Business planning is typically done when a business plan is needed for funding purposes or to use as a guide for the operation and growth of a business (as a start-up or for the next period of time). Many crucial characteristics of a business need to be addressed and balanced in this planning process. Various options, issues, and risks related to these features will be considered.
Entrepreneurs often assume that one variable has a linear relationship to another (for example, spending $ x on marketing will generate $ y revenue on sales). However, business is rarely that simple. Many multidirectional relationships tend to occur between the various characteristics. Sales, for example, would also be influenced by product quality, price, etc. Sales, on the other hand, will influence future expansions. Addressing this phenomenon requires an inclusive business planning process.
Crucial problems in business planning
Every business is different and the crucial problems in one do not necessarily occur in another. However, what is important is that business planners make sure to analyze and plan for all the relevant features for their specific business. Typically this would include the issues highlighted below.
- The business – It is essential to ensure that the opportunity, the business concept, its products, services and strategies and the industry in which it operates are sound.
- Marketing – You need to consider your marketing strategy. This includes things like pricing and promotion.
- Market research – This is a crucial issue that is often overlooked. It is important to know and understand the customers, the size and trends of the market and who the competition is.
- Development – It is necessary to plan all the questions related to the development of new products, services, markets and facilities.
- Operations – All aspects of the what, where and how of operations must be considered.
- The team – The management team must meet the requirements of a company. It would be preferable to establish what skills / jobs are needed and then link people with them. Where there is a lack of skills, training programs can be implemented and new people can be hired. The entire organization chart and composition of the board of directors, management teams, etc. needs to be planned.
- Finance – Finances are the ultimate criterion for a company’s success, but it cannot stand on its own. Important financial issues would typically include investment, financing, and dividend decisions and policies. Planning for billing (sales), gross profit margins and cost control (of expenses) is also essential. The relationships between these issues (financial ratios) require further planning to establish whether the business will be profitable, liquid, and solvent. The return on investment (ROI) and sustainable business growth would be, for example, specific aspects to consider.
- Risk management – The various risks that occur must be determined, analyzed and addressed. It is necessary to eliminate fatal defects. Operational and financial risks can often be hedged. This would incur certain costs and strategies, such as manufacturing in multiple countries and buying and selling futures and options in different currencies.
The complexity of detailed business planning
A quick review of the brief summary of the crucial issues to consider gives an idea of the complexity involved in business planning. If we only look at the financial problems, we will see that the price will have an impact on sales (turnover). The lower the price, the higher the physical volumes will typically be (except if the image requires a high price). However, the total turnover and profits will not necessarily be higher. There is usually a delicate balance between price, sales volume, turnover, and profit.
To further complicate this, the turnover, costs and profits and their timing have a direct impact on the cash flow of the company (a very critical issue). This whole aspect is further complicated by investment decisions (capital spending), financing (equity or debt?) And dividends. Spending too much on a plant, having too much debt and paying too much to shareholders will have a negative effect on the sustainable business growth of the company and this will reduce the achievable goals. This scenario shows only a part of the various aspects that need to be balanced within the broader financial sphere.
Unfortunately, the complication in the example doesn’t stop at finances. Finance influences many other crucial aspects of the business. On the other hand, many of the other crucial aspects also have an effect on finances, as well as on each other.
Financial decisions, for example, would have a direct bearing on business growth (eg geographic expansions and new product development), marketing spending, and employment and people development. All of these issues would have a similar impact on financial issues and on each other.
An inclusive business planning approach
The general trend in business planning would be to tackle each problem independently and then just add the pieces together and re-plan if something doesn’t make sense. Business planning often begins with some projected revenue and turnover figures in mind. Then everything is worked backwards from there.
A much better option would be to have an inclusive business planning approach. To do this, the following steps are needed:
- Determine all the salient features of the business.
- Determine the relationships between these salient features.
- Try to solve each characteristic taking into account the casualties and the effects with other characteristics.
- Use “what if” questions to create better holistic solutions.
The idea in business planning is not to optimize one aspect of the business and neglect or ignore some of the others. The various relationships (causes and effects) must be addressed in an integrative way. One important and fundamental characteristic or relationship that is ignored can jeopardize the existence of the entire business.
Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.