6. Business planning

Transcription

1 Do you want to start your own business? 6. Business planning If you are thinking of starting up your own business, this leaflet suggests ways in which you can provide investors and banks with the key information about your business ideas and strategy. It will help those who wish to invest in businesses, as it suggests what to look for within the company s business plan. Topics covers are: Why is business planning important? The stages in business planning How companies successfully implement business plans The main elements of a business plan The importance of cashflow in relation to business planning Reasons why charities and voluntary organisations have to plan The leaflet concludes with self assessment questions. Page 1 of 6

2 Business planning Why is business planning so important? Every business or organisation should have in place rigorous business planning processes. This applies whether they are a start-up operation; an established business producing financial budgets or projections; or an organisation seeking, for instance, to introduce a new product or to open a new outlet or to implement a change in systems. Without a realistic plan, progress towards achieving the set objective (whether that is a particular level of sales or profit or a new development/project of whatever type) cannot be easily monitored to ensure that it is on course in terms of cost or other financial measures, timescale and outputs. Regular monitoring of the agreed plan allows adjustments and revisions to be made in a timely manner and, of course, most importantly it enables the progress towards the objective to be communicated to all those involved in the plan. What are the stages in business planning? The typical stages in formulating any plan are: Setting or re-visiting the overall mission of the organisation to ensure that what is being proposed is in line with the aims of the organisation; Analysing the current position of the organisation, maybe using the SWOT technique (see Leaflet 5) Looking at other organisations or similar projects and establishing any learning points to be taken into consideration; Establishing goals; Setting strategies to achieve the set goals; Establishing objectives that represent key and timely milestones towards the target goals; Assigning responsibilities and time lines, with deadlines, for the achievement of objectives and goals; Detailing resources and drawing up budgets that are required to implement the strategies; Writing a succinct plan and communicating it to project members and others within the organisation who need to be kept informed; Monitoring and amending plans as appropriate and communicating progress towards objectives/goals; On completion evaluating the process, drawing out lessons for the future and celebrating success. Page 2 of 6

3 How do companies successfully implement business plans? Successful implementation of a plan involves: Getting the right people involved in the process and securing their commitment to what is proposed and their role within the plan; Having a detailed planning document and communicating it to all interested parties; Setting goals and objectives that are SMART (this stands for: Specific Measurable Acceptable Realistic Timely); Having clear lines of accountability; Regularly reviewing progress: plans invariably change as they are implemented and those changes need to be recorded and appropriate revisions to budgets, timescales etc. made. It is also essential to communicate the updated plans to all parties to the plan; At the end of the process/project or at major interim stages key participants need to reflect on the plan and the planning process to see what could have been improved and what went well. Should plans be top down or bottom up? Financial and Business Plans are vital documents both for start-up businesses, whether or not they need to gain funding support, and for established businesses. Business Plans, just like any other plan, should be written bearing in mind the general planning processes set out above. The very nature of financial planning leads to the age-old dilemma of whether the planning process should be top down or bottom up. The top down method involves a company board of directors or a chief executive setting the key targets in terms of sales and profit (outputs) and then plans are worked backwards to identify the processes and resources needed to achieve the targets (inputs). Bottom up occurs when different areas of an organisation or business produce their own mini plans and the aggregated results come together to form the organisational plan. There are advantages and disadvantages to both methods. The top down process produces the results desired by the organisational leaders and can be quicker to generate but this method risks alienating the people lower down the organisation who may feel they have no ownership of the plan. Bottom up is more inclusive and gives more ownership and responsibility to junior managers. However, when all the plans are aggregated, the projected outputs may well be below the required levels to sustain and grow the organisation or to satisfy funders and Page 3 of 6

4 shareholders and revisions may then be imposed from the top. Invariably the best planning systems involve a measure of both methods so that when targets are being set there is a realistic discussion process to ensure the people involved at all levels know what is required and what is stretching but nevertheless achievable. In business planning the norm is to produce budgets for three to five years with detailed monthly forecasts for at least two, often three, years. What are the main elements of business plans? When drawing up a full business plan, for either a start-up venture or when seeking to raise additional finance, the document should essentially consist of two key elements: 1. The narrative section covering the background to the business (including details of key personnel), its aims and objectives, its product or service offering, its market strategy and analysis, its operational requirements and a risk (SWOT) evaluation. 2. The financial section, the main elements of this being: The Sales Forecast o The key to any Business Plan and usually the hardest area to predict The Cost of Sales Forecast o This would include the purchase of goods for resale and/or components and raw materials and the labour costs directly associated with the manufacturing process to convert those components and materials into finished goods. o Any other variable costs associated directly with manufacturing activity e.g. power costs would be included as a cost of sale. The Overhead Forecast o The overhead forecast would include costs that are fixed regardless of activity, such as marketing costs, office labour costs, directors salaries, nonvariable heat, light and power costs, business rates, insurance, interest on borrowings etc. and a notional charge for the depreciation of assets used in the business. The Profit Forecast o Essentially Profit equals Sales less Cost of Sales less Overheads. The Cash Flow Forecast o Possibly the most important business forecast! Further information on drawing up a full Business Plan can be found in the Further Activities and Resources section of the Business and Commercial Awareness section of the LearnHigher website. Page 4 of 6

5 Why is cashflow so important in relation to business planning? The production of a cashflow forecast involves making assumptions about how a business will both receive monies for sales made and pay out money for wages and all other costs. In retail businesses sales generally generate immediate cash but in industries such as manufacturing, construction and in some service businesses, sales proceeds might not be received for one, maybe two or even three months, from the time the sale was made or the work was carried out for the client. Against that, the business may well not have to pay for goods bought in for resale or for components/raw materials for one or two months. Wages have, of course, to be paid weekly or monthly and most other overhead costs have to be paid within relatively short timescales. The calculation of the inflow and outflow of cash, which would additionally include any payments on loans and other finance commitments taken out by the company, are made so that the directors can judge whether they have enough funds to support the running of the business at the projected levels of activity. If the cashflow indicates that they do not have adequate funding available then the directors have to consider: a) Reducing manufacturing and/or overhead costs so that the company is more efficient and uses less cash to support a given level of sales; b) Agreeing different payment terms with both customers and suppliers; c) Reducing activity levels (N.B. increasing activity levels generally requires additional funding in the short term); d) Raising further capital from investors or their own resources or obtaining bank or other financial assistance. (See Leaflet 9: Raising Finance). Do financial forecasts and business plans need to be monitored? Just as with any other planning process it is vital that financial forecasts and business plans are monitored. If sales are running behind forecast or customers are not paying within the agreed timescale, or costs are higher than forecast this can have a major impact on cashflow and it is essential that directors are aware of the situation so that they have time to take appropriate action. Failure to do so can lead the business into a cash-flow crisis position and possibly into a situation where the business cannot meet its commitments and has to cease trading. Page 5 of 6

6 Why do charities and voluntary organisations have to plan? There is a widely-held view that charities and voluntary organisations can be less commercial than mainstream corporate bodies and that somehow normal commercial practices and planning techniques can be ignored. However, except in perhaps the very smallest of these organisations, this view is misplaced. Charities do not make profits as such but they do seek to generate surpluses (defined as an excess of income over expenditure) so that they can expand their activities or invest in improved facilities to help their beneficiaries and clients. This means that generally they have to seek to maximise their income and minimise/ control their outgoings in what is a very competitive sector. To generate their income the largest charities (for example, Oxfam, Cancer Research, Barnardos, NSPCC, Age Concern) usually employ the most sophisticated marketing techniques and use professional fund raisers, who often work alongside their volunteer workers. A key measure of performance that many major charities have to consider is their ratio of money raised to money paid out in direct support of their beneficiaries. This ratio is often looked at by potential donors and also the media when reviewing charity performance and an adverse ratio can clearly impact on both reputation and donations. Monitoring costs is also crucial for charities as they employ significant numbers of paid staff alongside volunteer workers and, indeed, establishing realistic ratios for paid staff against volunteer staff is an important consideration for the charity management. Charities that rely on local authority or government grants for a significant element of their income have additional challenges to meet as frequently this type of funding is given to cover specific projects for limited periods of time, say 2/3 years. This means long-term financial and staff planning is difficult and it is difficult to secure commercial funding for capital projects. Self assessment questions 1. What does the SMART acronym stand for? 2. Can you explain the advantages and limitations of Top Down and Bottom Up planning? 3. What are the key elements of the Financial Forecast section of a Business Plan? Page 6 of 6