Your Business Plan and Profit Protection Planning
ABC Security is a small security business with 61 employees (excluding contractors). Between 2003 and 2005 the company experienced serious profit erosion (i.e. a loss of profits) - due to various events, actions and decisions by employees and outsiders (like customers and the government), as well as circumstances in- and outside the company, affecting ABC Security's finances negatively. (When ABC Security started in 1997, they did write a business plan - but the owners only paid attention to the existing opportunities in the market at that time. They didn't address any risks or implement any system of control to protect the company against failure.)
By the end of 2005 the owners of ABC Security learned that business growth and success, in the long run, is established, not only by how much profit a business is making, but also how much profit a business is able to keep (protect). They learned that the number one overall reason for most business failures (i.e. the failures to grow as well as failures to survive) is that business owners don't make the time to profit from their business risks TOO!
As a result, they decided to perform adequate business planning and especially profit protection planning (i.e. enforce risk management in ABC Security) in the future (they also updated their business plan as they needed more funding and had to "set the tone" in the company by starting with the business plan as high level business document).
ABC Security's profit protection solution to reverse profit erosion and to put the business back on a profitable and growth path:
a) The owners DECIDED to perform profit protection planning (it always starts with a DELIBERATE DECISION) from January 2006 onwards and made it an official policy in the company. In other words they decided to create a risk management culture in the business by enforcing, among other risk identification methods they started to use, regular profit protection planning (brainstorming) sessions across the board - i.e. in all the departments and with all the employees participating. In other words, they decided to make time for planning and to make it part of the company's culture and policy.
b) The owners joined every department's profit protection planning session and kicked off by explaining to the employees what a business risk is (i.e. any event, action, decision, lack of action or decision as well as any circumstance in- or outside ABC Security that causes or could cause PROFIT EROSION). By encouraging managers and employees at all levels to participate in the discussions and to help identify risks and possible countermeasures, the owners were SHOCKED to discover how many internal and external threats the company was facing. As soon as the employees realized that the company's future was at stake, and that they were free to discuss anything, they started to mention all the problems in- and outside the business they have been aware of.
Let us look at only one example of a risk (threat) that has been identified during the Finance Department's brainstorming session:
Identified a circumstance (due to a previous decision) inside ABC Security, causing profit erosion:
ABC Security's contracts with their customers stipulated a 30-day notice period for the cancellation of a contract by a customer or ABC Security. Note: In the beginning the owners' rationale was to demonstrate their willingness to "keep ABC Security on its toes" - i.e. to let a customer cancel a contract should he/she wishes to do so because of, for example, poor service delivery by ABC Security.
Identified events, actions, decisions in connection with this existing circumstance, causing profit erosion:
Unfortunately, ABC Security's competitors discovered this weak point and "generosity" of ABC Security and decided to offer very low entry fees to current ABC Security customers with the intention of gaining their business and loyalty; although forcing them to sign 24 month contracts. The end result for ABC Security was a 10% loss of current customers and eventually monthly income and profits - WHILE ABC Security had already made a financial outlay to deliver services to these customers; i.e. they couldn't really reduce or recover these expenses and as a result their expenses stayed more or less the same (although with less customers on their books and with less income and profits).
During the profit protection planning session, the Accountant made a calculation and, as a result of this risk occurrence (i.e. of lost customers), estimated a loss of income (turnover) over the past year of almost $900 000.00 and a decline in actual profits of $250 000.00.
Let us look at one of the countermeasures ABC Security has identified to implement; with the intention of counteracting above risk ("profit erosion agent") in the future. In other words, the objective was to prevent an unnecessary loss of customers:
ABC Security considered several types of risk responses to this threat, as well as different types of controls (as indicated in our business survival manual), and decided to implement a company policy enforcing and regulating proper customer contracts in the future. Among other issues, the policy states that a contract period must be a fixed period of 24 months - except in certain cases. ALL new customers will have to sign a fixed 24 month contract.
The policy also states the specific procedures to be followed by the Financial Department to escalate exceptional cases to managers and even the owners - so as to prevent an unnecessary high number of customer losses in the future. The policy also states the guidelines (standards) to be used by employees to determine whether or not a case is an exceptional case.
ABC Security used a specific formula to calculate the cost of these extra business procedures, giving effect to the new policy. They discovered that the cost of the new control (i.e. the policy and new procedures to be followed) would be $50 000.00 a year. Since the profit erosion was $250 000.00 the past year, they concluded that the control was justified on a sound economic rationale.
Apart from above risk, ABC Security has identified a variety of other current and potential risks as well (by the way, two of the potential risks they have identified, did realize this year and, because of their advance risk planning, ABC Security was in a good position to counteract it immediately).
As a result, they started to rescue and maximize profits, and it is estimated that they will have higher net profits at the end of the financial year (in any case, better than the previous two years combined). The owners predict that ABC Security will be back on the road of growth within the next two years.
We can see that ABC Security has gained from its owners' willingness to admit that they had have major problems and to commit time for extensive planning so as to identify all current and potential business risks as well as possible countermeasures.
The owners also succeeded to create a risk awareness culture in the company. Consequently, employees started to report from time to time problems by themselves, seeming to pose a negative financial impact on ABC Security.
Finally, they have attached all identified risks and countermeasures and strategies to their business plan (as a separate attachment) for the information of their Bank and venture capitalists.
Have a question for Michiel or want to leave a comment? Click here.