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Episode Host: Henry Lopez is a serial entrepreneur, small business coach, and the host of this episode of The How of Business podcast show – dedicated to helping you start, run and grow your small business.

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Resources:

Free Downloads:

• Annual Strategic Plan Outline – 10 Steps to creating your Annual Strategic Plan

Books mentioned in this episode:
[We receive commissions for purchases made through these links (more info)].

• Playing to Win: How Strategy Really Works by A.G. Lafley and Roger L. Martin
• Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine by Mike Michalowicz.

Related Podcast Episodes:

Episode 506: Budgeting Fundamentals for Small Business

You can find other episodes of The How of Business podcast, the best small business podcast, on our Archives page.

Transcript:

The following is a full transcript of this episode. This transcript was produced by an automated system and may contain some typos.

Henry Lopez (00:12):

Welcome to the How of Business Podcast. This is Henry Lopez, and this episode is about annual strategic planning, why you should create a strategic plan at the beginning of the year and how to do so. I’ll share some best practices and tips and walk you through the high level steps to create your strategic plan, giving you a clear strategy and an action plan to help you achieve continued success with your business this year. To get more information about the How a business, including a show notes page for this episode and learn more about my one-on-one coaching and group coaching programs, please visit the how of business.com. I also encourage you to please subscribe to my show, wherever you might be listening so you don’t miss any new episodes. Also, want to take a moment to thank a few of my recent coaching clients, including John Rich and Tracy.

Henry Lopez (00:57):

Thanks for allowing me the opportunity to help you start and grow your small businesses. There is a free download that you can get at the show notes page for this episode@thehowbusiness.com called annual strategic plan outline. I created that outline for you to use to help you create your plan. It’s got 10 high level steps to creating your plan, and so I encourage you to download that once you get back to your computer or you get ready to finalize or create your plan for the year. Why do we need a plan? Let’s start with that question. I think for any of us who have accomplished great things in life, no matter what aspect of your life, you know that having set goals or a plan, something that we write down, allows us to focus, keeps it top of mind and allows us to plan for how we’re going to get there a step at a time.

Henry Lopez (01:47):

And so what I have found in my businesses and other businesses that I’ve had to privilege of working with and what I know about other successful businesses is that this is one of the things that they have in common is a plan, a plan of attack that gets refreshed every year that lays out a strategy and then action plans that then get refined and executed perhaps on a quarterly basis to accomplish the overall goals for the business for the year. So creating an annual strategic plan is essential, in my opinion, an experience for small business owners. And here are some specific additional reasons why I think you need to have an annual strategic plan. One again, is direction and focus. It’s going to provide you and your team if you have a team with a clear direction and focus for your business, and it helps you align your resources, your staffing, your budgets, your money, and all of your efforts towards specific goals that you lay out.

Henry Lopez (02:42):

And we all have limited resources as small business owners. So it’s important, it’s critical that we focus those resources, time people, money on the right initiatives, on the right projects, on the right actions that we believe based on our strategy will help us achieve our goals for the year. So direction and focus. Second is resource allocation. So it’s related to what I just shared. It helps you. This plan should help you with the efficient allocation of those limited resources that we all have as small business owners, ensuring that time, money, and effort are invested in the areas that will yield the best results for you this year. So where should you spend your money to grow your business? How much should you budget for marketing? For example, does it make sense to hire additional staff this year? What will that cost you and what will be the benefit of that?

Henry Lopez (03:30):

Is it expanded capacity? Will you invest in additional vehicles or equipment? All of those kind of high level decisions that should then be in alignment to helping you achieve your goals are what should be included in this plan, at least at a high level. Then we have to have a plan for how we will measure performance. So that’s the third reason. Performance measurement. A good strategic plan sets out benchmarks or goals or KPIs, key performance indicators, key performance indicators that allow for the measurement of progress and performance over the course of the year. Peter Drucker famously said, what gets measured gets managed, and I have seen that philosophy at work in my businesses and other businesses that I’ve worked with. Another reason is adaptability. It will enable you as a business to plan for, to foresee and to anticipate and prepare for changes in the market so that your business stays adaptable and responsive to the changing conditions in the market and the demands of your customer.

Henry Lopez (04:31):

And also, I want you to consider long-term success. A good strategic plan lays the groundwork, sets us on the right path for long-term success and growth, helping your small business navigate the challenges and seizing opportunities so that you continue on your path for your long-term vision for your business. To quote again, the renowned management consultant, Peter Drucker, he said the best way to predict the future is to create it. I think that quote emphasizes the proactive role that strategic planning plays in shaping the future success of your small business. Before I get into though the steps of how to create a strategic plan, I want to share with you some thoughts on the concept that a plan is not a strategy and that we use this term strategic planning. It’s become a common term and it means a lot of things to different people. For most business owners, even in the corporate world for that matter, or in larger organizations, the term strategic plan is used really to just mean a plan.

Henry Lopez (05:33):

There’s really not a strategic component to it. So as you’re creating your strategic plan, I want you to think about the difference and why a plan is not necessarily a strategy. I recently watched a video and have read a lot of content from Roger Martin. Roger Martin is the former dean of the Rodman School of Management at the University of Toronto, and he’s known as one of the world’s leading thinkers on strategy. There’s a great video that I’ll have a link to a short video on YouTube that has a link of him being interviewed for the Harvard Business Review on this topic of strategic planning and what that is, he’s also an author and a related book that he wrote is titled Playing to Win How Strategy Really Works by AJ Laffy and Roger Martin. What he explains in that video, and of course in more detail in the book, is that planning just by itself, planning is where we control the cost, the allocation of resources, as I just said a moment ago, that’s part of what we’re trying to accomplish, is to allocate our limited resources as a small business.

Henry Lopez (06:35):

When we plan, it’s mostly internal. It’s comfortable for us to do that kind of planning because we have a lot of control over it. We can set activities that the company then sets out to do, and that’s all good and important. But what we need is a strategy that guides that planning a plan that then is in alignment with our overall strategy. So a strategy and in particular as Roger Martin lays out, is an integrative set of choices that positions you on a playing field or a market of your choice in a way that you can win, or at least that we predict that we can win or continue winning. If that’s been the case, a strategy has a theory component. The theory is here is why we should be on this playing field and not another one, and here is how on that chosen playing field or that market, we are going to do better than anybody else at serving the customers in that market.

Henry Lopez (07:30):

This theory must be coherent and doable. It must be actionable. And of course then it translates into the actions that you will also spell out at a high level in this strategic action plan. So the question is, what is the plan that you’re creating here? This strategic plan going to collectively help the business accomplish a strategy is a specified competitive outcome that you wish to achieve, which involves customers wanting your product or service enough so that they will buy your product and service at a quantity and at a price that’ll help you make the profit that you hope to achieve for this year. This is a tricky thing because we don’t control the customer. So in a strategy, the customer is the customer instead of in just planning. We’re usually the customer is us internally and our team internally, and we can control that a lot more than we can control the customer, obviously, which in turn, there’s only so much control we have over our revenues.

Henry Lopez (08:30):

Sure, we’re going to have initiatives, marketing initiatives and sales initiatives to get people to know about us and to hopefully buy our products and services. But our strategy is what dictates overall how we will do that. How will we go to market for this particular year? And the plan, of course of execution must be in alignment with that strategy if you don’t take this approach to strategy and then the action plan, in other words, this concept of strategy being a key component, an integral component of your strategic plan, what can happen to you and what will happen to you is some other competitor, someone else will be doing the strategic work and planning to beat you in your market. So now having shared that about strategy and planning, let me share with you at a high level the 10 steps that I’ve laid out to create your strategic plan.

Henry Lopez (09:22):

Creating an annual strategic plan for your small business involves multiple of these steps, if not all of them. Your annual strategic plan, of course, is a critical tool again, to guide the direction, the priorities and the actions of your business over the course of this coming year. And so this is a general outline. Again, you can download this outline at the show notes page for this episode at the how of business.com. When we break something down like this to this level of detail, we have all of these steps. When you look at this outline, it can seem overwhelming and excessive. It’s one of the side effects of deconstructing something to help us learn it, but this is just a template, a guide. Whenever we break something down to this level of detail for learning, it can seem like it’s over the top, like it’ll paralyze you.

Henry Lopez (10:06):

Don’t let that happen. Just take a realistic and practical approach to what you need to include. Read through the outline, listen to this episode and decide what makes sense, what pieces of it makes sense. I think there are some essential components like what I just shared about the strategy, but then you’ll decide what makes sense, especially if this is the first time that you’re creating any kind of a written strategic plan for the year start. Simple. You’ll add to it later next year, you’ll get better at it, but it’ll be better than what you don’t have, and that’s the key takeaway here. So don’t make it so complicated that you don’t finish it. Create an outline version of this if you’re a small business. So a solopreneur, this could just be for yourself, so it doesn’t have to be an elaborate, highly polished document. This is a plan for you to follow and execute and guide you as you achieve continued success in your business this year.

Henry Lopez (10:59):

So here are my 10 steps to creating an effective annual strategic plan. First step is to review your previous year and in this strategic plan for this year, include a summary of what happened last year, the key performance indicators, your key financial summaries, and then highlight some victories and also some lessons learned from the previous year. Now, of course, this requires you to ideally have finalized your financial statements from last year to have a final profit and loss statement for last year. And I know that’s tricky for some of you. It’s going to take longer than the beginning of the year to have that ready. Hopefully maybe you have at least a preliminary idea of what the numbers will look like from a financial perspective, but that’s why it’s so important to stay on top of that, to make sure that throughout the year that you stay ahead of it so that you’re not waiting to be able to look at those numbers that are so critical to helping you make decisions about what you’re going to plan for this coming year.

Henry Lopez (11:55):

So review the previous year as step one. Step number two is to review, revisit or if you don’t have it, to create a vision and a mission for your business. Now, don’t get too bogged down with this if you don’t have one, and this is the first time you’re doing it, if you have one, it’s just time to revisit it. Does it still make sense? Does the vision you have for the business, which is usually a horizon of maybe five to 10 years at the most, maybe less and a mission, which is our purpose, how we go about doing it. It might be time to revise those. Certainly it’s important to bring those into this plan because at the highest level, our strategy, which we’ll come to in a moment, and then our plan should be in alignment with our vision and mission. This should be your vision and mission would guide you your high level why for the business.

Henry Lopez (12:42):

And so that’s why it’s important to review it, and I think included here in your plan. Step three is to complete a SWOT analysis, SWOT, which stands for strengths, weaknesses, opportunities, and Threats. I have a template for you in the download a chart for you where you just have to plug in the bullet points in the four quadrants. What I like about doing this type of work here upfront is then we’re kind of saying we’re laying the roadmap or we’re laying the forecast, if you will, for what we’re foreseeing both that we bring into this year and what might lie ahead in this year that we need to plan for. So that’s step three, completing a SWOT analysis. So it helps us better understand your business’s current position in the market and begins to help you determine where to allocate resources and which initiatives are most important.

Henry Lopez (15:31):

Step number four then is related to that after you’ve completed your SWOT analysis, then what are your plans for risks and contingencies? So those risks that you’ve identified, those threats and weaknesses, what’s your plan to address those? These again might include financial risks, market changes, competition, economic conditions, all of those things together. So these two sections, three, which is the SWOT analysis and section four or step four, these can be combined into one if that makes more sense for you. Step five is to determine your strategy. As I mentioned a few moments ago, this is the key component that really makes this a strategic action plan. So again, a strategy is that integrative set of choices that positions you in a market of your choice in a way that you can win. And so the theory of strategy is answering those questions of why you should be in this market, not another one, and the how your action plan, which come here now in steps six and seven, your action plan in that chosen market, how you are going to be better than anybody else that’s serving the customers in that particular market.

Henry Lopez (16:42):

So this strategy that you lay out here at a high level, this is how we’re going to go to market this year or continue to go to market this year. These are the things that we are foreseeing we’re going to do and why this theory needs to be coherent and doable. It must translate into action items that you’re going to detail in this plan. So your strategy here at a high level sets the target for what this plan is going to collectively help the business accomplish a strategy. A good strategy statement here specifies a competitive outcome that you wish to achieve, you and your team. If you have a team which involves customers, again, wanting your product and service such that they’ll buy enough of it, that’ll help you achieve your profit goal for the year. Don’t get too carried away with this section. Keep it to a tight paragraph or so of what the strategy is that you’re going to market with.

Henry Lopez (17:35):

Here’s an example of what you might include in the strategy statement. Our strategy is to position Henry’s home cleaning products as the leading provider of eco-friendly home cleaning products in the South Florida region for residential customers. We will achieve this by focusing on three key areas. One, developing a unique product line that combines innovative, sustainable ingredients with effective cleaning power. Two, building strong trust-based relationships with local environmentally conscious retailers and local influencers. And three, engaging with our local community through educational initiatives and partnerships to raise awareness about eco-friendly living and cleaning. This approach will enable us to capture an increased share from approximately 2% now to 5% of the South Florida residential market for eco-friendly cleaning products this year, setting the foundation for future expansion into additional eco-conscious product lines and further expansion. So that’s an example of a statement that includes the where to play part of it, what is our playing field, our market.

Henry Lopez (18:40):

So that’s the eco-friendly home cleaning products in the South Florida region for residential customers. And it also includes the how we’re going to win the unique product line, the strong trust-based relationships and the community engagement, and it also outlines clear areas of focus and sets a specific timeframe for achieving the goals, making it actionable and measurable. And then we will expand upon this as we lay out our goals, our KPIs, and our initiatives for the year in alignment with this strategy. If you get to a point where you’re struggling too much with this, don’t get hung up on it. Just put something to paper, you’ll get better and better at this as you continue with strategic planning. Don’t let it stop you from continuing to lay out your plan of action for the year. So step six and seven, even though I’m going to break ’em out into two steps, really can be combined and in the download, the free download that you can find on the show notes page for this episode, the annual strategic plan outline download.

Henry Lopez (19:39):

I have an example of how you might combine these, an outline example. So step six is setting your goals, your KPIs, your key performance indicators and your objectives. And sometimes those terms are interchangeable, so you’ll apply them or use them as it makes sense for your business. But what we’re doing in this section of the plan is to define clear, measurable, and achievable goals for the year. The objectives should be specific time-bound and aligned with the overall vision and mission and strategy that you have set for this year for the business. I want you to start by reviewing your previous year’s KPIs and maybe those same KPIs come forward, or maybe it’s time to drop or add KPIs to that list of KPIs. I certainly recommend that you don’t have a very long list of KPIs because then it really doesn’t become very usable. What are those most important KPIs?

Henry Lopez (20:33):

And a good practice is to break them down by functional area of your business. So I’ve laid out in this outline in six functional areas that at a high level cover most businesses, financial operations, production or manufacturing, sales and marketing, human resources and leadership, and you may not have KPIs for all six of those. Certainly you’re going to have KPIs for the financial component of it, like total revenues and gross profit margins and net operating profits, and perhaps other financial KPIs. But then what are those one or two other KPIs in the other areas of your business that are important for you to measure so that you can track progress and keep focus on those key actions, those key initiatives that you want to achieve this year to help you achieve your overall goals for the business? If you haven’t already, this is the time to implement a good financial system and tools like QuickBooks or FreshBooks so that you can stay ahead of it so that you can organize your financials if you have not already, perhaps it’s time to outsource the transactional components of your accounting to a bookkeeper.

Henry Lopez (21:40):

So this is the time to make those decisions and get ahead of it this year instead of being behind and not having that very important data to help you make business decisions. If you want to learn more about goal setting, I have a link here on the show notes page as well as in the download to episode 2 23 that I did on the topic specifically of goal setting. Step number seven is to create the action plan. So the more detailed the strategies or specific actions that are going to help you achieve these goals, KPIs and objectives that we just talked about. So you’re breaking it down. Again, this section ideally is combined with the previous one. I’ve just broken ’em out here for the purposes of guidance and instruction, but you’ll have an outline that includes whatever the KPI is the goal, the KPI, and then the actions as to how you’re going to accomplish that goal for the year.

Henry Lopez (22:31):

And then ideally, you break that down by quarter as well, because what you’ll find if you’re not doing quarterly planning that an annual plan is fantastic, but we need to ideally break it down into quarters because that allows us an ability to focus on a finite amount of time, a quarter. It’s short enough that we can execute, get some things done, but not so long that we can’t adjust depending on how things are progressing throughout the year. And I’ll come back to this point again, but this plan needs to be a living plan. It needs to be something that you keep front and center, not something that gathers dust in you open again next year. It should be a living document that you adjust as you go through the year as necessary. Step number eight is also related as budget planning. So you don’t have to get too detailed here, but for example, you may not have had a marketing budget in the past, and now it’s time to do so so that you can allocate, again, a limited resource, that money that you have to spend as carefully as possible on budgeting in that correct market to that target audience with marketing activities and campaigns that have a return either that you’ve proven before or that you’re going to this year.

Henry Lopez (23:40):

But measuring that and tracking that is so critical with that variable expense. There might other variable expenses that you need to track this year so that you can manage them. There might be capital investments that you’re planning for, like additional vehicles or equipment. So that all needs to be part of your budget planning. On this topic of budgeting, I want to share with you a suggestion my CPA Matt Chita recommends, which is the Profit First method. Matt recommends that approach for small business owners and he can help you with implementing that approach. So if you are looking for a new CPA or considering a new CPA, I encourage you to consider reaching out to Matt, schedule a free consultation with him. He is currently accepting new clients as long as it’s the right fit for both of you. So on the show notes page for this episode, I’ll have a link to Matt’s page where you can schedule a free consultation with him.

Henry Lopez (24:31):

But what Matt recommends to me and that he recommends to his clients is the Profit first method. Now, profit first is an approach to managing expenses to allocating the revenues in certain buckets so that it helps you with financial planning. It helps you with allocating and making sure, for example, you’ve got a reserve to pay taxes, and you are allocating an amount into the profit bucket so that you can hit that profit goal an amount that goes into covering your expenses and owner’s compensation. So this approach of creating separate bank accounts in particular is what underlies this profit first approach. There’s more to it than that, of course, and it all gets spelled out in a book written by Mike Michalowicz, and Mike’s book is titled, Profit First, transform your Business from a Cash Eating Monster to a Moneymaking Machine. I’ve had the privilege of interviewing Mike on the How a Business podcast.

Henry Lopez (25:23):

So that’s all part of this eighth component or step in the process of creating your strategic plan is budgeting. Again, as with other steps, don’t overcomplicate this. If you’ve not done any budgeting before, then maybe just starting with the Profit First Method might be a place to begin. Step number nine is then to share. First of all, finalize and then share this plan. If you have a team, whether that’s your leadership team, your partners, or any other key stakeholders like investors that are interested in what your plan is for this year. But if you are the audience for this, if it’s just you, then make sure you print out this plan or keep it front and center invisible, however that might work for you so that it becomes a working document that you refer to on a regular basis. If you do have a team, you want to ensure that everybody understands what is their role and how they contribute to helping the business execute this plan.

Henry Lopez (26:21):

Certainly, if you have a larger team, you probably would’ve engaged ideally, those leaders in the creation of portions of this plan, like the budgets, for example. So depending on the size of your business, they may have been more involved upfront in helping you create the plan, but certainly now that it’s created, it’s about communicating that and continuing to get buy-in and focus on executing on this plan throughout the year. And as I mentioned before, step 10 is to review and adapt. That’s why this quarterly approach makes a lot of sense. It helps us to stay focused for a quarter and probably also resist a tendency to keep making too many rudder adjustments to your course, but it’s not so long that you can’t correct to make sure you adjust for unforeseen circumstances or things that might have emerged in your space, in your market that you did not anticipate.

Henry Lopez (27:13):

I’ll begin to wrap it up with a quote from Stephen Covey, the author of The Seven Habits of Highly Effective People. It’s short, but to the point begin with the end in mind. I think that puts it very succinctly. It highlights the importance of setting clear goals and objectives in any planning process. So I encourage you to download the annual strategic plan outline that spells out the 10 steps that I just walked through to help you create your annual strategic plan. If you haven’t created one yet, if you’ve already created one that maybe refer to it to see what might be missing or what ideas you might get that’ll help you make it even better. The point is to have a plan. Don’t get bogged down or paralyzed by trying to write a novel here. Keep it simple, especially if it’s the first time you’ve done it.

Henry Lopez (27:59):

Again, it’s better than not having a plan. This is your plan. We need a plan to achieve success so that we focus on the right things and we allocate our limited resources as small business owners such that we carefully realize the best return on those investments. Your strategic plan, of course, should be guided by a strategy, and your plan is a living document that you refer to regularly, not something that you’ll look at again next year. I wish you the best this year as you continue to grow a successful and profitable small business. This is Enri Lopez. Thanks for joining me for this episode of The How of Business. I release new episodes every Monday morning. You can find a show anywhere you listen to podcasts, including the How of Business YouTube channel, and at my website, the How of business.com. Thanks for listening.