here on the Simplar site in the Manual of Construction Practice. Happy New Year.