Author: Jim Riley Last updated: Sunday 23 September, 2012
Business planning (introduction)
What is the Business Plan?
The business plan sets out how the owners/managers of a business
intend to realise its objectives. Without such a plan a business is likely
The business plan serves several purposes:it
(1) enables management to think through the business in a logical
and structured way and to set out the stages in the achievement of the business
(2 )enables management to plot progress against the plan (through the management
(3) ensures that both the resources needed to carry out the strategy and the
time when they are required are identified.
(4) is a means for making all employees aware of the business's direction (assuming
the key features of the business plan are communicated to employees)
(5) is an important document for for discussion with prospective investors
and lenders of finance (e.g. banks and venture capitalists).
(6) links into the detailed, short-term, one-year budget.
The Link Between the Business Plan and the Budget
A budget can be defined as "a financial or quantitative
statement", prepared for a specific accounting period (typically a year),
containing the plans and policies to be pursued during that period.
The main purposes of a budget are:
(1) to monitor business unit and managerial performance (the
latter possibly linking into bonus arrangements)
(2 )to forecast the out-turn of the period's trading (through the use of flexed
budgets and based on variance analyses)
(3 )to assist with cost control.
Generally, a functional budget is prepared for each functional
area within a business (e.g. call-centre, marketing, production, research
and development, finance and administration). In addition, it is also normal
to produce a "capital budget" detailing the capital investment required
for the period, a "cash flow budget", a "stock budget"
and a "master budget", which includes the budgeted profit and loss
account and balance sheet.
Preparing a Business Plan
A business plan has to be particular to the organisation in
question, its situation and time. However, a business plan is not just a document,
to be produced and filed. Business planning is a continuous process. The business
plan has to be a living document, constantly in use to monitor, control and
guide the progress of a business. That means it should be under regular review
and will need to be amended in line with changing circumstances.
Before preparing the plan management should:
- review previous business plans (if any) and their outcome. This review will
help highlight which areas of the business have proved difficult to forecast
historically. For example, are sales difficult to estimate? If so why?
- be very clear as to their objectives - a business plan must have a purpose
- set out the key business assumptions on which their plans will be based
(e.g. inflation, exchange rates, market growth, competitive pressures, etc.)
- take a critical look at their business. The classical way is by means of
the strengths-weaknesses-opportunities-threats (SWOT) analysis, which identifies
the business's situation from four key angles. The strategies adopted by a
business will be largely based on the outcome of this analysis.
Preparing the Budget
A typical business plan looks up to three years forward and
it is normal for the first year of the plan to be set out in considerable
detail. This one-year plan, or budget, will be prepared in such a way that
progress can be regularly monitored (usually monthly) by checking the variance
between the actual performance and the budget, which will be phased to take
account of seasonal variations.
The budget will show financial figures (cash, profit/loss working
capital, etc) and also non-financial items such as personnel numbers, output,
order book, etc. Budgets can be produced for units, departments and products
as well as for the total organisation. Budgets for the forthcoming period
are usually produced before the end of the current period. While it is not
usual for budgets to be changed during the period to which they relate (apart
from the most extraordinary circumstances) it is common practice for revised
forecasts to be produced during the year as circumstances change.
A further refinement is to flex the budgets, i.e. to
show performance at different levels of business. This makes comparisons with
actual outcomes more meaningful in cases where activity levels differ from
those included in the budget.
What Providers of Finance Want from a Business Plan
Almost invariably bank managers and other providers of finance
will want to see a business plan before agreeing to provide finance. Not to
have a business plan will be regarded as a bad sign. They will be looking
not only at the plan, but at the persons behind it. They will want details
of the owner/managers of the business, their background and experience, other
activities, etc. They will be looking for management commitment, with enthusiasm
tempered by realism. The plan must be thought through and not be a skimpy
piece of work. A few figures on a spreadsheet are not enough.
The plan must be used to run the business and there must be
a means for checking progress against the plan. An information system must
be in place to provide regular details of progress against plan. Bank managers
are particularly wary of businesses that are slow in producing internal performance
figures. Lenders will want to guard against risk. In particular they will
be looking for two assurances:
(1) that the business has the means of making regular payment
of interest on the amount loaned, and
(2) that if everything goes wrong the bank can still get its
money back (i.e. by having a debenture over the business's assets). Forward-looking
financial statements, particularly the cash flow forecast, are therefore of
critical importance. The bank wants openness and no surprises. If something
is going wrong it does not want this covered up, it wants to be informed -
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