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On a discussion panel, I was recently asked, "Was there a particular turning point when your small business really jumped ahead?" Absolutely. I always made up plans and budgets, but it was about five years into my business before I really began to proactively use them.

Before this point in time, my sales projections were miles off and, more importantly, I was always thinking up excuses for making unplanned expenditures, often for advertising that seldom matched my expectations. I'd finish the year way over budget, with profit margins a fraction of what my plan called for.

I learned that a lot of expenditures seem like a great decision if you look at them in isolation-but when you look at them in the context of the whole budget, they often look a lot less enticing.

Too many people equate annual planning with budgeting. Worse, when they budget, they simply extrapolate last year's numbers into next year's plan, perhaps increasing by 5 percent here and 6 percent there.

Big mistake! The annual planning process is your best chance to really manage the business-and to get key people to "buy into" the total plan by actively participating.

Even if you're running a one-person business you want to get a few words into your annual plans, not just numbers. You don't need a full-fledged 100-page business plan-in fact, a big, detailed plan takes focus away from what matters. What matters is the few big things that the business is going to strive to do better or different next year. The annual planning process should be focused around these few, important changes.

Before you start doing any nitty-gritty budgeting for your annual plan, here are the crucial first steps:

1. Review the company's business strategy. Do changing market conditions or heightened

competition mean that it's ready for an overhaul?
2. Establish just a few major goals for the next year. These are usually quantitative goals such as

to increase sales by 18 percent or to increase profit margins by 15 percent-but they may be

qualitative goals such as to improve the quality of a product or customer service. It is very

important to have very few major goals-otherwise, with too many goals, the company will lose

focus and be less likely to hit any of them.
3. If your company is big enough to have departments, have one or several specific goals for

each department. To take this one step further, you may want to have specific goals for

individual people within each department.

Once you've reviewed the company's strategy and set up company-wide, as well as department, strategies for the next year, then it's time to start cranking out budget numbers.

I always begin with sales, because sales numbers will drive many of the other numbers. Unfortunately, sales numbers, particularly of new products, are difficult to project. So I try to have at least three people, typically a project manager, the sales manager, and myself, work up new-product sales projections together. If you're really unsure of sales projections, consider multiple scenarios based on "weak," "likely," and "good" sales projections.

After we've got the sales numbers, each department works up its budget numbers. Once they're tentatively approved, the controller puts them all together into one big happy plan! But more often than not, I'm not completely satisfied with the overall profit margin, so I'll work with the different department heads to cut costs and drive up the projected earnings.

One of the best ways to establish cost goals for annual planning is to benchmark your costs with other firms in your industry. Don't get too wrapped up in the details; focus on the total picture for major categories. For example, if your marketing costs are 23 percent of sales and the industry average is 16 percent, it's time for some cost-cutting. Benchmarking is a great way to get department managers to understand why they need to control costs.

Often industry associations provide standard industry costs, and occasionally they might be mentioned in articles in trade magazines.

You may want to consider hiring a consultant to put together a study of a half-dozen or more firms very similar to yours. Being a third party, the consultant will keep each firm's individual numbers confidential by providing only average and median cost information to each company as an incentive for participating. What's worked best for me is when another publisher foots the bill for the consultant, but shares the results with us in exchange for our agreeing to share our numbers.