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How Does My Defined Benefit Pension Plan Work?

The Defined Benefit Plan used to be the standard for pension plans. Over the last 10 years, many companies have been phasing out these plans in favour of Defined Contribution Plans. Some companies may give you the option of switching between them as well, or converting from one type to another. This article is focused on the Defined Benefit Plan. If you start working for a company today, you will most likely be offered a Defined Contribution Plan unless you work for the public sector, a unionized environment, or a company with a long standing defined benefit plan.

How do I know the difference between the two plans? See the definitions below. The words in bold are terminology you will often see in the discussion of defined benefit pension plans.

Defined Benefit and Defined Contribution Plans Defined

A defined benefit plan is a pension plan where the future payout in retirement is defined by a set formula when you join the company. It is a calculation that usually includes your highest average salary, time working in the company, and how much money was contributed by you and the employer. The money is invested on your behalf and the firm is responsible for risk if something goes wrong. There is usually an implied rate of return that is guaranteed by your employer each year, which is the investment rate of return your money would earn if you could see your pension plan in a bank account.

A defined contribution plan is where the money you pay into the plan is defined: the amount contributed either by you or on your behalf by the company. It is a set dollar amount based on your salary in the year that you are working. You can think of it as the company (and sometimes you and the company) contributing to your pension account. This is similar to a Registered Retirement Savings Plan (RRSP) account, except that it is locked in. Locked in means that the money is in your name and you are entitled to the money, but cannot withdraw it unless there is a very exceptional circumstance. (i.e. this is the only money I have and I need to pay my bills). Also like an RRSP Account, you get to choose the investments in the defined contribution scenario, and you are taking the risks. If you invest in a fund and it loses money, you must deal with the consequences. It is for this reason that it is good to have a plan. If you are in a situation where you have a defined contribution account, you will have to make the decisions.

I know that I have a Defined Benefit Plan, What Now?

The good news is that defined benefit plans tend to work without many decisions being made on your part. This article is designed to make you aware of how they work so that you can be aware of potential changes and make decisions such as benefits changes, whether to stay at your employer a certain number of years, whether to transfer your pension to another institution, or convert to another type of plan (i.e. The Defined Contribution Plan). You may also be given warning if the promises that were made to you when you joined the pension plan get changed by the time you actually receive payment in retirement.

How Does It Work?

A defined benefit pension plan is basically a giant bank account, covering retirement for many employees in an organization over a long period of time. The employees and the employer contribute money every year, and this money is collected in this account. The entity that manages this bank account is called the plan sponsor. This account is typically run separately from the company operations, or from the institution it represents. For example, the GM pension plan is a separate entity from GM the corporation. The only relationship the pension plan and the underlying company should have is for company contributions, adding money to increase funding of the plan, or removing money over and above the projected amount needed to pay the present and future pensioners. If there is any other money transfer between the pension plan and the company, this should be monitored as it may signal funding problems, or a permanent change in the structure of the pension plan (for example company mergers, amalgamations or division split off from the parent company).

Once money is deposited into this bank account, it is invested for a long period of time to ensure that there is enough money to pay the future obligation. The amount of money promised to future pensioners is tabulated, and this amount is discounted back to the present, using an interest rate called a discount rate. This means that an equivalent amount of money invested in the current year is calculated to equal this expected future obligation. The calculation of the future obligation determines an expected rate of return which is the return necessary for the money sitting in the bank account to pay the future obligation and operate the pension plan. How do they know how much they will have to pay? This is where the actuary comes in. The actuary estimates how long people will contribute and withdraw money from the pension plan based on life expectancy, economic conditions, expenses of running the plan, the investment returns and inflation among other things to come up with a projected benefit obligation. The current health of the plan overall is measured using an asset-liability study, which is exactly what it sounds like – a study of the assets (money expected to be generated by the plan) and the liabilities (money that is expected to be paid out by the plan), or the funding situation of the pension plan. There can different versions of this calculation due to varying assumptions. If you are very keen, you can find the assumptions in the financial reports of your pension plan and see what the variations are. Since these calculations are projecting way out into the future, a small change in an assumption will mean a big change in the result. Keep an eye on this over the years to see what trends may be impacting the numbers. This asset-liability study also determines whether there is a surplus in the plan, or it isoverfunded (more money in the plan that the most current estimate requires to cover the future obligation) or a deficit in the plan, or it is underfunded (less money in the plan than the most current estimate requires to cover the future obligation). If a deficit becomes too large and stays there for a period of time, the plan may become insolvent. This is very similar to a company that goes insolvent because it ran out of cash and couldn’t sustain its business any longer. If this happens, the government may bail out the plan, but this depends on the jurisdiction, funds available and willingness of the government. The alternative is to wind up the planand whatever money is left over is divided among the stakeholders (the pensioners, contributors and entities that operate the plan). This is similar to a bankruptcy proceeding for a corporation.

Contributions

Contributions represent the money put into the pension plan by you and your employer. The contribution amount is usually based on a percentage of salary, and consequently the payout in retirement is also based on your salary. The specific calculation of the payout will vary for each plan – this should be checked with your employer. The retirement calculators provided at your workplace are very handy for figuring out your projected retirement monthly payout. Since the numbers are projecting well out into the future, unless you are within 5 years of your retirement, the numbers will likely change by the time you actually receive payments. The ratio of money you are contributing versus the employer will vary by plan and over time. Generally, the less you contribute, the better off you are if you receive the same benefits. Check your pay stub to make sure that the amount deducted equals the amount that should be deducted. If it is not, ask why. There may be some additional deductions or changes to the percentages that you may not be aware of. In some plans, you don’t see what the employer contributes – you only see what you have contributed. If you know the percentages of both parties, you can figure out how much you are actually getting. Also, for tax purposes, the company will reflect contributions from both parties on your tax slips, as the total dollar amount will impact RRSP contribution room and tax planning. Changes to contributions and benefits are usually reflected after union contract negotiations, or after asset-liability studies are carried out which determine how much money the plan will need to pay the pensioners, and how much you the contributor will need to pay.

Vesting

“Vesting” or “Vesting Period”is the time after which you are entitled to benefits or payment, either now or in the future. When you first join a pension plan, the first vesting period is the time when you are entitled to the employer contributions. It could be your first day of employment, or months and years out into the future from your first day of employment. There may be other vesting periods – times at which you are entitled to pension payments, or health benefits as well as pension payouts. Many defined benefit pension plans will include access to health insurance, and how much is covered is typically what you receive when you are working – but this varies and must be verified with your employer. There may be a vesting period for when you can take early retirement. This is usually called early retirement rather than vesting, but the idea is the same. If you stop contributing to the pension plan, you will lose anything that is not vested. Note that you may leave the company and return to the company but continue contributing in your absence. Whatever is vested can either be taken with you, or received as a deferred payment in the future. The tabulations that are done with the retirement calculators always assume you will contribute all the way up to your retirement without interruption. If you leave earlier, you need to calculate a deferred payment, where you input the start and stop date of your contributions, and how much money you put in over this period. If you are familiar with the concept of an annuity, this is very similar.

Indexing

When most pension calculations are done, it is assumed that there is no inflation in the numbers. If you see the term “real rate of return”, this interest rate would include inflation, and would equal the nominal rate of return, or typical interest rate that is quoted, minus the inflation rate. As an example, if you received a 5% return on your mutual fund last year, and the inflation rate was 2%, your real rate of return would be 5%-2% or 3%. Why does this matter? Typically pension payments are fixed – once a payment is calculated upon reaching retirement, it stays the same throughout retirement. The problem is that when you retire, you are supposed to have enough money to pay your expenses with this pension payout. If the rate of inflation is 2% every year up to your retirement, this is like saying you can buy 2% less stuff every year. If the promised pension payment is $2000 per month today, and you retire in 20 years, this 2% inflation rate would reduce the amount of stuff you can buy by 40% (2% x 20 years). If this continues while you are retired, say another 20 years, this money will now buy 80% less stuff than today. Imagine paying bills with 80% less money! Indexing raises the payout calculations by the amount of the inflation rate to prevent this erosion of monetary value from happening. Inflation is actually a very personal thing – the price increases of the stuff you personally spend your money on, is what will impact you the most. The pension plans assume that you buy the same quantity of stuff and in the same proportions as the average, or quoted inflation rate. This is likely not true, but it is better than no indexing at all. Some pension plans also have a maximum amount that they will index, or will not fully index but only partially. Check with your employer for the calculation to verify.

Early Retirement Special Features

Most plans have an option to retire early. They will usually combine how long you have worked there, or years of service with your age and determine a threshold for qualification for early retirement. If you retire early, the rules may change. They may give you a reduced pension for a period of time, or some other benefit. This is highly specific to your employer, so do the homework on this one. These features also change over time. The more the employer wants you to retire, the better an offer they will provide. Another indicator is that the more money the pension plan has, or the better the funding situation, the lower the contributions will be and the better the early retirement terms will be. The closer you are to retirement, the more these features will impact you. Retiring early is a very personal decision, as it will affect your retirement plan, tax status, income and employability. Make sure you plan carefully if you are offered early retirement, and do what is best for your needs.

RRSP Effect

The government views all of your pension accounts together when it comes to contribution room. The RRSP room that you are allowed will include defined benefit pension plan room, as well as all other types of retirement accounts. As an example, if you are allowed $12000 worth of RRSP room, and the defined benefit plan contributes $10000 in the relevant tax year (note that this includes your contributions and those of the company), you would have $2000 left for additional contributions to another type of retirement account.

What About the CPP?

The CPP contributions are also accounted for with your defined pension plan. The employer will account for the CPP limits when calculating your defined pension contributions. When you retire, the pension calculator that you use to determine how much money you receive in retirement accounts for CPP entitlements as well. How this accounting is done will depend on your salary and the CPP contribution calculations for the year in question. This would be another question for your employer. When you are retired, you would receive the CPP Payment and the Defined Benefit Pension payment separately, and the Old Age Supplement (OAS) if applicable.

What if I Leave the Company?

If you leave the company and you are vested, you can leave the money with your former employer, or take it with you to another institution. If you leave it with your employer, you will be able to receive it when you reach retirement age – this is called a “deferred payment”. It may also mean a series of payments over time – this is something I would ask the employer, especially if you will be retiring in the next 10 years. Since it is a pension plan, it will remain locked in until you are of retirement age. It would be kept separate from other non-locked in assets that you might have – like RRSPs, Tax Free Savings Accounts (TFSAs) or non-registered (cash) accounts. There are situations when you can combine locked in accounts from different employers into a single account. This should also be discussed with your current employer.

You can also combine defined contribution and defined benefit plans together in certain situations – if your current employer has a way of calculating the value of the contributions between the two (or more) types of plans. This is also possible between defined benefit plans of different types. Please ask your employer for the rules of their pension plan upon arriving or leaving a job to make sure you have all of the options open. You can also manage pension money yourself once you leave the employer. The money would go into a Locked in Retirement Account (LIRA), which can be managed by the same financial institutions that manage RRSP accounts. You can also turn this money over to a financial planner or broker if you believe they can manage your money more effectively than you can. There are usually time restrictions on making these transfers, and rules of protocol to follow, so please ask your company when you leave the firm and get the proper procedure so you can implement this strategy if you want to.

What If I Am Not Vested Yet?

If you leave the company before the vesting date – your funds will be returned to you but employer contributions will be kept by the company. For information purposes, keep track of how much you and the company contribute from when you joined the plan in the event of mistakes. As an aside, always keep your statements and print out hard copies of your records in case of issues with accessing your internet based accounts or loss of history. At the very least, have the records stored in your personal hard drive so they can be accessed without restriction. This is also a good idea for tax purposes. You want to be able to recreate your account situation from start to finish without relying on the internet, or any other parties to supply you with information.

In summation, the defined benefit pension plan is an integral part of your retirement. Even though it is managed by your employer, you should know what is going on and make decisions when appropriate.

 

Life Improvement: When Is It Time Not To Plan?

Many of us have all heard the age-old saying that failing to plan is planning to fail. And many of us know the value and power that is found in setting goals, especially written ones. Every business guru, diet guru, sports guru… any guru… take your pick from the plenty there are… all of them stress one thing: have goals, will succeed. So we know this works. At the same time, we all hear of the importance and immense power of letting go, detachment. So we also know that this works. But it all sounds contradictory at first, doesn’t it? Well, it isn’t. The question then is, when is it time to plan, and when is it time to let go (not plan)? Put in another way, when does planning help you, and when does it harm you? When do things “go bad” not in spite of your plans, but because of them? That is the question, the answer to which will allow you to drop off the stress and worry baggage, stop unwittingly messing yourself up with plans made at the wrong place and time, and generally empower and free you a great deal.

Well, to begin with, it is a good time to define a plan so that we know what we are talking about. A plan is a vision; a template which when followed guarantees a certain outcome. It is a collection of cause-and-effect clusters that all work together to produce one final desired outcome. The essence inspires a vision that defines the becoming of a form, through process, that will hold the expression and experience of the essence that inspired it. That is a plan. Obviously, a plan with missing or incorrect inputs will not lead to the correct outcome,because it is not based on truth, on the Universe as it were, on the Laws It Works By. So you can imagine that an incomplete plan will work, but it won’t – it can only hope to approximate. Incomplete plans don’t work fully, no matter how one deludes themselves prior to the frustration of seeing the plan dashed against the rocks. Moving on, a plan made at the level of your ego is a personal plan. You make it because you have certain hopes and fears and you wish to avoid what you fear and make what you hope for happen. Without fear, you would rarely plan personally. Most plans are defensive; defensive against some imagined attack. A feature of a personal plan is that they have a future imagined “good end” to aim for and a “bad end” to avoid. Therefore, a personal plan is based on judgment (against yourself and others) and abstract assumed scenarios as part of its inputs. Its driving force is partially based on fear, as all things from the ego level are.

Here is a key point: personal plans are made from a vantage point that has no vision of all factors involved in all dimensions of space and time, and that is why the ego assumes things in an attempt to fill in the places it has no idea about. At this level of consciousness, you can only see what is right Here Now, and for most humans that is a tiny slice of eternity. Of all the millions of cause-and-effect components required to cooperate all across the universe for your desire to be fulfilled, your egoic self is only aware of a tiny percentage of them. That is why its plans are never complete. But then there is a part of You that is nonphysical and aware of all, all, the components and how they would exactly fit into the space-time continuum to guarantee that your desire is fulfilled. That part of You is Everywhere, that is why It Knows.

Now, I would like you to stop for a moment and remember the last time you had a flash of insight, an ah-ha that made you smile with delight at how smart you are. We have all had those moments where, literally out of the blue, we get it! You could be taking a piss while daydreaming about the ocean, when this brilliant solution for your business appears in a flash in your mind, and you get so excited! It’s a funny thing how they happen. Have you ever wondered why they come to you as finished plans? Seriously, remember the last time you had one. You did not construct it, put it together, or formulate it. You know, you did not put it together, block by block, until it became the genius idea that it was. You just found it all done for you, there, flashing in your mind. And you ran out and told your friends what you just thought of, never once stopping to consider just how you thought of it. Really, who put it together? Think about that. You found it complete, perfect for your needs. Who put it together with such wakeful intelligence that is aware of all that is involved so much so as to produce such a suitable idea? What about musicians? Many chart-topping artists report that they simply find the music in them; they hear it then write it. They don’t put it together; they more like report it. The same goes for many inventors, many artists, and so on.

By the time you get one of those flashes of insights, by the time it enters your mind, it is already a copy. The original is out there somewhere, where it was put together by One who has full vision and was capable of bringing to you what you had not managed to package together yourself. But remember, there is only One Mind, separation is a mental illusion, just like time is a mental illusion (time is thought “stretched” out into “space” to demonstrate and experience it; you recognize sections of eternity “at a time” to experience process, space demonstrated). You “heard” the thought, the inspiration, because you were listening, at that point empty in relation to the matter. If you remain empty, you could continue, day by day, to listen to the rest of the plan, which includes how to execute the vision, what inputs to use, when to make what move, and so on. The place where the original plan came from is your own Higher Mind, that part of your individuation that is still in perfect recognition of its unity with All That Is, the part of you that sees all and knows all, the part of you that is not in the experience called human, the divine essence. Now here is the greatest news: no divine plans are incomplete. None! So none can possibly fail when executed as planned. The Planner Sees All, Directs All. The only thing that can interfere (which means it introduces inefficiency to your personal experience) with a divine plan is a personal plan. This is not because a personal plan is more powerful; it is because the right to free will is upheld with the highest respect. You have heard many times that you have many aspects of you, some of which you are conscious of and others of which you are not. When they are not aligned, you experience conflict and confusion. So now we know the difference between a personal and a divine plan. A divine plan is not some plan made by some foreign god to impose on you; it is Your Own answer to your questions, from a level that sees all (Spirit) to one whose experience is one slice of the whole at a time (human). But it is all you. That is why those flashes of genius that you get are so complete, yet they are specific to the very problem or desire you had.

Now let us go back to this goal-making business. Personal plans have a function, but only when used to free the individual. It is the only time they can help you. And this is why. Imagine a person who feels like a victim (in anything, any area of life). They have given up hope. They feel powerless, incapable of making anything happen. Now, if something happens that triggers their courage or anger enough to make them decide to do what it takes to make things work for them, they begin to become self-reliant. They drop the victim mentality. They make a plan; a way in which they feel will get them out of their desperation. Now, every time a human has a desire, the non-physical part of that human starts inspiring this human with ideas from a divine plan, ideas which are guaranteed to work. However, if you have so much personal thoughts and emotions distracting you, you cannot hear these inspirations. You must still yourself. Like a calm pond, one which will instantly be aware of any rock thrown in. If you are like the Niagara Falls inside, you will not notice the rocks being thrown in.

Anyway, back to our example. This person, far from calm, will only hear parts of the plan being given them. They will, out of fear and a belief that they can fail, that there is some danger somewhere, they make a personal plan. They use inputs from inspiration, whatever they can hear and are not afraid to follow, and they also make up scenarios, imaginings based on their fears, and use these in the planning process. At the end of it all, what they invariably find is that the plan works in certain portions. They are elated! Even if not everything worked as planned, at least something worked! And this way, they rise out of desperation and can now start to direct their life. The point here is that from the place they were, the helplessness they believed to be in, any plan was a good thing. Any plan! And goals are great, because they give a point of reference, something to aim for. As you can see, even the worst personal plan, one with 10% success, is still a great thing for one who though they had zero power. It is something to celebrate and honor.

But then there comes a point where self-confidence and self- reliance is believed in enough to no longer be doubted. At this point, making personal plans becomes a great hindrance. Once you have proof that your life can be deliberately lived instead of under the idea that you are a victim of forces beyond your control, it is time to start using complete plans. That means that the ego’s personal plans are no longer useful. They were a crutch to remind you how to walk, with their goals and all, but now that you can walk on your own, you need a new tool to show you how to run and fly. That is a complete plan, a divine plan made by the higher aspect of Who You Are. You are much larger than you imagine yourself to be. Let us examine how this works.

Under the rule of personal plans, a person would ‘hear’ the insight, the flash of genius, stop everything they are doing, and excitedly run to the office to start planning how to make this plan work! They assume it is ‘my idea’ and ‘I must make it work against threat of failure’. They make plans which rely largely on assumptions (an assumption is anything that is not What Is) because they cannot see the Whole Picture. So by mere fact, their personal plans will have elements in them that interfere with the smooth progress of the original insight, the divine plan. This is where you start to fail because of your plans, not in spite of them. To begin with, you do not know what the vision you saw in your mind is for, its complete use to the entire universe. The universe is not personal; it works as a Whole. But the Original Source of the idea does. You also do not know what the millions of cause-and-event components required are; you can only guess a few of them. And you do not know at what points in the space-time continuum they require to be inserted for everything to work perfectly; but the Maker of the Original Plan does. Now watch how a personal plan messes you up at this stage. Your plan is based on dates and deadlines that you pull out of the blue. It is full of standards that you have determined indicate whether you have succeeded or failed. Let us say you miss a deadline, and something happens that is opposite of what you had hoped and expected. What happens to your ego then? Does it not rush to judgment, calling you a failure, asserting the belief that things can go wrong and that you need even more control, and increasing the level of fear and anxiety? So next time when faced with a similar situation, you put even more focus on what you fear and then it happens again! Simply because you focused on it and thus created it. It becomes a viscous cycle. And you keep reaching for more control. And you experience more stress instead of less. And fear increases. You never once to consider that there is nothing wrong with you or the universe, nothing unsafe. You never stop to consider that it is your personal plan that was grossly mistaken due to relying on a fear-created ego.

Now let us see why the most successful people all preach the power of letting go. Let us look at how one would proceed in the above example, but by listening.

A person would hear the insight, and automatically know or remind himself or herself that all divine plans are complete, all the way to the end. They know that the vision is complete in the Mind of the One, and it cannot ever fail. So it is simple. In the same way, they listened to and heard the great idea that made them all excited, they would remember that their copy is just a copy. The original is still out there, along with everything needed to make it manifest. So they would listen and wait. They would know that at the right time and place, they would receive the next piece of the puzzle. They would rest, not stressing about making plans to ‘make sure’ it happens. And it makes sense. If they did not compose the first idea, why can’t they trust that Whatever composed it will also give forth, at the right time, everything else needed to make it work?

Imagine the universe is a big circle and you are a little circle within that big circle. Now a personal planner assumes that the big circle is at war with him or her, the little circle. In their fear over this imagined state of things, they make up a phantom world in their mind, with assumptions about the future and how the rest of the universe will act and react, and they plan against this. It is so draining. One who does not make personal plans but listens to their higher aspect, on the other hand, sees the big circle as part of them, part of the whole, with only an intention to love them and make sure all is OK, because all is One. They have chosen to believe in peace and love rather than separation and scarcity. This is a choice, and it is the choice that allows them to let go. They realize that they are best served focusing on the little circle, their Here Now, which is what they have full knowing of. And they awaken within that circle that is them, here, now. They chose to put all their attention here, now, and because they do this, they are aware of their emotions and thoughts. Presence gives them the ability to control their here, now. So they choose, here now, always, to make their here now happy and well. Here, Now, they follow whatever cues come up, always deliberately choosing their thoughts and emotions, here now, and not throwing their mind into some imagined past or future. In other words, they make every here now moment golden, and because all life is a successive moments of infinite Here Now, their lives automatically work perfectly! You have seen them or heard of them. That is how they do it. Clarity, simplicity, power, peace, calm… all rewards of being present and following complete plans, letting go of personal plans once you recognize that their use as a crutch is complete. They become purely efficient, effortless.

Such people walk this earth without the baggage of plans and worries, and things work better for them! They recognize that the universe is not personal, yet it is only, only, loving and all else is our self-created illusions. Just because we do not understand something does not make that thing wrong. There are more things relating to your life than you are consciously aware of at this level of your existence. Remember that your life always creates the next moment of your experience out of your intentions. Whatever you give attention to grows. You are therefore held hostage by your own personal plans. So what is the point of your mind at this level, in relation to planning? Well, it is to execute that plans it receives, knowing with certainty that they cannot fail. It is to fashion all of your existence here into an appropriate vessel to execute these plans. The plans are already perfect. All they need is a suitable vessel to manifest through. You have to become a certain person for certain things to flow through you. It is this that you can use your lower mind for, by following cues from the higher mind. The attainment of success is not something that one comes by through chasing after success – it is something one attracts by the person they become. You form a vibration match with what you desire. It is an inner journey of transformation. You can call it education, training, skills, self-help, discipline… it is all an inner transformational journey resulting in a frequency match. It is guaranteed. That is all you have to do. The rest is done for you (admit it; you don’t know how it is done, how all those things are coordinated universally to make this amazing miracle called life work with predictability!)

You now have a progression of the use of various types of plans. In the beginning, personal plans can be used to establish self-reliance in a being that has lost hope. However, there comes a time when that crutch, the personal plan, because the very problem itself, the cause of failure instead of being the cause of success. That’s when its time to let go of the crutch. It is time to dare give trust a chance, to dare believe that the universe is loving (not dangerous, as you have been indoctrinated to assume) and see what happens! Give it a go! Find out for yourself. Let go, truly, a few times and listen to the plans as they come and see what happens! Gather your own evidence instead of holding on to personal plans because you are afraid something could “go wrong”. You don’t have to carry that huge unnecessary load. Drop it. It is very liberating! Try it a few times and see how you like it.

Four Reasons Why Small Business Fail To Plan and Why They Need To Think Again

It is so widely acknowledged that a robust business plan is one of the key ingredients in small business success, it seems remarkable that anyone serious about their business could considerable it optional. For example, Business Link say, “It is essential to have a realistic, working business plan when you’re starting up a business”. A recent survey showed that small businesses were twice as likely to be successful with a written business plan as compared with those without one. The Times in their annual round up of 100 up and coming UK businesses suggest that “poor business planning” is a key reason for failure. Indeed, it’s almost impossible to find an authority that would advocate the opposite idea, a clear signal that this idea is accepted wisdom. Despite this, a recent survey shows that two thirds of small business owners run their businesses on gut instinct alone.

I had a very interesting discussion about this a couple of days ago with a good friend of mine who has run several successful small businesses in which he posited the idea of a “planning gene”. He felt that the only possible explanation for the lack of proper planning in small business was genetic.

According to his theory, the majority of people are born without the “planning gene” and this explains why so many people don’t have any written business plan, despite the overwhelming evidence of a high correlation between a robust and vigorously implemented business plan and business success. The majority of us are simply not biologically and genetically wired to plan.

This is certainly one explanation, although I have to say I have a few reservations as to the validity of his theory. I talk with small business owners about planning every day. I’m part of a small business myself. I’ve owned several small businesses over the last ten years each with varying degrees of success. In all those conversations and all that experience, this was the first (semi) serious discussion I’d had about the planning gene.

If I was to aggregate the results of the conversations I have had with actual and prospective customers on this topic, four distinctive strands emerge explaining why small business owners fail to plan. Whilst I have heard a few other explanations for the lack of effective small business planning, I am treating these as outliers and focusing on the most significant.

I’m Too Busy To Plan – More often than not, the small business owners we talk to tell us that proper planning is a luxury that only big business can afford. For them, business planning, if done at all, was a one-time event that produced a document for a bank manager or investor which is now gathering dust in the furthest recesses of some rarely opened filing cabinet. There just aren’t enough hours in the day and if forced to choose, they would do the real, physical work and leave the mental work undone, which seems to be the poor relation at best, if it is even dignified with the status of work at all.

Traditional Planning Doesn’t Work – The “I’m too busy to plan” excuse is often supplemented with this one. I’ve heard the stories of the most legendary construction overrun of all time, The Sydney Opera House, originally estimated to be completed in 1963 for $7 million, and finally completed in 1973 for $102 million, more times than I can remember. Sometimes, this idea is backed up with some actual research, such as the fascinating study by several eminent psychologists of what has been called the “planning fallacy”. It seems that some small business owners genuinely believe that mental work and planning is a bit of a con with no traction on physical reality.

My Business Is Doing Fine Without Detailed Planning – A minority of small business owners we speak to are in the privileged position of being able to say they’ve done pretty well without a plan. Why should they invest time and resources into something they don’t appear to have missed?

Planning Is Futile In A Chaotic World – Every once in a while, we hear how deluded we are to believe that the world can be shaped by our hopes and actions. This philosophical objection to planning is perhaps my favourite. It takes ammunition from a serious debate about the fundamental nature of the universe and uses it to defend what almost always is either uncertainty about how to plan effectively or simple pessimism. This is different from the idea that planning doesn’t work as these business owners have never even tried to form a coherent plan, but have just decided to do the best they can and hope that they get lucky as they are knocked hither and thither like a steel ball in the pinball machine of life.

As with all of the most dangerous excuses, there is a kernel of truth in each of these ideas and I sympathise with those who have allowed themselves to be seduced into either abandoning or failing to adopt the habit of business planning. Most small business owners feel the same dread in relation to business planning as they do to visits to the dentist, so it’s unsurprising that so many simply don’t bother. However, by turning their backs completely on planning, they are in danger of throwing the baby out with the bathwater. Taking each idea outlined above in turn, I’ll attempt to show why business planning is critical, not just despite that reason but precisely because of that reason.

I’m Too Busy Not To Plan – Time is the scarcest resource we have and it is natural that we would want to spend it doing those things that we believe will have the greatest impact. Of course, we want to spend most of our time producing, but we should also invest at least some time into developing our productive capacity. As Stephen Covey pointed out in his seminal work, “The Seven Habits of Highly Effective People”, we should never be too busy sawing to sharpen a blunted saw. Planning is one of the highest leverage activities we can engage in, as when done effectively it enhances the productive capacity of small businesses, enabling them to do more with less. Nothing could be a bigger waste of precious time than to find out too late that we have been using blunt tools in pursuit of our business goals.

If we as small business owners weren’t so busy and time wasn’t so scarce, then we wouldn’t have to make choices about what we did with our time and resources. We could simply pursue every opportunity which presented itself. However, for the busy entrepreneur, the decision to do one thing always has the opportunity cost of not being able to do something else. How can we be certain that our business is going where we want it to go without pausing regularly, scanning the horizon and making sure not only that we are on track but also making sure that we still want to get to where we are heading? I believe more time is wasted in the single-minded pursuit of opportunities that are not right than is wasted by over thinking the opportunity of a lifetime.

In short, small business owners are extremely busy and their time is precious. So much so that to waste it doing the wrong things with the wrong tools would be tragic. Small business owners that cannot afford the luxury of making expensive mistakes simply must regularly sharpen the saw through continuous business planning.

Traditional Planning Doesn’t Work, So We Need a New Approach That Does – There are some fairly large question marks over the effectiveness of traditional business planning techniques. In an age where business models are becoming obsolete in months rather than years, a business plan projecting five years into the future cannot be viewed as gospel. Nobody has a crystal ball and if they did, they probably wouldn’t be writing business plans but using their remarkable predictive powers to some more profitable end.

Dwight D Eisenhower said “plans are useless, but planning is essential”. Whilst producing a document called a business plan is far from useless, the real value lies in the process by which the plan is created in the first place. If this process can be kept alive in a business then the dangers associated with traditional planning can be minimised or avoided all together. In an environment of continuous business planning, small businesses can be flexible and adaptive to the inevitable changes and challenges they will face. Rather than quickly becoming obsolete, their plan will simply evolve with the changing circumstances.

Accepting that the plan is a living thing that will evolve necessitates a change of approach to business planning. An effective business plan is the response to the repeated asking of the questions what, why, how, who and how much. It is not a 20 – 30 page form to fill in for the benefit of a bank manager or some venture capitalist, who will probably never fully read it. A business plan should help you, not hinder you, in doing business. If traditional business planning doesn’t work for you, it’s time to embrace the new paradigm of continuous business planning.

My Business Could Do Even Better With Effective Planning – If you are one of the lucky few whose business has thrived despite an absence of traditional business planning, then I say a sincere well done. I hope that you can say the same thing in five years time.

Business life expectancy in Britain and across Europe and indeed the world are in rapid decline. A study done at the end of the eighties and then again as we marched into the new Millennium showed that life expectancy had more than halved for British businesses in those ten years, from an average of 9.7 years to 4.1 years. Just because a company once enjoyed market leadership does not mean that its future is assured. Many high street institutions have fallen victim to the recent recession. Five years ago it was inconceivable that UK retail institutions like Clinton Cards, Game, Borders, Barratts, T J Hughes, Habitat, Focus DIY, Oddbins, Ethel Austin, Principles, Allied Carpets, Woolworths, MFI and Zavvi/Virgin Megastore would all be either out of business or teetering on the brink of oblivion in 2012. Yet that is exactly what has transpired.

Any business from the smallest to the greatest is not impervious to the winds of change. A new competitor, a technological breakthrough, new laws or simply changes in fashion and consumer preference can all re-write the future of a company regardless of how bright that future once seemed. It is precisely because these risks exist that business planning is critical. To survive in business is extremely hard, but failing to effectively plan for the future or adapt to current realities surely makes it impossible and failure inevitable.

Of course, it is not necessarily the absence of plans that did for these companies but the quality of their plans and most especially the quality of their implementation. Even a poor plan vigorously executed is preferable to the finest planning and research left to rot in a drawer. Continuous business planning is effective business planning because it emphasizes implementation and regular reviews of real results as part of what should be a continual process of improving company performance rather than simply attempting to predict the future and wringing our hands when our prophecy fails to come true. We believe, like Peter Drucker, that the best way to predict the future is to create it.

Planning Is Essential In A Chaotic World – We sometimes feel small and insignificant as we try against all odds to translate our dreams into business reality. It’s easy to feel all at sea when we consider some of the challenges we face. However, whilst it is true that we cannot control the direction of the wind, we can adjust our sails and change the direction of the rudder. Difficult and challenging circumstances may come in our lives, but we can control the outcome of these circumstances by choosing which path to take.

The truth is that we are fundamentally achievement orientated as human beings. When this is taken away, we lose much of the energy and motivation that propels us forward. There have been numerous studies carried out on life expectancy rates after retirement, which show that when clearly defined goals and daily action moving in the direction of those goals are removed from our lives, the result is literally fatal. The individuals studied who failed to replace their career goals with a new focus for their retirement simply shriveled up and died. The implications for small business owners are clear. Those business owners with clear goals who take action daily that propels them in the direction of their goals are far more likely to thrive and survive than those who take any old goal that comes along or move from day to day with no defined objective other than survival.

It seems to me that precisely because life is so chaotic and challenging that effective planning is essential. Without continuous business planning, our businesses and the small business owners that work in them may find that bit by bit they are atrophying and on their way to becoming another business failure statistic.

There undoubtedly exists an antipathy for business planning felt by many small business owners. Clearly, this cannot be fully explained by the lack of a “planning gene”, but it equally cannot be fully justified by the reasons most commonly put forward by small business owners to not engage in the business planning process. These reasons must be critically re-evaluated and a commitment made to a continual and never ending process of improving the condition of their small businesses. Without such a commitment, the future for small businesses in the UK is uncertain.