Plotting your course

March 21, 2012

The likelihood of large companies and organizations not having an annual budget and business plan is fairly remote. To succeed, they need to plan on a formal basis what the expectations of future periods will be, and how they will react to changes. Additionally, during the period they will track their performance against this budget and analyze changes that occur. On the other hand, many owners of dental laboratory businesses do not routinely create a budget, let alone a business plan. There are reasons large organizations use these tools and they can help you, too.

The likelihood of large companies and organizations not having an annual budget and business plan is fairly remote. To succeed, they need to plan on a formal basis what the expectations of future periods will be, and how they will react to changes. Additionally, during the period they will track their performance against this budget and analyze changes that occur.

On the other hand, many owners of dental laboratory businesses do not routinely create a budget, let alone a business plan. There are reasons large organizations use these tools and they can help you, too.

What is the difference?

A budget projects for a period of time-normally one or more years-the estimated income and expenses for the business, the cash flow for that period and other key financial information such as balance sheets, capital expenditures, financing options, etc.

A business plan includes the budget, but is more comprehensive. It includes more information regarding the company, its products and services, the competition it faces, the markets it serves, its human resources, and the basis of its assumptions and projections. But, importantly, a business plan also includes how the company will be affected if its assumptions do not ­actually happen, and what will be done in such cases.

The business plan as a management tool

In most cases, a business plan is prepared when a company is seeking financing from a bank or other lender. Lenders want to understand the company’s history, its expectations and the thinking underlying those expectations. In fact, the assumptions and management’s plans are as important as the actual financial projections, if not more so.

Particularly in these uncertain economic times, many dental lab companies could significantly benefit by preparing a full business plan, challenging themselves to identify things that could go wrong, and how the companies would react to those events is healthy. It is the process itself that helps a company and its management focus attention on opportunities and risks, and helps guide necessary adjustments.

A good business plan also should identify items that will make a positive impact and that will lead to the lab’s success. Include things such as new products, new sales programs, cost saving ideas and employee ­training plans, too.

Understanding the market for your lab

One key element of any business plan is a description and analysis of the market the lab serves. This needs to be an ­honest, critical description and analysis. The market for a company should be very specific and clearly define what the lab will offer and how it will differentiate itself from competitors.

Does the lab intend to sell its existing products into a new market? What is the lab doing to be sure the products meet current and future demands? One thing for sure is that the pace of change in today’s dental lab market is faster than it ever has been.

But don’t just rely on your gut feelings about the marketplace and trends that will impact it. Be sure your plan contains some kind of third-party evidence to support the assumptions made about the future.

Planning around costs, prices and cash flow

Another element of a business plan relates to the cost to produce the products. Does the lab have a good and realistic understanding of production costs, costs of financing and prices products can be sold for? Will these items provide an acceptable gross margin? What is the competition selling these for? How will a price reduction by domestic or offshore competition affect the ­profitability of the business?

Cash flow is perhaps the most important part of a company’s life, but many companies do not routinely make projections of cash needs. What will happen if dentist clients delay payments? Can the lab absorb a slowdown in sales due to changes in product demand or a slow economy?

How will expansion or upgrading to new technologies be financed? Many great plans never succeeded because of a lack of resources, both cash and human.

Why a business needs a business plan

I know what you are probably thinking right now, “Come on, Chuck, I can’t think of everything.”

You might be right, but it is important to think of as many of the critical items as you can ahead of time, and it is very important to include your management team in the process. I can’t stress the point enough that including your trusted managers in the process reinforces that you have a team and helps them become stakeholders.

The point is to get management to consider the impact of negative and positive occurrences, and then to consider how the company would react to those situations…it’s like a role-playing exercise to make you better prepared when reality hits.

And remember, this is a living document that is routinely updated for current conditions and new opportunities. Properly done and managed it becomes the recipe for success.