In part 1 of this series on the Guide to Business Planning, we started with an introduction: what it a business plan, why it is important and what type(s) of businesses require this plan. Why does any business - whether is a start-up or an established one - need a business plan? They know what they want to do. Why can't they just set-up and start operating? In this second part of the series, we highlight 6 key benefits why every business needs to have a business plan.
- Helps to articulate business goals
Every business owner must be able to articulate its business goal in a simple 60 second “elevator pitch” – describing the raison d’etre of the business; why it exists. This provides a “unified focus” for everyone involved in the business.
At Xeed Business, our goal is to “Support businesses to evolve and grow – whether start-ups or SMEs. Our specialist areas are Strategy & Business Planning, Marketing Strategy and Operational change”. We have also set financial and operational goals for the business.
Every business must do this. Having clear business goals defines the planned destination of the business and becomes the measure by which all activities are evaluated, ensuring that each activity being undertaken will help the business reach its defined destination.
As will will see in future series, the process of setting business goals is actually more difficult that it seems and many small businesses do not have clear goals which means they are oftentimes spending a lot of time and effort on activities that do not and will not contribute to long term business success.
- Enables optimisation and prioritisation of business operations
Once the business goal - the destination - is clear, the business needs to plan how the goal will be realised i.e. have a business journey map.
Going into business without a plan is akin to building a house without architect’s drawings. For instance, it will be impossible to truly assess the type of foundation required, where to place the main load bearing beams, whether one can afford the cost of building etc. Without architectural plans (especially for a complex structure), the builder is likely to need multiple re-works to correct mistakes. This leads to higher costs and longer timelines – that is if the house ever gets completed.
Similarly, running a business without a plan is likely to lead to high inefficiencies and possible business failure.
The business plan is a tool for understanding what is required to deliver the business goal and how different pieces of the business fit together: people, finance, supplier, equipment, customers, route to market etc. Each of these elements are surprisingly interrelated. For example, when choosing a manufacturing plant, the questions isn't just about costs of the plant. The business also needs to consider the number of people required to run the plant, whether it has a building large enough to house it and whether it can fund its ongoing maintenance etc.
Through planning, the business owner may identify similar business constraints and is able to explore alternative ways of achieving its goals e.g. certain functions may be outsourced to reduce management overhead; business premises could be leased instead of being purchased in order to free up cash for purchasing larger manufacturing equipment etc.
The Business Planning process therefore helps the business owners and managers to assess and make the most efficient and effective operational decisions prior to committing resources to other activities. It also enables the business owners to map out a route to achieving business success before it sets off on the wrong path.
- Highlights potential risks and mitigate impact
Through the process of planning, weaknesses, threats and potential risks will be evident. For instance, the business may realise that its production cost may be too high to make the business viable compared to competitor products.
Identifying risks enables the business to take mitigating actions before those risks actualise.
All businesses operate in an uncertain world and it is impossible to have 100% certainty about internal and external factors that would impact the business – how competitors would reaction, customers’ product uptake, regulatory changes etc. These add to the risk of running a business.
Once potential risks are identified, the business find ways to avoid the risk or map out what actions it would take in the event that the risk materialises.
- Keeps everyone focussed on a common goal
The business plan details different aspects of the businesses operations and how they are interrelated. Therefore, it becomes a reference point for everyone involved in the business; its shareholders, financiers, suppliers, employees etc. With the business plan, the business can cover the same message to every stakeholder.
Employees are able to understand the bigger picture and their role in delivering the business goals; shareholders can see how their funds are being used etc.
- Allows progress to be tracked, evaluated and corrected
The business plan will include expected resources, operational output, costs and timelines. As the business progresses, it is important to regularly refer to the plan and assess how well the business is tracking against the plan: have we recruited more people than planned, are sales volumes and price in line with the plan etc. Remember that the business has a destination and the plan is the journey map for getting to that destination. If the business is going off-track, it is unlikely to achieve its targets.
If the business is missing its targets, it can compare assumptions made in the plan to reality and use this information to introduce corrective measures. For instance, if profits are lower than expected because the actual cost of raw materials is higher than expected, the business can seek corrective measures such as looking for alternative suppliers, renegotiate with existing suppliers or increase pricing in order to achieve the set objectives.
- Essential for raising external funding
Most businesses require external funding at some point in their business life. Potential investors will need to see a business plan that fully explains the business, its potential and when and how the investor is likely to get a return on their investment.
Potential investors have to be confident that the business owners fully understand their business including the external and internal environment it operates within. They also want to see that the business owners have considered all elements of the business including potential risks and how these will be mitigated.
The business plan (the narrative and the numbers) will do this. It is unlikely that any external financier will invest in a business without such a plan.
There are other benefits of having a business plan, but we have focused on the main ones.
The business plan is however not a dormant document. It is a live document which business owners and managers refer to regularly and revise when required. The process of building the business plan and referencing it within the business is what brings the real benefits to the business.
In the next part of the series we will cover the different elements of the business plan.
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