You Have to Plan Your Garden
General Business News
You Have to Plan Your Garden
Well, perhaps thatâs what some people think of us. Others have learned that to have those beans for us to count, you first have to get them and, if youâre a purist, you will want to grow them yourself.
For that, you will need a garden, but how will you construct the garden to give you the best yield on those beans? What kind of soil is best and do you need fertilizer? There are numerous questions such as these whether you are starting your garden today, or you have been growing beans for a hundred years.
Thatâs where we bean counters come in. We have been helping people with new, and more importantly, their old gardens for a very long time. Take a look at the following discussion between a typical client and his controller as they discuss âplanning their garden.â
"Hey boss," Jonathan the controller said to Frank as he walked into his office. "What's happening?"
Frank, the president of Frank's Fine Fabrics, looked up glumly at his controller and said, "Aw, these auditors are going to kill me.
First, they come in and take all your time looking at the books, only to tell us what we already knew â we lost a fortune last year.
Now they give me this management letter that says I donât know what I am doing and I need some sort of âplan.â
Who are these guys to tell me anything? Theyâve never run a business in their lives. All they know how to do is criticize what us real businessmen do! This business survived over 100 years without some âbean counterâ telling my dad and granddad what to do.
The really bad thing is the banker's are telling me to do what these guys say, or they may pull the financing.
Get this Johnathan. Iâm losing a ton of money, so the bank wants me to spend more money on some stupid âbusiness plan.â It just doesn't make any sense, but what am I supposed to do?"
"Well, Frank," Johnathan said, "I know how you feel, but remember Iâve been on both sides of the desk. Don't forget I used to be an auditor at Forest, Fore, Thetrees & Company before I went into industry.
Frank, I donât think they are saying you donât know what youâre doing. I do think they are saying you could do better, though. Let's back up and take a look at what the auditors are really saying in that management letter.
Don't kid yourself, Frank, accountants are businessmen too. They're just running a business thatâs different than yours. It just happens, though, that their business allows them to see what does and doesn't work in other businesses. I think that's what the bank is hoping you will realize as these guys talk to you.
Let me tell you about an experience we had at Julie's Fine Furniture about ten years ago.
If you remember, that's when antiques were really in vogue and everyone in the antique business was making a killing.
Well Julie Wanitall figured if she could open shops in all the major markets in the southeast, sheâd make a killing. She was ready to mortgage her life away and open 20 new shops in 2 years. She even had a preliminary commitment from Getimin Bank & Trust to finance the cost of the new buildings and inventory she would need.
Then, in a chance conversation about the year-end tax return, I told Fred Sharp, her CPA, about the grand plans. Imagine my surprise when he went from a nice tan color to completely white! He said, 'Johnathan, have you and Julie sat down and mapped out a strategy to break into these areas? How long do you expect these boom times to last?'
Of course, that got me to thinking and I finally said, 'Well Fred, to be honest, we haven't really planned anything. Julie figures with the market the way it is and our reputation as a quality dealer, we wonât have any problems. After all, the quality of what we sell far exceeds the quality of our competitorsâ merchandise.'
'Which competitors are those, Johnathan,' was Fred's reply. 'I mean, you have done a great business here in Youngville, but this is not a very big place. You're only competitors are Joe and Sally Small and Jerry Spence and they're just in the business as a sideline. Of course they aren't going to acquire the same quality merchandise as you do. Their idea of a buying trip is to go around to local estate sales, not estate sales in Europe.
I think we need to talk to Julie very seriously before you guys start committing yourself to something that may kill you.'
After thinking about it over the weekend, I decided Fred was right. We really did need to map out a plan of action and be certain of our opportunities and risks. But, having been on both sides of the controller's desk, Fred didnât have to work hard to sell me on the idea.
Julie was a different story.
Over the next week, I pitched the idea to her. From that initial volley of common sense, we, or should I say Julie, waged a hot war of words like, "Who do you think you are to tell me what to do? How dare you question my abilities? Youâre crazy if you think I am going to listen to some bean counter about the antique business?" And those were the nice words she used.
Next came the cold war of icy glares and terse comments in meetings, but the wall finally crumbled when I pointedly asked, 'Look, Julie. You are a great antique buyer and seller. You run the current two stores admirably, but you're talking about spending $20 million over the next two years on storefront, equipment and stock. Don't you think we should at least talk to Fred about how he can help? What have we got to lose?'
Frank, you know yourself that nothing hits a business owner harder than the magic words: You-Spend-Money. Julie wasnât any different.
The following Monday we met with Fred. He suggested we do some strategic planning. What he suggested was a lot of work, but we agreed to follow his advice. I am going to tell you what he said and did, but remember this - If we had followed Julie's first plan, Julie's Fine Furniture would now belong to Getimin Bank and Trust's largest customer. Farlieâs Fancy Furniture.
Fred convinced us we needed to devise a strategic plan. He broke the planning process down into several substeps:
Define our mission and our goals.
Analyze the information.
Formulate our plans.
Implement our plans.
Fred also told us that it was imperative we have an outside facilitator in all of our critical meetings. As he explained it, the facilitator wasn't going to tell us what to do or how to do it. All the facilitator was supposed to do was keep the conversation moving on an appropriate track. The facilitator had no stake in the outcome of the discussions, except that of a mentor seeing his protÃ©gÃ©s leave with a viable plan that they would be proud of.
Of course, Fred said he would be more than happy to serve as the facilitator.
We then scheduled a Saturday meeting with all the department heads. As I expected, Julie pushed the expansion idea. Also, as I expected, Fred kept gently saying, "Why do you want this? What goal will having 20 stores in 2 years attain?" Through some gentle, and not so gentle, prodding, Fred was able to keep us on track and by the end of the day we were able to identify why we were in business (our mission) and our short and long-term goals.
Looking back it strikes me as funny that not one of those major goals mentioned expanding into 20 different markets in two years.
Fred then gave us a homework assignment. Now that we had identified our goals, we needed to brainstorm on the best ways to achieve those goals. The following Saturday, we had a brainstorming session that resulted in 10 different action plans to meet our goals. Several of them did mention the words "new store," but not how many stores we expected to open.
That's when things got really tough. Fred gave us a new homework assignment. Go out and collect as much data on the markets Julie wanted to go into. We were getting enthusiastic at this point and scheduled another meeting for the following Saturday.
Fred nixed this because 1) he knew it would take a while to gather the information and 2) he was playing in the club championship that weekend. Nothing comes between Fred and his golf game. Eventually, we agreed to reconvene in one month and, man, was that ever a wise move.
Each person would have one piece of the demographic and economic pie to research.
I was responsible for putting together cost estimates for everything from toilet paper to facilities, as well as preparing projected income statements for each proposed market. Likewise, Janet in sales was responsible for estimating sales and Murray in purchasing, along with Julie, would determine the cost for the inventory needed for each new shop. Finally, Perry in marketing would develop the advertising budget.
It took forever for me to get the projections done. It also took Fred a lot of time - time spent hunting through his old files for costs of previous store openings. Some of the information was simply not available in our files. We found out, much to our chagrin, that we had destroyed all general ledgers and monthly financial statements that were older than three years. Lucky for us, Fred is a packrat and had all that information in his files. Fred was also able to advise me on how to allocate income and expense amongst the stores and even found statistics on similar stores that helped me compare our results with the industry.
Even after we found the old information, we had to update it. Fred went to this book bankers actually use and found some current information that helped refine our numbers.
Perry had a pretty tough time nailing down advertising costs in the various markets we planned on entering. Fred was able to help there by contacting some CPAs in those areas and asking who the good advertising agencies were. The agencies were glad to help Susie pinpoint the type of advertising that would be needed and ballpark the cost.
Overall, Fred spent a good bit of time with each of us helping us brainstorm the various costs and potential revenues in each planned market. Then, after he helped develop the assumptions, he challenged every one of them. Even Julie was impressed with his ability to analyze the type of space the stores would need and then find realtors to give us an idea of the cost.
When the next meeting came, we were all shocked by what we had found out. Of the twenty markets Julie originally wanted to enter, only 15 of them had the facilities we would need to start a viable store.
Of those 15 locations, only ten had the freight companies we use to deliver our stock. That may seem picky, but these are the only companies we will use because they know how to handle antiques. Busted antiques don't sell very well.
Of those ten, two markets had some low price sellers that we just wouldn't be able to compete with. Sure, the merchandise was junk, but it takes a long time to educate the buying public about quality. At a million bucks per store, we needed sales fast and those sales had to be at reasonable prices.
Finally, Fred had called in an outside expert on the furniture industry. Based on what he said, it became clear that there would be a decrease in the market sometime in the next five years. Money was already getting tight in some of the original 20 markets. He strongly suggested we move more cautiously than we had originally planned.
In the end, we dropped our original plans and concentrated on the 3 markets we figured we could penetrate.
As it turned out, our final decision was the right one. In the antique industry, it takes about 5 years to recoup the cost of store openings and create positive cash flow. Two years after we started our expansion, the bottom dropped out of the economy in the other markets we decided not to pursue and it even dropped out in one of the markets we did enter.
Because we moved more cautiously than Julie originally anticipated, four of our stores were able to turn pretty good profits. That helped us fund the one store that was not making money until the market came back. We would never have been able to carry seventeen additional stores. Julie would have gone bankrupt.
Fred also helped us contact the economic development boards in the markets we entered and that saved us a ton in interest costs over ten years. We were also able to get some pretty good tax breaks after talking to the economic development folks in those markets.
If Fred hadnât helped us formulate a strong plan, Julie wouldnât be making a fortune on the five stores she does have, she would be broke and working for Farlieâs.
I guess what I am saying Frank is maybe the bankers have a good idea. A CPA is independent enough and detached enough to be able to see the whole picture. A good CPA is going to have the experience to help you clarify what is really important in the business and how to make all the important parts work together. You and I are so involved in fighting fires around here, it is hard for us to focus on anything but today. The CPAs can help us focus on growing tomorrow while making it through today.
I suggest we take their advice and work on a strategic plan to return this company to profitability."
"So," Fred began, "You're telling me that the only reason Julie was able to pull off expansion was that she listened to the accountants and created a strategic plan. That surprises me because I always thought she was a pretty shrewd business person and she made her own decisions. I can't believe she listened to the accountants."
"Fred, she did make her own decisions, every step of the way. It's just that her first decision was the right one. She was smart enough to know she didn't know everything and more detail planning might be necessary. Then, she was smart enough to implement the plan the way we all felt it should be implemented.
She was smart enough to know that her CPAs were good objective operators themselves. Their insight may not have come from selling antiques, but they had seen what happened when a business failed to plan.
The question is, 'What are you going to do?'"
"Johnathan, I guess you are right. I think I will get the CPAs back over here to discuss our next move."
Julie, Johnathan and Fank all found it necessary to âplan their gardenâ, that is, their business, better to get the results they needed. Although not part of the story, that gave them greater confidence in their companies. That helped them sleep better tonight.
How do you want your garden to grow? What keeps you up late at night with your business? Come see us and let us help you sleep better at night by planning your garden better.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.