This article covers 5 key questions about the subject of Business Planning:
- What is a Business Plan
- What is the purpose of it
- Why do you need to prepare it
- What should it contain
- When should you prepare it
1. What is a Business Plan
A Business plan is a document in which a business opportunity, or a business already in existence, is identified, described, and analysed both in words and in numbers to set out its technical, economic, and financial feasibility. It is an extremely important document when starting a business or a project as it outlines the basis of the business by answering simple questions.
The plan should always include all the methods and strategies that are necessary to convert a business opportunity into an actual project or achieve the goals and objectives in an existing business model.
2. What is the purpose of a Business Plan
In an existing business, a business plan sets out the strategic objectives of that business for the forthcoming years, typically over a 3-5 year period where it hopes to achieve specific aims. A comprehensive business plan has a dual function. It is both a management tool and a planning tool.
As a management tool it
- Provides economic and financial projections
- Facilitates the monitoring of the business performance as actuals can be measured against defined plans both through key performance indicators and financial outcomes
- Introduces and analyses both the supply and demand factors of the business
- Sets put the commercial strategy and marketing policy
- Identifies the resource requirements
- Analyses the key factors of success and the risks and opportunities that may exist
As a planning tool
It enables the organisation to take responsibility for the definition of the management and team objectives by detailing
- Result-oriented actions
- Decision-making processes
- Quantitative and Qualitative information
- Fulfillment of economic commitments
3. Why prepare a business plan
In the case of a new business, the primary reason is to analyse and assess in a variety of methods whether the business project/ idea/model is feasible or not. For an existing business, it provides a different type of analysis of the business forcing the owners/management to set out in words and numbers the strategic direction of the business. It becomes the starting point for the creation of operational objectives and targets to manage the business. It is also an all-encompassing document that can be used to introduce the business to investors, funders, or persons of interest.
4. What should a business plan contain
The diagram below illustrates what makes up a good business plan.
There are four component parts
A. Analysis of the present situation
- Is there a target market for this business?
- Who are the potential competitors and how much of the sector do they already occupy?
- What does the sector look like at present?
- What is the future of the sector and is it likely to change positively or negatively
- In what way is this business different from the business of the competition
- Includes a Strengths, Weakness, Opportunities and Threats analysis
B. Business Plan Objectives
- What does the business consist of?
- What are the defined goods and services the business is going to offer?
- What strategy is to be adopted to be competitive in the market?
- What parts of the business are critical for business development and success?
- How do we expect this business to evolve in the future?
- What reasons have the founders/investors invested in this business?
C. Strategic Plan
- The strategic plan should set out in clear terms the mission of the company.
- Strategic aims should be translated into long term objectives
- Long terms objectives should be condensed into specific action plans defined to achieve the same
- Should contain a sales plan, marketing and resources plan to cover all the requirements to deliver the long term objectives and/or action plans set out
D. Financial Plan
- The financial Plan forms a large part of the business plan as it analyses the economic feasibility and profitability of the business It consists of the following information
INCOME PROJECTIONS
An income projection is made for each product or service line of the business as they exist. For each item of income or income stream, the most accurate projection possible is stated showing sales and volume growth for each as well as each item's potential market.
EXPENDITURE PROJECTIONS
For the projection of expenditure, an analysis is provided of all items that make up the costs of running the business whether fixed or variable in nature.
INVESTMENT REQUIREMENTS
Sometimes an investment in equipment or assets is required to facilitate the delivery of the expected future profits. The financial resources required to obtain such assets should be set out in what is sometimes called a capital budget.
DEPRECIATION SCHEDULE
Depreciation is the loss in value of the said investment in fixed assets over a period of time known as the economic useful life. A fund is created over a defined period added to during that time by the amount equal to the loss in value undergone by the assets in such a way that by the end of the economic life of the depreciable element, the business will be able to replace that element by using the funds accrued in the depreciation fund.
PROFIT AND LOSS ACCOUNT
Part of the basis of the economic viability of the business is in the analysis of the profit and loss account which shows the performance of the turnover, trends in gross margin as well as trends in the overhead and financing charges. Profit and loss should be broken down into the various product or business lines if these exist for both the current year and future years that are being projected.
BALANCE SHEET
The balance sheet shows the company’s net worth which is made up of the fixed assets, net current assets, and reserves which the company has at any given time.
Analysis of the balance sheet enables, liquidity, payment capacity, indebtedness to be assessed. A projected annual end-of-the-year balance sheet should be prepared for each subsequent financial year, taking into consideration financing of the company in the short term ( less than one year) and long term ( greater than one year). A balance sheet is not static it changes over time and thus enables the analyser to determine the net worth movement of the business throughout the business plan.
BORROWING REQUIREMENTS
In some instances particularly in new startup businesses, to implement the plan the owner, the founder may have to obtain outside financing in addition to capital to commence the business. The amount of financial input that a company needs depends on the investment in fixed and current assets as required each year. It would be expected that the business would reach a financial balance where the working capital requirements are positive. Working capital refers to the part of the current assets that are financed with long-term debt or as the amount by which the current assets exceed the current liabilities.
A strong indication of financial stability is that there is more than sufficient liquid assets to meet the short term debt or short term overall commitments.
CASHFLOW
A cash flow monitors the company’s liquidity and capacity to generate funds and remain positive cash-flow terms. It is one of the most efficient decision-making tools that a business owner can use. Overall the business owner can ascertain reasonably quickly whether the investment is financially possible or not.
5. When should you prepare a business plan
Research indicates that success rates for entrepreneurs who plan are higher. Those that wrote their business plan between 6-12 months after deciding to start a business had the most success.
For an ongoing business, most organisations will rewrite their entire business plan every 3-5 years. However, a good business plan is reviewed and possibly updated at least once a year especially in young companies who have or want to achieve exponential growth. Other reasons such as internal or external events may trigger the need to update your existing business plan.
If you are contemplating writing a business plan for your business and need some help, or don’t know where to start, we can help
Contact contactus@ekstraas.co.uk Tel 07458 302 512
Website www.ekstraas.co.uk