6. Business planning
Do you want to start your own business?
If you are thinking of starting up your own business, this leaflet suggests ways in which you
can provide investors and banks with the key information about your business ideas and
strategy. It will help those who wish to invest in businesses, as it suggests what to look for
within the company’s business plan.
Topics covers are:
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Why is business planning important?
The stages in business planning
How companies successfully implement business plans
The main elements of a business plan
The importance of cashflow in relation to business planning
Reasons why charities and voluntary organisations have to plan
The leaflet concludes with self assessment questions.
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Business planning
Why is business planning so important?
Every business or organisation should
have in place rigorous business planning
processes. This applies whether they are a
start-up operation; an established
business producing financial budgets or
projections; or an organisation seeking,
for instance, to introduce a new product
or to open a new outlet or to implement a
change in systems.
Without a realistic plan, progress towards
achieving the set objective (whether that
is a particular level of sales or profit or a
new development/project of whatever
type) cannot be easily monitored to
ensure that it is on course in terms of cost
or other financial measures, timescale and
outputs.
Regular monitoring of the agreed plan
allows adjustments and revisions to be
made in a timely manner and, of course,
most importantly it enables the progress
towards the objective to be
communicated to all those involved in the
plan.
What are the stages in business planning?
The typical stages in formulating any plan
are:
Setting or re-visiting the overall
mission of the organisation to ensure
that what is being proposed is in line
with the aims of the organisation;
Analysing the current position of the
organisation, maybe using the SWOT
technique (see Leaflet 5)
Looking at other organisations or
similar projects and establishing any
learning points to be taken into
consideration;
Establishing goals;
Setting strategies to achieve the set
goals;
Establishing objectives that represent
key and timely milestones towards the
target goals;
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Assigning responsibilities and time
lines, with deadlines, for the
achievement of objectives and goals;
Detailing resources and drawing up
budgets that are required to
implement the strategies;
Writing a succinct plan and
communicating it to project members
and others within the organisation
who need to be kept informed;
Monitoring and amending plans as
appropriate and communicating
progress towards objectives/goals;
On completion evaluating the process,
drawing out lessons for the future and
celebrating success.
How do companies successfully implement business plans?
Successful implementation of a plan
involves:
Getting the right people involved in
the process and securing their
commitment to what is proposed and
their role within the plan;
Having a detailed planning document
and communicating it to all interested
parties;
Setting goals and objectives that are
SMART (this stands for:
Specific
Measurable
Acceptable
Realistic
Timely);
Having clear lines of accountability;
Regularly reviewing progress: plans
invariably change as they are
implemented and those changes need
to be recorded and appropriate
revisions to budgets, timescales etc.
made. It is also essential to
communicate the updated plans to all
parties to the plan;
At the end of the process/project or at
major interim stages key participants
need to reflect on the plan and the
planning process to see what could
have been improved and what went
well.
Should plans be top down or bottom up?
Financial and Business Plans are vital
documents both for start-up businesses,
whether or not they need to gain funding
support, and for established businesses.
Business Plans, just like any other plan,
should be written bearing in mind the
general planning processes set out above.
The very nature of financial planning leads
to the age-old dilemma of whether the
planning process should be ‘top down’ or
‘bottom up’.
The ‘top down’ method involves a
company board of directors or a chief
executive setting the key targets in terms
of sales and profit (outputs) and then
plans are worked backwards to identify
the processes and resources needed to
achieve the targets (inputs).
‘Bottom up’ occurs when different areas
of an organisation or business produce
their own ‘mini’ plans and the aggregated
results come together to form the
organisational plan.
There are advantages and disadvantages
to both methods. The ‘top down’ process
produces the results desired by the
organisational leaders and can be quicker
to generate but this method risks
alienating the people lower down the
organisation who may feel they have no
ownership of the plan.
‘Bottom up’ is more inclusive and gives
more ownership and responsibility to
junior managers. However, when all the
plans are aggregated, the projected
outputs may well be below the required
levels to sustain and grow the
organisation or to satisfy funders and
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shareholders and revisions may then be
imposed from the top.
people involved at all levels know what is
required and what is stretching but
nevertheless achievable. In business
planning the norm is to produce budgets
for three to five years with detailed
monthly forecasts for at least two, often
three, years.
Invariably the best planning systems
involve a measure of both methods so
that when targets are being set there is a
realistic discussion process to ensure the
What are the main elements of business plans?
When drawing up a full business plan, for
either a start-up venture or when seeking
to raise additional finance, the document
should essentially consist of two key
elements:
1. The narrative section covering the
background to the business (including
details of key personnel), its aims and
objectives, its product or service
offering, its market strategy and
analysis, its operational requirements
and a risk (SWOT) evaluation.
2. The financial section, the main
elements of this being:
The Sales Forecast
o The key to any Business Plan
and usually the hardest area to
predict
The Cost of Sales Forecast
o This would include the
purchase of goods for resale
and/or components and raw
materials and the labour costs
directly associated with the
manufacturing process to
convert those components and
materials into finished goods.
o Any other variable costs
associated directly with
manufacturing activity e.g.
power costs would be included
as a cost of sale.
The Overhead Forecast
o The overhead forecast would
include costs that are fixed
regardless of activity, such as
marketing costs, office labour
costs, directors’ salaries, nonvariable heat, light and power
costs, business rates,
insurance, interest on
borrowings etc. and a notional
charge for the depreciation of
assets used in the business.
The Profit Forecast
o Essentially Profit equals Sales
less Cost of Sales less
Overheads.
The Cash Flow Forecast
o Possibly the most important
business forecast!
Further information on drawing up a full
Business Plan can be found in the Further
Activities and Resources section of the
Business and Commercial Awareness
section of the LearnHigher website.
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Why is cashflow so important in relation to business planning?
The production of a cashflow forecast
involves making assumptions about how a
business will both receive monies for sales
made and pay out money for wages and
all other costs.
In retail businesses sales generally
generate immediate cash but in industries
such as manufacturing, construction and
in some service businesses, sales proceeds
might not be received for one, maybe two
or even three months, from the time the
sale was made or the work was carried
out for the client.
Against that, the business may well not
have to pay for goods bought in for resale
or for components/raw materials for one
or two months. Wages have, of course, to
be paid weekly or monthly and most other
overhead costs have to be paid within
relatively short timescales.
The calculation of the inflow and outflow
of cash, which would additionally include
any payments on loans and other finance
commitments taken out by the company,
are made so that the directors can judge
whether they have enough funds to
support the running of the business at the
projected levels of activity.
If the cashflow indicates that they do not
have adequate funding available then the
directors have to consider:
a) Reducing manufacturing and/or
overhead costs so that the company is
more efficient and uses less cash to
support a given level of sales;
b) Agreeing different payment terms
with both customers and suppliers;
c) Reducing activity levels (N.B.
increasing activity levels generally
requires additional funding in the
short term);
d) Raising further capital from investors
or their own resources or obtaining
bank or other financial assistance. (See
Leaflet 9: Raising Finance).
Do financial forecasts and business plans need to be monitored?
Just as with any other planning process it
is vital that financial forecasts and
business plans are monitored.
are aware of the situation so that they
have time to take appropriate action.
If sales are running behind forecast or
customers are not paying within the
agreed timescale, or costs are higher than
forecast this can have a major impact on
cashflow and it is essential that directors
Failure to do so can lead the business into
a cash-flow crisis position and possibly
into a situation where the business cannot
meet its commitments and has to cease
trading.
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Why do charities and voluntary organisations have to plan?
There is a widely-held view that charities
and voluntary organisations can be less
commercial than mainstream corporate
bodies and that somehow normal
commercial practices and planning
techniques can be ignored. However,
except in perhaps the very smallest of
these organisations, this view is
misplaced.
ratio of money raised to money paid out
in direct support of their beneficiaries.
This ratio is often looked at by potential
donors and also the media when
reviewing charity performance and an
adverse ratio can clearly impact on both
reputation and donations.
Charities do not make profits as such but
they do seek to generate surpluses
(defined as an excess of income over
expenditure) so that they can expand their
activities or invest in improved facilities to
help their beneficiaries and clients. This
means that generally they have to seek to
maximise their income and minimise/
control their outgoings in what is a very
competitive sector. To generate their
income the largest charities (for example,
Oxfam, Cancer Research, Barnardos, NSPCC,
Age Concern) usually employ the most
sophisticated marketing techniques and
use professional fund raisers, who often
work alongside their volunteer workers.
A key measure of performance that many
major charities have to consider is their
Monitoring costs is also crucial for
charities as they employ significant
numbers of paid staff alongside volunteer
workers and, indeed, establishing realistic
ratios for paid staff against volunteer staff
is an important consideration for the
charity management.
Charities that rely on local authority or
government grants for a significant
element of their income have additional
challenges to meet as frequently this type
of funding is given to cover specific
projects for limited periods of time, say
2/3 years.
This means long-term financial and staff
planning is difficult and it is difficult to
secure commercial funding for capital
projects.
Self assessment questions
1. What does the SMART acronym stand for?
2. Can you explain the advantages and limitations of Top Down and Bottom Up planning?
3. What are the key elements of the Financial Forecast section of a Business Plan?
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