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The two business planning approaches; which is the right one for you?


Returning back to the pre-covid level stability”, the phrase seems like an ultimate goal for many companies. Take up any sector and you’ll notice an overwhelming change in its performance for the past two years. The transition of working in a cubicle to working from home spaces, or watching the predictable human preferences change drastically, covid made us experience the worst-case scenarios in every industry. The unexpected shift in demands further created disruptions in the production boundary, making it extremely difficult to maintain the efficiency of the supply-chains. Such performance led to many experts to believe that, many more months of economic resorting and whipsawing will be witnessed before the business environment returns back to a level of pre-covid stability.


For a business leader, trying to navigate through this environment, following the traditional approach of traditional planning is not an apt solution. Even the business leaders have been moving towards continuous planning, as a substitute to traditional annual planning, which is worth considering as a better way to navigate the higher instability and uncertainty that lies ahead. This exploration of various business planning approaches began before the pandemic, with an aim to bring plans that are more nimble than typical annual plans.


But now, the question arises, what are these business approaches? Before we get ahead with these two business planning strategies, let us highlight that planning and forecasting are in no way similar to each other. Just like a square is a rectangle, but a rectangle isn’t a square, planning is forecasting but forecasting isn’t always planning.


  • In another words, the objective of business planning is to align an organization around a road map for execution and accountability. An effective business planning focuses on highlighting the results which the organization is committing to deliver and also create a road-map of how and when these results are going to be delivered.


  • On the other hand, the objective of business forecasting is to provide the most up-to-date translation of information into forward-looking projections to enable the most effective decisions today. An effective business forecasting process focuses on outlining the results which an organization believes it’s going to be able to deliver based on the latest information. It also guides and enhances a firm in its on-going decision-making.


Irrespective of the planning process an organization has adopted, “planning” and “forecasting” always remain an essential ingredient. While there can be endless approaches towards business planning, most organizations opt for the version of “traditional annual planning.” If we consider the “continuous planning” approach, it has been gaining a fair market share, but still in comparison to the latter, its adoption has been comparatively low. But nevertheless, with changing business environment, this approach will also gain more share.


A traditional annual planning often works well in stable organizations which are competing in mature markets where targets are achieved through a culture of empowerment and accountability. Here, the way targets are going to be achieved is fully planned up front. Following are the components of traditional annual planning approach.


1. Operational plans and budgets: in traditional planning, operational choices and assumptions are converted into financial budgets, which become the road map for achieving targets. These budgets are set annually and serve as commitments tied to incentives.


2. Monthly forecasts: based on the new information which the firm gathers, these are revised operational choices and assumptions to achieve plans which can provide the best possible expectation of future performance.


3. Plans and forecasts working together: Monthly forecasts are compared to operating plans to track and highlight areas in need of course corrections.


Traditional annual planning serves numerous benefits.


  • When annual targets are linked with strategic objectives, it fosters long-term thinking and decision-making.


  • Strategic annual planning empowers executives to operate more autonomously within approved budgets.


  • There are also organizational costs to traditional annual planning. These include significant time commitments to developing and aligning annual business plans and budgets and rapid obsolescence when the organization is experiencing rapid external and/or internal changes.


In continuous planning approach, how targets are going to be achieved is planned as you go. It works well in rapidly growing or changing organizations where targets are best achieved through a culture of agility. In continuous planning approach, components are:


1. Targets: Performance goals are established as commitments tied to incentives.


2. Integrated rolling forecasts: Operational choices and assumptions are revised to achieve targets based on new information, with an aim to provide the best possible expectation of future performance.


The benefits of continuous planning are noticeable.

  • Continual planning changes the mindset from focusing largely on decisions that impact the company in the next year to decisions with longer-term impact. This encourages business leaders to think more holistically about their investment decisions.

  • One of the biggest benefits of continuous planning is, it allows you to more easily pivot, if the business doesn’t turn out as expected.

  • It fosters organisational agility by allowing plans to evolve quickly to match the rate of organisational change and improves stakeholder time efficiency by spreading decision-making, alignment and planning throughout the year as an ongoing process.

  • Here, the organisational costs are noticeable too. There is a risk of short-term thinking and decision-making and reduced stakeholder empowerment due to the continuous need to decide, align and approve new plans.

Now, let us address the elephant in the room, which approach is more effective?


Well, that depends completely on various factors depending on the organisation, external as well as internal.The pandemic forced the companies to dig deep regarding their markets, products and the way they approach consumers. It even showcased a continuous external instability an uncertainty in business sectors, which leaves us with choosing continuous planning approach as an answer. If a firm is looking for the same planning rigour but with more agility and a better way to achieve long-term goals and objectives, continuous planning is the best approach.

 

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