Why to write a Business Plan

Preparing a business plan is often perceived by business owners as an academic exercise to satisfy the bank. As such it is only prepared reluctantly on request and produced either by the business owner or the accountant and then filed away. That is why so many owners fail to realise the benefits of a good plan and suggest that there is no need for one.

There are many important benefits that derive from a quality plan which include:

• considered approach
• risk mitigation
• benchmarking
• collective responsibility
• clear communication

Considered approach

A business plan should be the result of a collective brainstorming amongst all key contributors who assess the current position, consider all the options available and determine a course to follow. Ideally this will start with blue-sky thinking and then reined back as necessary to comply with perceived constraints, each of which can then be scrutinised and evaluated.

Risk mitigation

An important part of compiling any plan is to assess the level of risk that the owners are willing to accept. A high risk strategy may yield enormous results if successful but could be disastrous, whilst a low risk strategy whilst much safer may never yield what is achievable. Part of the planning should be to identify the potential risks and quantify the impact of these. Some of these risks will be beyond your control, eg. a general strike, but this does not prevent you from estimating what the impact on the business might be if that event were to occur. Having assessed the major risks, you must then identify ways of mitigating your exposure to them and minimising the impact of each event. Now you have your estimate of how much risk you are taking and you can determine whether that is acceptable to you or not. This will determine whether you should pursue the plan or seek an alternative strategy. It is highly probable that in seeking to mitigate the risks the plan of action will be enhanced. Always remember Murphy’s law: things will go wrong which you are unable to predict!

Benchmarking

In building the plan and establishing targets, you now have some valuable benchmarks against which to measure performance. Measures like sales and profit are unlikely to be appropriate. Sales are only relevant if there is good control over related costs. Profit is unlikely to be quantifiable on a real time basis and so corrective action cannot be taken quickly enough. Key Performance Indicators (‘KPIs’) are measures selected for your business that are critical to performance, easy to measure quickly and regularly, under the control of a business area and remedial action can be taken if results are not attractive. It is unlikely that any KPI can be viewed in isolation but its variance from the benchmark can be investigated and its understanding should prompt corrective action. As an example high sales sounds like a good thing, but … it may result from underpricing … and/or may cause stock shortages. It is only when it is understood why there is a variance that one can establish whether it is good or not. Remember that the variation may result from poor planning and setting the wrong benchmarks so you should not even be content when you are spot on!

Collective responsibility

To help optimise performance it is important that all key personnel sign up to the business plan and are given the opportunity to voice any concerns. Simply including key personnel in the process and providing the opportunity for them to participate is likely to be highly motivational and teambuilding. It is also likely to elicit ideas that may not have been considered. Decisions taken do not need to be democratic but if any key holders do not commit to the plan then it is almost certain that they will not deliver it. Often the plan is written from one perspective by the business owner and then imposed on the business. Not only does this result in blinkered thinking but it also antagonises colleagues and can generate negativity which will not help the team to deliver.

Clear communication

Having done so many things correctly and stimulated the team, the next phase is to ensure that the resultant plan is communicated clearly and accurately to all those affected by it. This will avoid misunderstanding, misinterpretation and disinclination. It is important to convey the objective, the strategy, the risks, the obstacles and create an energy that the whole team is enthused about and supports. By achieving that you are well on the way to accomplishing the goal.

The written plan need not be an extensive tome – indeed the bulkier it is the less likely it is to be used and reviewed. It is perfectly acceptable to produce a succinct document (perhaps 10 pages) which summarises the plan and refers to more detailed analysis if required. Whilst this may contain some confidential information it should be available for inspection by relevant personalities.

As a minimum, the written plan should include:

• definition of the business objective(s)
• summary of the market (geography, size, share, major competitors, SWOT analysis (strengths, weaknesses, opportunities and threats), risk policy etc)
• summary of the marketing plan (how to attract new customers, how to increase sales to existing customers, pricing policy, advertising media, key products/services etc)
• human resources plan (recruitment plan, training, development, incentive schemes, pay policy)
• financial summary - headline figures (eg. turnover, gross margin, net profit, headcount, cash balance, prime key performance indicators)
• Financial forecasts (monthly/quarterly key figures including profit and loss account, balance sheet, cash flow forecast, sensitivity analysis)
• Brief biographies of the key personnel

It is fundamental that key personnel are kept aware of how the business is actually performing and are able to understand why any variations from the plan have occurred. The sooner corrective action is taken (whether to revise the plan or change performance) the less damage will be inflicted on the business. Note that the plan was a plan at a particular point in time like a photograph, and, although it should ideally look 3-5 years ahead, it should be amended to reflect changes in circumstances (eg. technology advances, new competitor, acquisitions, market conditions etc) so that it continues to be viewed as being achievable. As soon as the goals are thought to be unattainable the energy levels will drop and focus will be lost.

It is more than probable that the business will digress from the set path whilst on the journey and so the plan should be reassessed and updated at frequent intervals. If you were to divert away from your SatNav’s recommended route, it would not force you back onto the original route, but show you the optimal route given where you are now and where you want to be!

With a well considered and well presented business plan you will have strengthened your team, set higher  and more reachable targets and will make a great impression on your bank manager! You will have a great story to tell which will in itself inspire existing and potential stakeholders.

This is one from a series of articles written by Nigel Grant to help owner-managers increase their profits and achieve their potential. For a free initial discussion to see how you can achieve the potential for your business, contact Nigel Grant of More Profit For You Ltd on 07801624865 or [email protected]