The importance of business planning

In every aspect of our lives the importance of planning is clear to see, so why do so many small business owners not give the same level of importance to planning when it comes to their company? Alan Woods, director of the UK accountancy firm Woods Squared, reports on the importance of business planning.

Just as you would plan your route for a journey you should also plan your route for your business, as without a clear plan of the route you will take, and of where you want that route to take you, how will you know when you have got there?

The most common time for someone to draw up a business plan is prior to the commencement of the business. There are several reasons why they are drawn up at this point such as:

  • For the bank - if a new start up business needs an overdraft facility or loan then the majority of banks will want to see a business plan in order for them to assess the potential viability of the new business
  • For a grant - there are some grants available to new start up businesses to which a business plan may help gain access
  • For the business owner - a business plan can give the small business owner more comfort and security that they have made the right decision

Whilst the above are some of the more common reasons why business owners draw up a business plan the most important reason is to allow the business to track its actual progress against its projected targets. By its very nature a business plan can never be 100% accurate as it is written in advance and cannot take into account unexpected changes in the marketplace - this is why it is crucial that a business plan is revisited frequently by the business owner and adapted when needed.

Areas that a business plan should cover include:

  • Nature of the business - an outline of the type of business and what the trading activities of the business will be
  • Business background - gives details of your experience in the area of your new business
  • Business aims and objectives - what do you want to achieve? These aims and objectives should be quantifiable and should be split between short term (i.e. next 12 months) and longer term (i.e. next 3 years)
  • Main products and services - a description of the main products and services that your new business will be providing
  • Market research - details of the research that you have carried out in respect of your new business idea - this will help to highlight the areas in which you can capitalize and that there is a need within the market place for what it is that your business will be providing
  • SWOT (strengths, weaknesses, opportunities and threats) analysis - analysis of your new business and that of your competitors - this process can be invaluable as it can identify areas of opportunity for your new business which you may not have previously considered
  • Marketing strategy - based on the information gathered as part of your market research and SWOT analysis you should put together a strategy for how you intend to market your new business as different marketing techniques will have vastly differing results from one type of business. Having an understanding of this at an early stage may avoid incurring unnecessary expense on ineffective marketing
  • Location and image - where will your business operate from and what experience do you want your customers to have when they deal with you?
  • Legal aspects - issues such as health and safety, insurance requirements and employment law
  • Cash flow and profit and loss projections - these projections should show your anticipated activity (usually for the next three years) and should be based on all of the information gathered as part of your business plan. It is important that these projections are realistic and that due consideration is paid to them otherwise you may find yourself having to face an uncomfortable reality which may have been avoided if your initial projections were more accurate
  • Break even analysis - probably one of the single most important pieces of information contained within your business plan. The break even point of your business will be the turnover required to cover all costs of the business (be sure to include as a cost any monies which you may need to take as earnings)

In conclusion, every business owner should make sure that they spend some time writing a business plan. Once written it should not be filed away in a drawer never to be seen again. It should be used as a map to guide you and your business towards your goals.

By Alan Woods, for our sister site, BusinessZone.co.uk

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