Do you conduct an annual business review? For 95 percent of the business owners and entrepreneurs I coach, the answer is no.
The annual business review of last year is the foundation for creating next year’s annual business plan. You can’t decide where to go in business if you don’t have a firm grasp of where you are. The areas you’ll analyze in your annual business review include:
- Human Resources
- Investments and Marketing
- Debt Analysis
- Contract Review and Pricing
This article is going to give you an overview of each of the sections that make up the annual business review.
The first area to analyze during your annual business review is your financials. Look at the three key documents of your financial statement, which are:
Profit and Loss Statement
Statement of Cash Flows
I analyze these documents by year, quarter, and month. This shows me a ton of information regarding the financial health of my business, which I cover in more detail here. Next, we look at sales.
The next step of the annual business review is to look at your sales. Ask and answer the following questions:
Which sales systems are working? Which ones aren’t?
Which products and services sold better than expected?
Which products and services sold worse than expected?
Which sales channels generated the most revenue?
You want to analyze your sales to determine what your money-makers really are. Let’s use a Plumber as an example. Say our Plumber’s goal last year was to acquire 10 new commercial clients. They generate $3,000 in revenue for each commercial client, compared to only $300 in revenue for each residential client.
On the surface, it seems our Plumber is right to focus their client acquisition efforts on commercial clients, but these numbers don’t tell the whole story.
When our Plumber conducted their year-end financial analysis, he saw 70 percent of his business came from residential, not commercial, clients. This made him realize he should be focusing on increasing volume of residential clients, rather than chasing elusive business clients.
Like the Plumber in our example, we often end up wasting resources on chasing the wrong goals if said goals are not created after conducting a thorough annual business review. Basing your annual business plan on last year’s results gives you a plan grounded in reality. Now let’s move on to the Human Resources analysis.
The first step of your annual HR analysis is to make a list of every employee and contractor within your organization. Then, calculate each employee’s total cost and put that number next to their name. This number includes salary, bonuses, and benefits.
Next, you look at the results each person produced. The goal is to determine whether each person’s contribution to the business was worth their total cost. Use this analysis to decide:
- Who you need to fire
- Who needs to be put on a Performance Improvement Plan
- Which areas you need to hire more people
Once you analyze your human resources, you’re ready to move on to project analysis.
What did you try last year in order to grow or improve your business? All of these experiments are projects you need to analyze before next year. Did these projects help or hurt your business? You want to do smaller reviews of your projects on a quarterly, monthly, and weekly basis. It is the only way to keep your projects on task and on
Did these projects help or hurt your business? You want to do smaller reviews of your projects on a quarterly, monthly, and weekly basis. It is the only way to keep your projects on task and on budget.
Investments and Marketing
Where did you invest money this past year? This includes things like marketing, research and development, and new equipment. When it comes to investments, especially your marketing investments, it is crucial to analyze your return on investment.
Let’s go back to our Plumber example. Say our Plumber spent $50,000 last year on marketing efforts to acquire commercial clients. He only got 15 new commercial clients, which at $3,000 a pop, is only $45,000 in revenue. Meanwhile, our Plumber spent $5,000 on marketing efforts to acquire new residential clients.
He got 30 new residential clients, which at $300 a pop, is $9,000 in revenue. Even though the dollar amount is higher for commercial clients, there was more of a return on investment for residential clients.
After you look at your investments and marketing, you have to analyze your debt. How much outstanding debt do you have tied to your business?
How much is it costing you to service this debt? This is a short, but important, part of the annual business review. I once had a small business owner client who was spending $100,000 a year to service his debt, making it virtually impossible for him to turn a profit.
Contract Reviews and Pricing
The last component of your annual business review is reviewing contracts with vendors and pricing of products and services. What vendors or online services do you pay for, but hardly use?
Answering this question shows you exactly where you can cut costs. You also want to look at which vendors you are giving the most volume. Make a plan to call your high-volume vendors and renegotiate your contracts.
Scheduling and Conducting Your Annual Business Review
I suggest locking yourself away for two full days to complete your annual business review. I’ll usually book a room at a hotel for a couple of days so I can be free from distractions.
The first day is dedicated to the review process, and the second day is dedicated to crafting my annual business plan for next year. My formula for success during the year is to conduct mini-versions of the annual business review on a quarterly, monthly, and weekly basis.
Now that we covered all of the components of the annual business review, I have a challenge for you. Take out your calendar and schedule those two days. Make a commitment to conducting your annual business review during this time and you’ll be one step closer to your business goals.