Business Plan

What is a Business Plan?

1.    Introduction

At a time of constrained resources and  low consumer demand,  it is even more critical than usual  that businesses, and small businesses in particular, have a quantified and detailed plan as to where the business has come from and more importantly, where it intends to go in the future-in essence a Business Plan. As any seasoned watcher of the BBC series Dragons’ Den will realise-without such a plan and a thorough grasp of its content, any appeal for investment is likely to be met with scepticism from business angels or banks. As the owner of the business your credibility will be blown apart!  In any event, regardless of funding requirements, how can a manager run a business of any size effectively without knowing their long term destination or understand the way in which the business will get there? Would you go sailing not knowing the port you are trying to reach and the course you intend to follow?   

2.    Definition

Numerous definitions exist as to what constitutes a Business Plan but one easily understood definition has been provided by Cox and Farndon (1997)[1] which has stood the test of time:-

“A plan presented to a bank or other provider of finance, describing what the business intends to do, explaining what its costs will be, what it expects to earn, how it will repay money it has borrowed and how soon it will make a profit.”

A business will often compile such a plan prior to the start of operations as part of the start-up process but may, sometimes, decide once operations have commenced that the back of the envelope previously employed no longer passes muster. The business plan then becomes a “live” document going through successive rewrites as the business grows and hopefully thrives.

3.    Purpose of the Business Plan

As hinted at above, a Business plan meets a number of purposes which can be boiled down to:-

• To help manage the business-it will chart the future direction of the business and indicate the long term ambitions often expressed in the form of statements concerning corporate strategy. For example top level growth plans by product and market and resources needed to enable the growth to take place over a specified, discrete timescale.
• To measure business progress-as the business grows (hopefully) management can measure actual progress against their original expectations and amend/update the plan accordingly.
• To raise financial resources for the business-the business plan will encourage funders (business angels or banks) to lend to the business in order to facilitate growth. The written plan also becomes a major tool to establish and maintain the credibility of the management of the business-i.e. it provides comfort to lenders that the owners know what they are doing!

4.    Format of a Business Plan

Business Plans come in all shapes and sizes simply because businesses come in all shapes and sizes so the following comments are not intended to prescriptive but more to give a flavour of the content which can then be adapted to meet the specific circumstances of the business.  The terminology employed in business plans also varies from business to business-for example what one organisation calls an “objective” another may refer as a “goal”. In my commercial experience its best not to get too hung up on this as long as the business plan makes clear what meaning is intended. Also the exact ordering of the content is often best left to the preference of the person within the business responsible for coordinating business activity and writing the plan.

5.    Overview of Business and Objectives

This section is often equivalent to an Executive Summary. It will include details of the long term aspirations of the business often encapsulated in its Mission Statement. For larger businesses there may be more explanation of the corporate strategy that has been adopted which will ensure the reader (especially any funder) understands the strategic focus and positioning of the business especially in relation to its competitive environment.

6.    Sales and Marketing Plan

The above section should link easily into further detail concerning the sales and marketing plans of the business. This section can contain details of products on offer or planned, sales volumes and sales budgets over the life of the plan, current and expected market share as well as marketing and distribution plans. This section may also include details of any digital marketing initiatives.  Promotional materials relating to the products on offer are relevant here but often the detail is relegated to an Appendix of the plan. It is important to note that the construction of the Business Plan and the financial budgets that underpin it take as a starting point agreed sales forecasts and that subsequent coordination of the remaining sections regarding production levels, manpower plans and other resourcing requirements especially borrowing are all predicated on these sales forecasts. Hence it is vitally important that these sales forecasts are realistic, achievable and owned by the business as a whole. These forecasts can be abbreviated for the purposes of a published business plan. 

7.    HR Plan

One of the most important resources a business possesses is the people it employs from senior management down through middle management to “shop floor” staff. All have a vital role to play if the business is to achieve its objectives. A manpower plan detailing how the expected sales volumes will be resourced is therefore essential showing both numbers of staff, skill levels required and training to be provided over the term of the business plan. Again, these forecasts can be abbreviated for the purposes of a published business plan. C.Vs of senior management could be included here or relegated to an Appendix. However it’s fair to say lenders will be especially interested in the track record of the senior management running the business.

8.    Production/Operations Plan

Linking into and coordinated with the sales forecasts will be the Production or Operations plan. This will show that the sales forecasts can be met from the physical resources of the business such bas;-

• Factory capacity by geographical location, premises owned or leased.
• Office locations
• Machinery and vehicles required
• Raw material sourcing, costing and stock levels required
• Production methods
• Quality control methodologies employed
• The content of this section is quite flexible depending on whether the business output relates to a product or service or a combination of the two.

9.    Resourcing Plan

This section contains an overview of the resources required to deliver the overall business plan. It will contain details of:-

• Total financing requirements of the business over the term of the plan
• Finance being provided by the owners in cash or kind
• Borrowing requirements
• Assets available for security

This part of the business plan will be of most interest to external providers of finance whether banks or other institutional providers e.g. business angels.

10.  Financial Plan

This section will contain detailed financial forecasts for over the term of the plan. This will include at the very least:-

• Forecast Income Statement (formerly known as the Profit and Loss Account)
• Forecast Balance Sheet
• Cash Flow forecast

An established business will also include, at least three years of historical financial results. For larger business there may also be details of any sensitivity analysis or modelling carried regarding the financial impact of changing levels of demand or other economic factors e.g interest rates, currency exchange rates or inflation levels.

11.  Performance Review process

This section will detail the process to be adopted to ensure the business plan remains an effective planning and control document. It will explain how business performance will be monitored across a number of metrics e.g sales, market share but primarily by financial performance. Larger businesses may adopt a form of “balanced scorecard” reflecting overall performance across the business.

12.  Appendices & detailed financial forecasts

Depending on the size and complexity of the business, this part of the business will include relevant material that is too detailed to be included elsewhere in the Business Plan.

13.  Legal & Constitutional Details, Professional Advisors

This section will include factual data for use by lenders and potential investors and may also include contact details of the person responsible for coordinating the Business Plan.

Summary

The above exposition of the contents of a business plan is not meant to be exhaustive merely indicative as the circumstances of each business will be different. It is intended however to be helpful in terms of pointing out the matters that an effective Business Plan will address in order for a business to grow and attract appropriate investment.

Jim Stockton is a Senior Lecturer of Finance at the Warrington School of Management, University of Chester