Anyone who has owned a boat has heard of dead reckoning. Dead reckoning is the process of calculating the current position of a moving object by using a previously determined position, or fix, and incorporating estimates of speed, heading (or direction), and elapsed time. It answers the question, "How do I get from point A to point B?"

Dead Reckoning

Dead reckoning begins with a known position, or fix, which is then advanced directly on a chart, by means of a recorded heading, speed, and time. Dead reckoning positions are calculated at predetermined intervals and are maintained between fixes. The duration of the interval varies. Factors including one's speed, course changes, and the navigator's judgment determine when dead reckoning positions are calculated.

Strategic Planning is Dead Reckoning

The strategic planning we have been discussing these past weeks is nothing more than a form of dead reckoning. If your company is at point A, what direction, speed, and time will it take to arrive at point B in the future? A simple question, really, when you break it down to its elements. To answer that question, you must first determine where your company is now (point A) and where you want it to be (point B) at some time in the future (your goal).

Determining Point A

To determine your company's present position (point A) you must make some accurate measurements by answering the following questions.

1. What is my company's current annual turnover?
2. What is our profit margin for the past twelve months?
3. How much working capital is on our balance sheet?
4. How many cumulative years of experience does my management team have?
5. What amount is left in our untapped working capital line of credit?
6. What's our available bonding capacity?
7. How large is our retainage overhang?

With the data points above, you can determine exactly where your company is situated in terms of earning power.

Determining Point B

Contractors all have goals for their companies that have something to do with their company's future value to them and their heirs. Starting with a realistic appraisal of their company's current position, they must chart a course that moves their current company's earning power on a path to the future value they have envisioned. In other words:

• What do you want your annual turnover to look like 5 years in the future?
• What must your margins be to deliver the profits that will determine your company's value?
• How much working capital will it take to maintain the increasing incline of your company's annual turnover?
• What must your staff look like to deliver the projected volume of business?
• What kind of work will best produce the necessary profit margins?
• Will your company's evolving balance sheet support the working capital lines of credit and bonding capacity required to take on the desired volume of work?

Plotting Your Course

Now you know what your company's earning power looks like in the present (point A), and what its earning power must look like 5 years from now (point B) to achieve your valuation goal. Using the two data sets, how do you determine the speed, direction, and duration of your business activity to plot the most direct course to your objective? You turn static data points into dynamic five-year trends.

• A single year's earnings tell you nothing about the direction of the business. But a five-year earnings history reveals positive or negative trends and other variables that affected the direction of the earnings.
• One year's revenues tell you nothing about what direction your business is going in. However, a five-year revenue history tells you whether the business is growing or shrinking, and how much, and under what circumstances, it either grows or shrinks.
• Five years of working capital history tells you how much revenue growth a given amount of working capital can support.
• Looking at a five-year history of various types of jobs tells you which type, and size, contributed the most (and the least) to your profit margins.

Data trends tell you not only the direction your business is going in, but also reveal the speed and the elapsed time it will take to get there. Imagine being at sea and not knowing where you are or in what direction your port lies. Running your business without a plan will give you the same feeling.