Published on: 21:26PM Jul 29, 2008
One of the most important reasons to have a plan for your business is to capture value in timing.
Markets are constantly adjusting to either stimulate or deter action of the market participants. As market participants, it is our job to react to the signals that the market is sending us. A good plan can help stimulate the most profitable reaction to these market signals.
Here is an example of capturing value in timing.
The market anticipates a larger than needed supply of product in October due to heavy shipments. With a heavy supply anticipated, the market will generally show cheaper prices for that time period. The job of the market is to keep producers from moving too much product in October. A strategy might be to avoid selling in the month of October by utilizing your storage capability. This strategy would be an important item to outline in the business plan. Identifying a time to avoid selling “cheap prices” is a way to capture value in timing.
Another way to capture value in timing is anticipating seasonal changes in supply and demand and reacting in advance of those time periods.
Nearly every year, October is a poor time to sell product, but the continuous nature of production requires that sales must be made in that time slot. By planning ahead, necessary sales can be evaluated and made for the period prior to the shipment period. This “forward selling” allows for evaluation of profit margins up until the time of shipment.
By utilizing forward market information, the potential to capture value in timing is increased over selling and shipping in October when prices are likely to be at their worst.
Cash flow is always the trump card to any plan.
Understanding the timing of cash flow is a key to the success of every organization. There it is again… timing. But don’t get confused by the cash flow. Cash flow is a key determinate in short term borrowing needs but is not usually a significant determinate in profitability unless access to short term borrowing is a problem.
One of the biggest mistakes I see, in those who fail to have a written plan, is mismatching of costs and revenue. Without a written plan it is easy to get confused and start using future costs to evaluate current period pricing decisions. That is a big mistake.
Costs occur first in processing and farming. Not selling existing production, due to increases in future cost, is a sure way to get frozen in you tracks. Make sure to compare the correct costs, to the correct revenue, to determine profit. Mixing this timing issue up will lead to poor decision making.
Capabilities of operations vary greatly. A plan or strategy that works for one operation might be disastrous for another. This should not be a deterrent to planning. In fact, differences in operations and issues of timing are what gives companies competitive advantage. Getting a competitive advantage is what planning is all about.