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Commercial Angles' Newsletter - November 2001

Business plans

What is a business plan?

A plan is intended to be both a signpost and a milestone. A business plan is prepared by the management of the business and is the management team's statement about:

The business's anticipated future performance over a period of three, four or five years.
The means by which the management intends to achieve this performance.
The time scale of when it will achieve this performance.
The resources required by the business to achieve this performance.
The means by which actual performance will be monitored and compared against the plan.

A business plan differs from a budget. A budget is a detailed forecast for a short period of time - often twelve months. A business plan covers a longer period of time and concentrates on the strategy and objectives of the business. The budget is a more detailed exposition of a short time frame within the plan period. A budget is a subsidiary part of the business plan.

Why are business plans necessary?

Business plans are essential for every business. They involve many hours of work to produce but can be the difference between the business's success or failure. Business plans are not just for the managing and finance directors of the business, they are for everybody in the business. Business plans are not done just to be filed away in a cabinet and forgotten. They should be used, if not daily, very nearly every day. Business plans focus the energy of a business along a pre-defined path. Ultimately the livelihood of every employee of the company depends on a sound business plan.

Types of business plan

Business plans have several uses in a business and at various stages of a business's development one type of plan will be more appropriate than others. Business plans can be used to evaluate new business startups, to raise external bank finance, to raise external equity investment, to act as a management tool to coordinate every department towards achieving a desired goal, or for other purposes such as growing the business or preparing for a flotation/sale of the business. Each of the different output plan formats has a different readership and a different objective. The contents and sections of the different output plan formats will be tailored to the needs of its intended readers. But each type of plan output format must be based on the same internal plan used by management to control the business.The first part of publishing a plan is to identify the purpose of the plan and the needs of those to whom it is addressed. The first part of writing the published plan is actually the last step in the process of preparing the internal plan.

Who should prepare the internal business plan?

Within the business plan there are sections covering all the different departments within the business: sales, marketing, human resources, production, didtribution, research and development, accounts, finance and general administration. Active participation by the entire management team is essential in the preparation of a good plan. Without input from all facets and departments of management a plan is likely to be defective and lop-sided. The consequences of following misguided strategies resulting from such a plan can be catastrophic.

Identifying what drives business growth and profitability

The evaluation of various strategies which could be used to achieve various objectives gives management an insight into the business which otherwise it might not have. A good plan will give very clear indications of what drives business growth and profitability. The emphasis is on active participation by the management team as a team. Actions undertaken by marketing will influence sales and R&D which in turn will influence production and financial resources.Unless all these areas are involved in the planning process the effects of one department's plan on the other departments will not be appreciated. Too often business plans are regarded as a product of the accounts department or the managing director. Very often they are but very rarely are such plans of much value. To be effective, and good plans are very effective, the planning process must involve the entire management team. At the end of the process the key profit drivers will be known by all.

Preparing an internal business plan

The basis of a good plan is a parameterised model of the business. The parameters are essentially the assumptions used in the plan and the model is a self-balancing profit and loss account, balance sheet and cash flow engine which reflects the way in which the business works. The model takes the parameters and evaluates the financial or other results in a manner to which individual departments within the business can relate. The parameters and model output together provide a series of performance indicators by which actual performance of the business can be compared against the plan. This repeated evaluation of performance in a systematic way is the mechanism by which the business is controlled to move in the direction specified in the plan.

Articles from previous newsletters