The year 2014 is projected to be another chaotic year for the mortgage industry. While the U.S. economy is expected to improve, the actions of the Federal Reserve regarding interest rate movement continue to be uncertain. Unemployment remains high among middle-income earners, and those who do have jobs are unlikely to see significant increases in pay. Federal debt continues to climb to untenable heights, despite the need for massive investment in infrastructure, education, and research.
The Dodd-Frank Act is unpopular among big and small bankers alike and may be amended. The costs of Obamacare to small businesses, including mortgage brokers with 50 or fewer employees, are just now becoming visible. The large mortgage banks have retrenched, cutting personnel and closing offices as refinance activity has declined. Congress is virtually at a standstill, locked in a partisan stalemate with new elections coming in the fall, which means that the future role of government in housing remains unknown. All of this uncertainty brings risk, but it also brings opportunity.
How do you expect your organization to be affected by circumstances in 2014? Are you trying to build while others focus on survival, or is retrenchment, holding cash, and sitting back the best strategy in the face of unknowns? Whatever your conclusions, one thing is certain—now is the time to plan for the future.
The value of business planning
Many business owners and managers underestimate the value of a business plan, believing that complexities and chaos render such efforts futile. They regard business plans in the same way that Mike Tyson ridiculed boxing strategy: "Everyone has a plan 'till they get punched in the face." Poet Robert Burns explained the anti-planning rationale perhaps a little more eloquently when he suggested that the best-laid schemes of mice and men often go awry.
Burns, Tyson and their business counterparts incorrectly equate outcomes with the values of planning, failing to see the benefits of greater preparedness and increased flexibility. It is the planning, not the plan, that separates the winners from the losers. Research by Professor Andrew Burke at the Cranfield University School of Management suggested that growth in business for new organizations with business plans was 30 percent higher
than those without. The start of a new calendar year is a perfect time to review your previous year's performance, confirm company objectives, and adjust strategies and tactics where necessary.
A business plan defined
Business plans range from extensive, elaborate productions beautifully bound for presentation to simple notes scratched out on a legal pad. Whatever their appearance, though, all business plans share certain common components:
►Operational and financial objectives of the business:
A valid criticism of business plans is the tendency of their authors to rely upon general, nebulous statements, rather than specifically defining tangible goals. A good business plan establishes concrete objectives such as future revenue and profit growth
, percentage of market share, cost and expense reductions, and new products to be introduced or territorial expansion to be achieved.
►Strategies and tactics to achieve objectives: A strategy, sometimes referred to as a "master plan" or "game plan," defines a basic approach taken to achieve a particular objective and establish a competitive position relative to other companies. For example, one company may elect to provide products with the lowest possible retail price while another may compete by offering the highest quality at elite prices. Tactics, on the other hand, are subsets of strategies detailing specific actions to be taken by specific personnel. A mortgage broker with the goal of increasing market share may elect a strategy to close loans faster than others in the marketplace. In order to minimize cycle time, the company may employ tactics such as standardization of forms, electronic linkage between mortgage broker and lenders, and third-party services brought in-house for better coordination and control.
►Measures used to gauge progress: The old business adage, "If you can't measure it, you can't manage it" is especially true in planning. Without benchmarks and measures, knowing whether you are progressing toward your objectives is impossible. A good business plan defines tangible measures such as total cost of closing a loan, labor costs per application, cycle times, and ratio of outsourced to in-house services. To be useful, measures should be simple, easily understood, and known to all relevant participants who are affected by the objective.
The scope of an effective business plan
Every business owner and manager is familiar with the term "paralysis by analysis." Defining the scope and due date of a business plan before beginning the exercise is essential to completing a document that is easily understood, unambiguous, and actionable. The primary objectives of companies should include the following:
►Growth of revenues and profits: If your intent is to grow or maintain company revenues and profits, you should define your objective clearly and specifically. For example, you might aspire to a 10 percent increase in total revenues or profits for 2014, expressed at a rate of 2.5 percent quarter-to-quarter growth. Or you could express the objective as a total dollar figure—an increase in the number of sale units, an increase in the average sale per unit, or a combination of the two. However you choose to define your objective, it should be based on your regular accounting data.
►Greater financial stability: These objectives might be stated either as specific actions to be accomplished or as a financial ratio. For example, a specific action might be the addition of $100,000 of company equity by June 1 or the establishment of an accounts receivable line in the first quarter. A financial ratio objective could be a reduction in overall debt of 15 percent, a decline in accounts receivable days outstanding from 30 to 20, or an increase in accounts payable days outstanding from 10 to 15.
►Reduced costs: Objectives could range from a reduction in total cost of goods to specific expense items such as attorney fees, IT costs, or printing and postage. It could also include ratios such as increased man-hours per closed mortgage, cycle times (shorter cycle times generally reduce costs if there is no increase in resources), and total costs per unit (mortgages closed).
►Employee commitment: Standard measures of employee commitment include turnover, absenteeism and new hire referrals. Some companies do regular employee polling or consider participation in suggestion boxes, company blogs, and other company-sponsored events.
►Determining and defining appropriate objectives is the foundation upon which any business plan rests: Objectives that are either too easily attainable or impossible to achieve can destroy any potential benefits. Whatever measures you choose should be directly related to the objective, a logical linkage that is visible and readily understood by those responsible for delivering the desired results.
Many companies lack the resources to implement multiple strategies simultaneously—trying to do too much too quickly invariably fails, leaving participants disillusioned, frustrated and suspicious of future planning exercises. To help ensure success, managers must correctly evaluate their companies' capacity to introduce and accept change in the midst of ongoing business demands and prioritize multiple objectives so that maximum effort delivers maximum benefit. The one exception to this is when low-hanging fruit—quick and easy changes that deliver tangible benefits—can be taken advantage of. For example, simplifying and combining information on forms may reduce cycle time, cut employee time and expense, and improve client satisfaction while reducing storage and security costs.
The results-analysis-adjustments cycle
While improvement begins with the planning exercise, value is achieved by analyzing results continuously and making necessary adjustments. For example, a new regulation adding complicated forms or enhanced security may negate a cost or cycle time objective forcing you to adjust the goal. An external factor such as a new regulation affects all competitors, which means that your planning effort may actually increase the expected benefit, especially if your competitors are unprepared.
As a business owner or manager, you are used to reviewing monthly financial reports - income statements, balance sheets, and cash flow statements - to keep abreast of your business. The objectives and measures specified in your business plan require a similar effort if you are to achieve your 2014 goals. The quicker you can identify a variance from the plan, analyze its cause, and take corrective action, the quicker you can achieve your goals by the end of the year.
Planning can be a burdensome, boring exercise for action-oriented individuals confident in their ability to quickly adjust to the unexpected. If you are tempted to forego planning for 2014, you would do well to heed business professor Andrew Burke's comment about its purpose: "A plan is not so much about trying to predict the future, but how to be adaptable, how to sustain the business, and how to develop it to exploit the market opportunity." Are you ready for 2014?
Mike Lewis is a retired business executive and personal finance columnist.