Why You Need a Business Plan & How to Prepare It

Virtually all businesses, within a corporate structure and the majority of larger private businesses, have well-developed business plans that incorporate clearly defined strategic objectives, detailed plans about how those objectives will be achieved and financial projections, including forecasts for sales, profit & loss account, balance sheet and cash flow. None of this guarantees success but it provides a road map, with a clear destination and a properly defined route for the business to follow. These types of businesses usually put considerable time and effort into the preparation of their business plans because they know it significantly improves the likelihood of building and/or maintaining successful market positions, strong balance sheets and sustainable competitive advantage.

By contrast, many small and medium-sized businesses spend very little time thinking through and preparing business plans and, in some cases, they spend none at all. As a result they tend to drift. The business is managed from day-to-day and goes from one year to the next, sometimes moving forward and sometimes going backwards but, in reality, making little or no progress.

Initially, many start-ups can show considerable progress, as they establish their market position but, more often than not, without a business plan as a blue print, they generally reach an early plateau, from which they find it difficult to progress. To be fair, this suits some business owners but, for many, it creates enormous stress, as they are continually living with a very uncertain future and less personal income than they require. And yet, preparing a worthwhile and effective business plan doesn’t have to be a massive project that distracts the business owner away from the action for too long; and actually, standing back for a short time to work on a business plan, almost always proves highly beneficial for the business and can be very therapeutic for the business owner.

So why don’t business owners stand back more? In my experience, the usual reason is that they think “no one else can do what they do” or no one else can do what they do as well as they do it”. So they micromanage everything and get increasingly bogged down and stressed out. In reality, many of the day-to-day activities can be done quicker and more effectively by their staff, if only the business owner would just let go. I’ve developed this theme in another article but, for the time being, let’s assume that the business owner has let go and is now about to work on a new business plan. How does she or he go about it?

The first thing is to look outside the business and see what’s going on in the market. For most small and medium-sized businesses, this doesn’t require a lot of detailed market research, it’s more about using suppliers, customers, competitors, trade organisations, trade publications and, of course, your own staff, who interface with customers. Using all these sources and any others that may also be helpful, try to establish what’s actually happening. Which market sectors and product groups are growing and which are declining? What’s happening with prices across those market sectors and product groups? What are your competitors doing? What quality standards and service levels are the norm? What technological developments are occurring? What legislative and regulatory factors are likely to affect you? In practice you’ll know much of this anyway; so it’s as much about standing back and putting everything into context and creating a balanced and objective picture, as it is about searching for new market data and intelligence.

The next step is to look at your own business and make an honest and objective assessment of how well it interfaces with the market. Are you capitalising on the sectors and products that are in a growth phase? Are you exposed to market sectors and products that are in decline? Are you under-pricing and giving away margin unnecessarily? Are you over-pricing and uncompetitive? How do you shape up against your key competitors? Where do you have competitive advantages over them? And where do they have competitive advantages over you? Are your quality standards and service levels meeting market expectations? Are you investing in appropriate technologies? Are you complying with all appropriate legislative and regulatory requirements? And are you running ahead of your competitors or lagging behind them?

You can now compare your business with the market by undertaking a simple SWOT analysis (Strengths, Weaknesses, Opportunities and Threats). You’ll very quickly see where your business’s strengths and weaknesses lie and you’ll clarify where the threats and opportunities, presented by the market, are likely to be.

Once your SWOT analysis has been completed, you can start to develop your strategy. Generally, you’ll want to build on areas, where you’re already strong. The more difficult decisions are likely to be around strategies for areas of weakness. How are you going to deal with these? Alongside this you’ll need to consider the threats to the business, from wherever they may come and decide how you are going to meet them. Then lastly, you’ll need to look at the opportunities the market is presenting and decide whether you should exploit any of them.

At this stage, you’ll probably have a lot of potential ideas, which collectively will be unaffordable and which, if you tried to implement them all immediately, would simply overwhelm the business. So you need to start establishing priorities and time frames; and as you do that, you’ll create the framework for your business plan, which would probably be built over a three-year period.

With the framework complete, it’s time to run some numbers, which would normally include projections for sales, profit & loss account, balance sheet and cash flow. The first year of the plan, which is your next full financial year, is likely to become the budget for that year. The second and third years will be increasingly aspirational. So this process needs to be undertaken on an annual basis, which means you’re always working with a business plan on a rolling three year basis.

It is highly likely that the first time you run your numbers, the projections will look completely unrealistic; unachievable, unaffordable etc. So you’ll need to adjust and refine; correcting errors; improving the accuracy of some of your assumptions; scaling some things down; scaling other things up; adjusting time frames etc. until you have a realistic and achievable plan. At this stage you’ll have your road map, with a clear destination and a properly defined route for the business to follow. As I stated at the beginning of this article, it won’t guarantee you success, but it will make success a considerably easier and more likely outcome.

If you haven’t been through this type of process before, you’ll probably need some help. If your business is big enough to employ its own management accountant, he/she should be able to run the numbers; if not, you may need to engage your external accountants. But, in a sense the numbers are the easy part. It’s the development of the strategy that leads up to the point where you can run the numbers that is important to get right. And to do that, you need to debate all the ideas, challenge all the assumptions and make sure that the strategic framework is realistic, robust and achievable. For many small and medium-sized businesses this isn’t always easy because it can be difficult for employees to challenge the boss’s ideas and there is no one else to do so. That’s where you need help from an experienced independent industry expert. Some small and medium-sized businesses have a non-executive director; and this is an area where he/she can play a very important role. If you don’t have a non-exec, there are invariably a number of independent business consultants who could be brought in. However, if this is something you are considering, do ensure that the person you select has had senior management experience within your industry and has a good understanding of your type of business and the market, in which it operates.

Once you have your business plan, it should become a key reference point for you and your management team. It should be the yardstick by which you measure performance and there should be regular monthly reviews to see how the business is performing against the plan. In areas where the business is under performing against plan you’ll need to consider what remedial action is required. Where the business is over performing, you’ll need to consider whether and how this can be further exploited.

Once you’ve started to use your business plan in this way, you’ll wonder how you ever managed before. It will provide focus for many of your management decisions; it will provide direction for your managers and staff; and it will help you to build a much more profitable and sustainable business.

If you’d like to discuss any of the issues raised in this article, in more detail, please feel free to contact me.

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