Business plan

Question 1

What is a business plan?

Answer 1

A business plan is a formal written document that explains in detail how a business is going to achieve its objectives.
-It also describes a its strategies, the market it is in and its financial forecasts.

Question 2

Why is a business plan good for start-ups?

Answer 2

The absence of a plan for a business which is starting up virtually guarantees failure. A proper plan proves that those who run the business ‘know what they’re doing’ and also the potential of the business.

-Ability to access funds is a crucial reason for drawing up a plan - Without a plan it will almost be impossible to obtain financial backing because there is no formal indication of what the business intends to achieve and how it will attempt to do it.

Question 3

How is a business plan for established companies linked to a strategic review?

Answer 3

For existing companies, planning doesn’t occur as an isolated activity - it usually follows a strategic review of the firm, which is about improving and sustaining business performance.

-It addresses questions like ‘where are we now?’, ‘where do we want to go?’, ‘can we get there?’ and ‘how?’.

Question 4

Why is a business plan good for existing companies?

Answer 4

It is similar to start-ups because having a plan means a business is more likely to get the finance it needs like capital for expansion.

Question 5

Why is a plan important for the business’s stakeholders?

-List stakeholders (5) + their main objectives and explain why they would want to view the business plan.

Answer 5

Whether a firm has been established for years or is just starting up, its stakeholders will want to see its plan; and preferably they should be involved in some way in its construction. The reason for this is related to the objectives of the individual stakeholder.

• Employees - job security, pay rises + improved conditions of work and service (Main objectives) - want to view plan to see if their main objectives (employee’s) are likely to be forthcoming in the future and to what extent.
• Suppliers - regular orders, preferably of increasing size + prompt payment for products - want to see if more/less likely to occur, may be implications for expansion + gaining economies of scale if orders increase, or may need to find new customers if business plans to use new suppliers.
• Investors, like the bank - interest on loans (and the capital) repaid on time - is there an excessive degree of risk in the plan that may worsen cash flow + make this less likely.
• Customers - fair price, ethical issues with how the product is made/sourced, a product that can be trusted, improvement in product, good customer service - will there be changes to products, are the sourced ethically, is customer service likely to improve- even if individual customers don’t look at plan, pressure groups + consumer groups will.
• Local community - jobs (preferably full time + permanent), business involvement in community, supply links to other local firms, responsible attitude to those affected by the business’ activities - are jobs likely to be created or lost, will more be put back into the community, will (smaller) existing firms be adversely affected or will it create more business for them, will the plan mean more negative externalities like pollution, noise and congestion.

Question 6

Explain the purpose of a business plan

Answer 6

The business plan has many functions, from securing external funding to measuring success within the business.

• Generally the three main purposes are -
  1) to create an effective strategy for growth
  2) to determine a business’s future financial needs
  3) to attract investors

Question 7

Describe the main contents of a business plan.

Answer 7

The short answer is ‘everything’ - but a business plan must answer these questions:

• What are they aiming to achieve?
• Why?
• What will need to be done to achieve this?
• By whom?
• When?
• Using what resources?

Planning must involve all the functional areas of the business and the implementation must be carefully co-ordinated.

Question 8

For the accounting and finance sector of the business, what are the key considerations in a business plan and what are the reasons for planning?

(Just some examples)

Answer 8

• Cash flow implications for the future, especially if the firm is expanding - because ensures adequate cash flow which will avoid need to borrow money as short notice on unfavourable terms.
• How to raise any additional funds needed, or maintain existing levels of funding - so to ensure that any funds needed to be raised are available and raised in an appropriate way - e.g. preventing business from getting too highly geared.
• Budget to be allocated to each department - so those with management responsibility for implementing the plan know what their budget is; they can then prioritise actions.
• A projection of the costs involved in implementing the plan, the stage the business will break-even and the resulting revenue and profit - identifies + quantifies the effects of the events being planned for, a plan without cost + revenue projects is worthless + dangerous for a business. - to try to ensure shareholder objectives in terms of expected returns are met, if financial results are out of line with expectations the share price will drop.

Question 9

For the human resource management sector of the business, what are the key considerations in a business plan and what are the reasons for planning?

(Just some examples)

Answer 9

• Whether the existing workforce is capable of carrying out the plan - to ensure employees have the right skills and competencies for what the firm is trying to achieve, if there are recruitment and training implications then there are issues like ‘who?’ ‘when?’ and ‘how?’.
• If any changes to recruitment and training are necessary - correct planning here can avoid hiring or training employees at the wrong time, either too early or late.
• The projected level of labour turnover - need to be calculated and planned for in order to avoid future staff shortages, even if the plan is not for a significant change of direction, some employees will retire and some will leave.

Question 10

For the operations management sector of the business, what are the key considerations in a business plan and what are the reasons for planning?

(Just some examples)

Answer 10

• Whether the existing capacity of the firm is correct, i.e. is it too big or small? Is it underused or is there a need for expansion? - to consider if there is a large amount of unused capacity; if so, unit fixed costs will be higher than they could be, alternatively there needs to be an investigation into whether the business could achieve economies of scale by expanding.
• If the existing production process can cope with any planned changes - to examine the implications in terms of the need for new capital equipment, there will need to be liaison with those responsible for accounting + finance.
• Are changes in technology necessary (even if firm is not planning on making major changes) to stay competitive? - to identify what will happen to costs as a result of the plan + to avoid an ‘out of stock’ situation where customers are unsatisfied.

Question 11

For the marketing sector of the business, what are the key considerations in a business plan and what are the reasons for planning?

(Just some examples)

Answer 11

• Are there any changes to the product or service as a result of (say) changes in demographics or income levels - markets are dynamic, there is a need to identify if the products are those wanted by the consumer, is the price ‘correct’? if not then the business is going to suffer in terms of reputation and profit.
• The advertising and promotional plan - to see if new market segments have emerged that can be exploited.
• The pricing strategies for different products - to avoid any mistakes from previous promotions and/or pricing strategies that have failed.
• Likely sales and revenue levels, overreliance on a single or a few products to be the business ‘cash cow’ - to ensure that sales levels are carefully co-ordinated with the amount being produced to avoid unsatisfied customers or a build-up of excess stock. There is a need to identify what will happen to revenue from the products as a result of the plan - like accounting + finance - links to shareholders.

Question 12

What are the advantages of a business plan - simplified?

Answer 12

• Gives sense of direction
• Evaluation of objectives
• Consider constraints on the business
• Establishes department + individual roles
• Encourages communication

Question 13

What are the advantages of a business plan?

Answer 13

• A business plan requires that a strategic review of the firm is conducted; meaning there will be an analysis and evaluation of how well each functional area of the business is performing.
• Gives business sense of direction
• Forces an evaluation of current strategic and tactical objectives
• Forces senior managers to explicitly consider the constraints faced by the business in reaching its objectives.
• Sets out the role of each department/section of the business and the part it has to play in the achievement of the overall strategic objectives.
• Encourages communication, co-ordination and co-operation between different departments and stakeholders of the business.

Question 14

What are the disadvantages of a business plan?

Answer 14

• There is an opportunity cost (the cost of the next best alternative foregone) of time spent gathering the data for the planning process and then analysing and evaluating it. Planning is an ongoing process and so this opportunity cost is also ongoing. May not be a burden in a large established company with specialist managers, but could be considerable for a small business.
• Possibility of spending too much time on planning, rather than implementing that it reduces the initial enthusiasm for moving forward.
• A plan may be too rigid and leave little room for individual employee creativity; this may demotivate those responsible for carrying it out - needs flexibility and be able to adapt to a change in circumstances.
• The plan may be disregarded or altered by someone who doesn’t like it, a plan is useless unless it is actually followed by those responsible for implementing it - if a business plan is drawn up in isolation from its stakeholders, it has a lower chance of succeeding than one in which they have been involved.
• The plan could get leaked, which could mean competitors will gain knowledge that could be used to undermine the business.

Question 15

What should a business plan include? - more specific with titles.

Answer 15

1) Company name, address, and other contact details
2) Non-disclosure statement
3) Table of contents
4) Executive summary (easier to do after rest if completed) - summary of business, financial summary, objectives of plan, etc.
5) Business description - business idea, brief history or business, etc
6) Management and personnel
7) The products and services
8) The market
9) Sales and marketing
10) Operations - premises, production facilities, suppliers, etc.
11) Finance - financial analysis, etc.
12) Risk analysis - explanation of what could go wrong and how to overcome
13) Cash flow and profit and loss forecasts - detailed forecasts for 12 months, summarised forecasts for years 2 + 3
14) Appendices

Question 16

Other than helping to raise finance, analyse one likely advantage of producing a detailed business plan for a start-up business.

Answer 16

• Entrepreneur is forced to consider what to do in terms of all aspects of the business’ operations - if the owner has never run a business before - it reduces the risk of failure, as all costs can be calculated so accurate forecasts can be made.
• Can identify strengths and weaknesses - this may mean the entrepreneur is able to exploit their strengths and find ways to avoid any weaknesses.

Question 17

Explain what is meant by the ‘Plan-Do-Review’ cycle

Answer 17

Once a plan has been drawn up it needs to be implemented and then monitored to make sure that it and the business as a whole is ‘on track’.
-The plan-do-review process formalises this approach.

Question 18

How does the plan-do-review cycle work?

Answer 18

This method is used to achieve key departmental tasks which should mean that the business reaches its strategic objectives - stated in the business plan.

Question 19

What does plan mean in the plan-do-review cycle?

Answer 19

Plan - establish objectives and the course(s) of action, and the resources necessary to achieve them.

Question 20

What does do mean in the plan-do-review cycle?

Answer 20

Do - implement the plan ensuring that all areas of the business understand their part of it in terms of responsibilities and deadlines.

Question 21

What does review mean in the plan-do-review cycle?

Answer 21

Review - there will need to be a formal ‘ongoing’ evaluation of progress towards objectives and a ‘final review’ at the end of the process.

Question 22

What are the advantages of the plan-do-review cycle?

Answer 22

• Approach is methodical, it forces a strategic approach on those setting the objectives. They need to consider carefully what the business should be trying to achieve and how likely it is that it will reach the objectives. Useful to all businesses no matter the size.
• If those in each department are clear about what they have to do then employees should be more focussed on achieving the desired results.
• Encourages kaizen - continuous improvement.
• Regular reviews of departmental and individual employee progress mean that deviations from the plan can be identified and corrected.
• A final strategic review gives opportunity to evaluate the appropriateness of the objectives and the methods used to achieve them, were there problems and why. After the final review the whole cycle can begin again, along with a consideration of how these problems could be avoided in the future.

Question 23

What are the disadvantages of the plan-do-review cycle?

Answer 23

• It is a lengthy process that will have a large opportunity cost in terms of managers’ time, both senior and middle level.
• Once cycle has started it can be inflexible, if the whole organisation is set on a particular course with a specific set of objectives, then if a chance event occurs it could be difficult to change direction, especially if contingency planning has not been conducted thoroughly.
• If employees haven’t been involved in the planning process they may feel less committed to the firm’s objectives, as they have no ‘ownership’ of them, this may make the achievement of the objectives slower.
• Some employees may dislike the ongoing review of their progress, they may regard it as ‘spying’ and an indication that management has a lack of trust in them.

Question 24

What is a strategic review?

Answer 24

They usually happen in established business’s following business plans.

• They aim to improve and sustain business performance.
• A strategy review is the process in which organizations discuss the progress of their goals and objectives and make the necessary adjustments for the upcoming year.

Question 25

What are the benefits of a strategic review?

Answer 25

• It enables the analysis of the key performance indicators from all of the four functional areas in the firm; underperforming departments and products can be identified.
• Enables SWOT (strengths, weaknesses, opportunities, threats) and PEST to be undertaken and so the current situation in the external environment (e.g. changes in competition, whether market is growing or not, changes in technology); this means that the options for future action can be considered.
• Allows identification of ‘good practice’ - e.g. how employees kept motivated; also identification of ‘bad practice’, e.g. budgets being routinely exceeded.
• Enables consensus to be hopefully established among senior managers on exactly where the business is headed and what needs to be done to get there.

Question 26

Why is conducting a strategic review good for stakeholders?

Answer 26

By conducting a strategic review it is most likely that by doing all of the above before planning, it will lead to an improvement in the long-run profitability of the business.

• This means that stakeholders are more likely to be satisfied;
• shareholders will have greater dividends;
• employees will have more job security;
• suppliers will be in a more secure position; and
• there can be greater community involvement because more funds are available.