Chapter 1   The importance
Chapter 1   of business
Chapter 1   planning

Why should I bother with a business plan?

There is a whole host of reasons to justify the preparation of business plans, not just for business start-up enterprises, but as a model of good practice for established organizations. Any one of these reasons in its own right should make the planning process a worthwhile exercise, if it is done properly. However, the important thing to remember, is that just producing a good business plan alone, will not result in a sound, profitable or prosperous business. The business plan is just that – a plan – and like any other plan, the only way to see if it really works is to monitor its progress at regular intervals, so that you can respond to any potential problems which may arise and then change or modify your business strategy as necessary. So, let us have a look at some of the reasons why people take the trouble to produce business plans.

First, the process of producing a business plan acts as a very efficient method of focusing the ideas of potential entrepreneurs in terms of defining their objectives and assessing their own abilities to organize and run the business. It also acts as a means of testing the viability of the business proposal before actually committing its proposers to any substantial expenditure or investment. Typically, this type of plan would be prepared before the start-up or acquisition of the business.

Second, the planning process establishes parameters and specific targets which provide a yardstick against which the progress and profitability of the business can be measured. Again, this planning activity is a prerequisite to starting or acquiring a business but, beyond that, it is also part of the ongoing process of running a business which should be continued as an ongoing process, long after the initial start-up.

Third, as there are relatively few aspiring entrepreneurs who have the resources to be totally self-financing, most are faced at some time with the need to raise external finance, if not at the start-up stage then later when they wish to expand and grow the established business. For these persons, possession of a good business plan is crucial to their future; their appointment with the financier or bank manager to discuss the proposal is a bit like an audition for a part in a Hollywood film – if you blow your lines you blow your chances or, at least, you reduce your prospects of getting the part you really want! So it is most important to prepare the plan thoroughly, and to present it in a professional and competent manner.

The business plan as a means of focusing ideas

The production of a comprehensive business plan is really centred on a process of questions and answers; and the deeper you move into the plan, the more questions arise which must be answered. Most people who are considering buying or setting up a business, or becoming self-employed, have a fairly general idea of what they would like to achieve. Typically this may take the form of a range of activities or options, perhaps linked in some way, or built around a central idea. It is only when someone asks them the question ‘What are your specific objectives?’ that they actually start to define the precise parameters within which their proposed business will operate. Typically, this question is only asked for the first time when they start to fill in the bank's business plan form. The primary objectives (often called the mission statement) of the business need to state clearly and specifically, the purpose for which the business exists, and the market in which it will operate. For example, ‘I intend to operate a high-quality and profitable mobile catering service specializing in wedding receptions and private parties in the Kent and Sussex area’ or, ‘We will be providing a service which designs, constructs and maintains heated swimming pools for large private homes in London and the South East’. Invariably, statements such as these will invoke the immediate question ‘How will this be achieved?’ and leads the budding entrepreneur into the examination and explanation of the financial, operational, marketing and control aspects of the proposition, which forms the core of the business plan.

The next aspect which our new business person must consider is the viability of the proposition, and yet another question: ‘Yes, it sound like a good idea, but what makes you think it will work?’ Unfortunately, hunches, gut feelings, innate beliefs and even feminine intuition, cannot guarantee the viability of a business venture, so in answering the question we must offer some more tangible ideas, e.g. ‘I am offering a service for which there is a growing awareness and demand and, at the current time, the nearest alternative supplier is located 100 miles away’. Viability may involve a range of considerations including market research and segmentation, feasibility studies, assessment of potential sales turnover and profit margins, breakeven analysis, availability of regular supplies, availability of competent staff, adequate working capital etc. Again, our budding entrepreneur is required to focus in much more detail on the practicalities of the proposition, not the least of which is his or her own personal skills. The subject of business viability will be examined in more detail in Chapter 3.

The business idea itself may be perfectly viable for any competent or experienced business person, but the other area which must be considered is whether or not our budding entrepreneur actually has the necessary skills and competencies to pull it off. Does the person have the necessary technical knowledge of the product or service? Do they have knowledge of the market? Have they had any sales experience? Can they manage people and delegate work? Do they have the necessary financial skills for book-keeping and credit control?

If any of these skills are lacking, can they be acquired in time, or will it be necessary to buy them in and, if so, can they afford the cost? The biggest single difference between managers of large firms and those of small firms, is that the large-company manager can afford to be a specialist, and can usually tap into someone else in the organization if there is a skills shortage in a specific area, e.g. finance or marketing. In contrast, in the small firm, the manager needs a breadth of general business skills, as well as a depth of knowledge of the product or service. Barclays Bank (1998) highlighted the fact that business owners only seem to appreciate the skills required to run a small business once they have experienced it for themselves. Less than one-third of business owners undertake any basic business skills training prior to starting up, with 80 per cent of the others believing that they already have adequate business skills to manage their business ventures.

However, personal aptitude is not just a question of possessing a broad range of basic business skills. The clearing banks have recognized this in the past few years and, as a result, have started to incorporate questions into their standard business plan forms which relate to personal skills, i.e. the management of yourself and your time. For example questions such as: are you self-motivated? Are you persistent, or do you give up easily? Can you take responsibility? Do you find it easy to make decisions? Are you a good organizer? Can you lead and motivate others? These again are aspects which can be developed and explained within your business plan as part of your personal profile and action plan. The business plan gives you the opportunity to emphasize your personal strengths in these areas, and to propose how you intend to improve on those skills that are not so strong. Those who ignore these questions, do so at their peril; as the lending banks are unlikely to have any sympathy with someone who cannot answer these questions openly and honestly, and admit to their own weaknesses.

It is interesting that in a survey carried out by Cranfield Management School on behalf of the Small Firms Enterprise Development Initiative (1998), contact was made with 1000 firms that had recently closed down. Of those, some 70 per cent claimed to have lacked the basic business skills they needed to survive. The business planning process provides an ideal opportunity to assess the range of skills which are needed in order for the business to succeed and, at the same time, identify any potential gaps within that range. The subject of self-assessment and self-appraisal is covered in more depth in Chapter 4.

The business plan as a yardstick to measure progress and achievement

As explained above, it is imperative that every new business has clearly defined objectives and parameters within which it will operate, however it is not sufficient for these to be expressed simply as bland statements. In order for us to be able to determine whether or not the objectives are being achieved, it is necessary to define them in much more detail. This is achieved through the process of financial planning (Chapter 6) and by the preparation of marketing plans (Chapter 9). These plans provide us with specific measurable targets against which we can compare and monitor progress and achievement on an ongoing basis, for example:

•   Annual budgetary plans, forecasting income and expenditure on a month by month basis, against which actual income and expenditure can be monitored.

•   Forecasts of gross profit margins and net profit margins derived from the budgetary plans, which can be monitored to pick up any problems due to rising costs, falling sales, or seasonal fluctuations in sales, etc.

•   The effects of specific sales or promotional activities on sales revenues or profit margins.

•   Cash flow forecasts, and the effects of giving or taking credit.

•   The need for additional working capital to sustain business, e.g. by means of short-term overdrafts; or longer-term loans to facilitate expansion of the business.

•   Affordability of capital investment – do we replace or repair? Do we produce components ourselves, or buy in? Do we use loans or hire purchase to buy equipment, or do we lease?

The planning and monitoring of progress and achievement is an integral part of the formulation of business policy. The initial business idea formulates the initial policies which determine the financial and marketing plans and targets. Achievement of those targets, or modifications to the plans in response to external influences and change, will influence the resources available for the future, which will in turn have a bearing on future business policy. This is the constant cycle of Plan, Implement, Monitor and Revise, although ideally, the revisions should take the form of proactive plans made in anticipation of future events, rather than a series of reactions in response to past events or circumstances.

Raising finance for start-up or expansion

As we have already considered, very few start-up businesses (apart, that is, from some self-employed trades, or ex-lottery winners!) have the luxury of not needing some form of finance, if not at the outset of trading, then later as the business starts to expand and grow. Even those not requiring funding are sometimes asked to provide a basic business plan in order to qualify for the initial period of free bank charges on their business bank accounts.

The various potential sources of business finance are discussed in Chapter 8, but for the great majority of small firms, the first port of call is their local bank manager. Inevitably, the first question asked of our budding entrepreneur is ‘Can I see your Business Plan?’ (a question which is usually closely followed by ‘What forms of security or collateral can you offer?’). The simple fact of the matter is that these days banks will not readily lend to anyone who cannot present them with a viable business plan. Fortunately, this requirement also constitutes a much more responsible attitude to lending on the part of the banks; who at one time in the 1980s, were frequently accused of being willing to lend to anyone with adequate security, irrespective of the viability of their business proposition. When the going became tough, some bank managers simply closed down the struggling small businesses and called in their security against their loans.

Today, the clearing banks take a much more responsible attitude to potential business customers, and this is reflected in the questions which are asked within their standard business plan packs. The business plan has become an essential prerequisite of any dialogue with the bank manager and forms the core means of assessing the prospects of survival and growth of any business. This attitude is best illustrated by three extracts from current customer information packs for business startup issued by three of these banks:

A well-presented business plan will show if you have a viable idea, and a sound business-like approach to making something of it.
(Lloyds [TSB] Bank plc, 1998, p. 9)

A business plan sets out your objectives, estimates and financial forecasts. It will help you establish where you are, where you are going, and how you intend to get there. A well prepared business plan demonstrates your determination to start a successful business. It will help convince your bank manager, suppliers, and contacts, that you know what you are doing.
(Midland Bank plc [HSBC], 1999, p. 11)

According to statistics taken from VAT [value added tax] records, only half of new businesses survive more than five years. The better your planning is, the more likely you are to succeed.
(NatWest Bank and Durham University Business School, 1995, p. 2)

The ability to prepare a comprehensive and coherent business plan is an absolute imperative for anyone starting in business, and particularly if finance is required from outside the business. Preparing a plan is not too difficult, given the many standard formats which are available these days; but preparing a good business plan requires a great deal of careful thought and effort. Take a look from the point of view of the bank manager; he or she is charged with the responsibility of controlling money which other people (possibly including yourself) have invested in the bank, and using that money to generate a profit. How would you feel if the bank manager went down to the local bookmakers and ‘invested’ your money on an outsider in the 2.30 p.m. horse race at Haydock Park – you would most definitely not be very impressed. From the bank manager's view, it is your business plan that reduces your chances of winning from those of a rank outsider to those of an odds-on favourite, or at least to an even chance. Your business proposal provides the bank manager with a risk analysis of your prospects, so it is in the interests of both of you to take all practical precautions to minimize those risks. You do so by preparing a detailed and comprehensive business plan, and the bank manager does his or her part by checking it objectively for potential hazards and risks, before lending you any money.

How often should I update my business plan?

Most business plans are updated on an annual basis. For most small firms it is unrealistic to prepare budgets and cash flow forecasts for more than a year ahead, but preparing them for less than a full year would be too short a time to generate useful information. Some firms revise their plans at the half-year stage if there look like being any major changes afoot.

The important thing to remember is that business planning is an ongoing process – it is not just something you prepare for the bank manager at the start of the year, and then throw in the filing cabinet and forget it until next time around. Plans need to be monitored on a regular and frequent basis if they are to be of any productive use. Budget outcomes (actual figures) should be compared with forecast figures at least once each month, and then within two weeks of the end of the month. This will enable prompt identification of any major discrepancies or problems which lie on the horizon. When discrepancies occur they must be questioned: why has this happened? Is it a one-off occurrence, or the start of a longer-term trend and potential problem? What has to be done to resolve the situation? Unfortunately, too many people faced with apparent problems are more concerned with asking ‘Who is to blame?’ rather than identifying the cause of the problems and working to find a solution. The subject of monitoring and control will be examined in more detail in Chapter 10.

One other aspect which must be considered here is the fundamentally different approach to planning by small firms compared with their big-company counterparts. Welch (1995, p. 3) states that ‘the big-company model of managing and career development does not apply to small businesses’. Larger organizations have the resources, stability and security to facilitate the luxury of long-term strategic planning, perhaps three to five years ahead or possibly more, and the immediate year ahead is seen as the short term. For the owner-managers of small firms, the immediate problem is often simply one of survival – where is the next order coming from? – particularly in the early stages of development of the business, when planning even one year ahead counts as long term. Small firms are essentially focused on short-term plans and goals with survival as the first priority. Consequently they look to the equally short-term policies that will enable them to meet the short-term goals. Only when they have achieved some measure of stability and security can they start to look at longer-term planning and investment, staff development and training etc.

How much detail should the business plan contain?

The answer to this question will very much depend on the type of business for which the plan is being prepared. For example, the self-employed window cleaner with no overheads or equipment apart from a car, ladders, bucket, chamois and scraper will have quite simple requirements – in fact the biggest problem will probably be in planning where to get the clean water from on each part of his daily round. In comparison, someone setting up a wholesale or manufacturing business, as a hotelier, as an import/export agent or as a specialist holiday tour operator; where longer-term capital funding is required or where specific and possibly complex legislation applies, may have quite a detailed business plan.

Some self-employed people who have no need of external funding simply do not bother to prepare business plans. Others working on a part-time basis may have a very simple plan; their income may be regarded as a bonus to pay for holidays or luxuries because they may not depend on that particular activity for their main source of income or survival, e.g. part-time hairdressers, beauticians, or therapists who have a working partner, or those who have a regular day job. In reality no prescriptions can be made about the size and content of any particular business plan, as it will depend on the personal circumstances and resources of the owner-manager, the borrowing requirements needed for the business and the size, complexity and operating activity of the proposed business itself. The content and layout of the business plan will be considered in more detail in Chapter 2

References

Barclays Bank Small Business Review (1998). Training: the key to success. May. Barclays Bank plc.

Lloyds [TSB] Bank plc (1998). Customer Information Booklet: Your Business Plan. Lloyds Bank plc

Midland Bank plc (HSBC) (1999). Customer Information Booklet: Starting a Business. Midland Bank plc.

NatWest Bank and Durham University Business School (1995). Start-up Guide. NatWest Bank plc.

Small Firms Enterprise Development Initiative (1998). Newsletter.

Welch, B. (1995). Developing Managers for the Smaller Business: A Report on Training and Development Needs. Institute of Management and University of Cambridge, p. 3.

Further reading

Burns, P. and Dewhurst, J. (1996). Small Business and Entrepreneurship. Macmillan.

Stokes, D. (1998). Small Business Management: A Case Study Approach. Letts.