Why Do I Need A Business Plan?

Why Do I Need A Business Plan?

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If properly generated, and appropriately used, the time spent on the development of a business plan is far outweighed by the potential benefits and considerable advantages.
Business-plan-writing

The vast majority of business owners develop a business plan because they are told to do so. The instruction will generally come from a bank, lawyer or business advisor; and once the much thought out plan has fulfilled its purpose, it is often left to decay in a bottom drawer next to those articles one always intends to read… one day.

The importance and advantages of a business plan are rarely recognised and the strategic relevance such documents can play in directing a business is very much undervalued.

A good business plan should be an honest and extraordinary document, specific to the business, that can be used as a living action plan.

If planned, approached and executed correctly, it can serve as a vehicle to success. In a business plan the definition of “success” is of course open to anything at all! Any time is the right time to prepare a business plan. It is most effective at the innovation stage of a business, but can be used throughout the life cycle of a business.

A business has different needs, risks, rewards, possibilities and challenges at each stage of the lifecycle; hence the business plan should accommodate all of these and be used as a dynamic document that should be regularly maintained, updated and developed.

Download: Free Business Plan Template Download

Writing-a-business-plan

Why do you need a business plan?

It’s always necessary to objectively evaluate your business – this is daunting to even the most profitable and successful of business owners.

Generating a business plan would assist to determine the feasibility of a business, or at innovation stage, a business idea. A business plan will give a new business the best possible chance of survival.

In most instances, financial institutions or investors will insist on seeing a business plan. Therefore, it becomes a requirement in order to secure external funding.

For the most part, the test of strength at this point is financial viability and, although that is certainly a major aspect of any business plan, it should also carefully detail goals and objectives for the business, as well as estimated growth rates and possible challenges in achieving the estimated growth rate.

A good business plan should direct the business and facilitate action through quantitatively measurable criteria, where possible.

Key employees can be measured according to the outcomes and achievements in terms of the business plan in order to ensure movement and to ensure that the strategic vision of the business is being achieved. It should turn thinking into doing.

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How do I draft a business plan?

The first step is identifying what is to be achieved through the creation of a business plan.

It could be for any number of reasons, such as: to facilitate growth, evaluate and/or value the business, to identify a possible acquisition, to initiate a restructure, or even as part of an exit strategy. Often, as a business plan grows and develops, the strategic direction needs to be reassessed.

Therefore the initial plans should not be cast in stone. The business plan should become a tool, so where possible, big picture simplicity is key.

The second step is to decide on how the financial aspects of the business plan will be handled and what significant areas should be involved.

The third step is to stretch into the non-financial aspects of the business. It can be quite challenging to decide which non-financial aspects should have their own business plan within the overall business plan.

The fourth step is deciding which persons should be involved in which areas. From the very beginning, it is vital to include key employees in order to ensure that the specific individuals who will be making the action items happen, are involved and part of moving the business forward.

Related: Business Plan Examples to Get You Going

Where possible, meetings should be open to all employees on a voluntary basis in order to ensure that people who are interested in the future of the business, as well as their own futures within the business, can also contribute and feel like they are included in deciding on certain strategic initiatives.

Opening up the invitation for employees to volunteer as active participants in the process should assist in creating higher levels of commitment to the direction and ultimate goals of the business.

Lastly, once there is a framework of the above steps, it must be decided what timeframe will be used in order to measure the actions and outcomes identified as the business plan comes to life.

Finding the correct balance in the timing of the business plan is vital. If the timing is too fast, it creates undue pressure on employees and in some cases on finances. If the timing is too slow, the momentum is lost.

business-plan-content

Content of a business plan

The executive summary should be the starting point for the development of a business plan.

The executive summary should focus on the reasons for preparing a business plan and contain detail on the background of the business in order to lay out the foundation for the starting point.

The current corporate structure will be an important aspect to consider in the executive summary, as it will have severe consequences in the future for new product development, significant growth, succession planning, exit strategies and the like.

Key products and market ownership percentage should be researched and documented in order to identify strengths and opportunities or threats to the business.

Planned future product development and their possible impact on the business should also be included in this analysis, as should major successes and disappointments.

The management team, the board of directors, the owners or shareholders and senior managers should be identified with details as to their involvement in the generation and facilitation of the business plan.

Begin with a rough draft to identify a few key action points that will be instrumental in achieving the plan as initially defined in the executive summary.

As the business plan evolves the executive summary should be assessed to ensure that the strategic goals the business should be heading towards are still viable; and whether the action points are really going to facilitate the planned outcome.

Related: Keep it Simple: How to Write a One Page Business Plan

The marketing plan section of a business plan should evaluate products currently available on the market, the pricing and demand for such products the distribution and positioning of such products and the brand awareness.

Included in the marketing plan should be the possible development of future products and viability of such products. The business plan should contain a detailed layout of what is being sold, where it will be sold, how much of it is expected to be sold, and who is going to buy it.

The operational plan should specify the physical day to day running requirements of the business. In a service and manufacturing entity, employees are the single most important operational factor.

Management structures and a detailed organogram should therefore be created. In order to generate the management structures and organogram, every employee should have a job description, remuneration information must be available and the productive capacity of employees should be calculated to ensure maximum productivity.

In a manufacturing environment, capital expenditure requirements would be a focal point, together with product input needed, facility requirements and possibly warehousing and manufacturing facilities.

If variable cost is included in the business plan, the adoption of a cost allocation model is critical to ensure the correct gross profit and net profit percentage analysis can be done on all products’ profitability.

This will ensure profitable products are developed and promoted and that non profitable products are either further developed and promoted; or are ceased altogether. Information System Technology needs will be determined.

Identification of operational systems may be needed, as well as the support programs and the analysis between in house development and off the shelf purchasing.

Security and protection settings are one of the bigger risks in the operational plan and should receive adequate attention in order to mitigate risk.

Where relevant, a training plan should be set out to make sure employees will be updated with the latest developments and technology pertaining to the products of the business. Such training will result in a technological advantage in a rapidly developing and changing technological climate.

Each and every business has different financial needs during different stages of the business life cycle. During the innovation stage the business will need cash to start the business and maintain it for at least a year or longer.

If there is insufficient funding for this period, the business will fail before it has properly had a chance to get started.

Resource: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

During the growth phase, a cash flow forecast should be maintained and the capital requirements of the business must be considered. The source of financing must be set out in the business plan during the different stages.

As funding can come from a number of sources such as family, friends, financial institutions and investors; it is important to detail where the funding came from as well as the terms, obligations and costs of the different funding options.

Financial forecasts in the form of a Cash Flow Statement, Statement of Financial Position and Statement of Comprehensive Income for future periods should be prepared and included in the business plan. These should be based on projected sales and capital requirements and further product development and market establishment.

Risk, in various forms and ranges of significance, should be assessed throughout the business plan. The impact of the identified risks should be incorporated in every area of the business plan and controls must be implemented to mitigate such risks, where possible.

The business plan should be well drafted, dynamic, realistic, specific and measurable. It should clarify the mission and vision of the business; it will also facilitate growth, development of products, identification and mitigation of risks and many other factors that can benefit the business. Communication and involvement are key to receiving commitment from key employees and vital to ensuring that the strategic direction of the business is maintained.

May 26, 2016
Leana van der Merwe is a Audit Partner at RSM South Africa. Following her Bachelor of Accounting Degree, Leana joined RSM under a Training Contract after which she qualified as a Chartered Accountant. In September 2011 she was appointed partner to the firm while continuing to build on her extensive experience in the audit of retail, manufacturing, not for profit, property investment and construction companies.