Introduction
Business planning is typically done when a business plan is needed for financial purposes or to use as a guide to running and growing a business (as a start-up or for the next period of time). Many crucial features 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 with another (for example, $x marketing expenses will generate $y sales revenue). However, business is rarely that simple. Many multidirectional relationships tend to occur between the various features. 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 issues in business planning
Every business is different and crucial issues in one do not necessarily occur in another. What is important, however, is that business planners make sure they analyze and plan for all features relevant to their specific business. This would typically 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 solid.
- Marketing- The marketing strategy must be considered. This includes aspects such as price and promotion.
- Market research – This is a crucial topic 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.
- Developing – All issues related to the development of new products, services, markets and facilities must be planned.
- Operations – All aspects related to the what, where and how of operations must be considered.
- The team – The management team must adapt to the requirements of a company. It would be preferable to establish what skills/jobs are needed and then link people. Where there is a lack of skills, training programs can be put in place and new people can be hired. The entire organization chart and composition of the board of directors, management teams, etc. you have to plan.
- Finance – Finances are the ultimate criteria for business success, but they cannot stand on their own. Important financial issues often include investment, financing, and dividend decisions and policies. It is also crucial to plan billing (sales), gross profit margins and cost control (of expenses). The relationships between these topics (financial ratios) need further planning to establish if the business will be profitable, liquid and solvent. Return on investment (ROI) and sustainable business growth would be, for example, specific aspects to consider.
- Risk management – It is necessary to determine, analyze and address the various risks that arise. It is necessary to eliminate fatal flaws. 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 crucial issues to consider gives an idea of the complexity involved in business planning. If we only look at the financial issues, we will see that the price will have an impact on sales (turnover). The lower the price, the larger the physical volumes will usually be (except if the image requires a high price). However, the turnover and total profits will not necessarily be higher. There is normally a delicate balance between price, sales volume, turnover and profit.
To further complicate this, billing, costs and profits and timing have a direct impact on the company’s cash flow (a very critical issue). This whole aspect is further complicated by investment (capital spending), financing (equity or debt?) and dividend decisions. Spending too much on a plant, having too much debt and paying too much to shareholders will have a negative effect on the company’s sustainable business growth and this will reduce achievable goals. This scenario shows only a part of the various aspects that must be balanced within the broader financial sphere.
Unfortunately, the complication of the example does not end with 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 each other.
Financial decisions, for example, would have a direct relationship to business growth (for example, geographic expansions and new product development), marketing expenses, and employment and people development. All of these problems would have a similar impact on financial problems and each other.
An integrative 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 turnover and profit figures in mind. From there, everything works backwards.
A much better option would be to have an integrative approach to business planning. The following steps are required for this:
- Determine all salient features of the business.
- Determine the relationships between these salient features.
- Test and resolve each feature taking into account casualties and effects with other features.
- Use what-if questions to create better holistic solutions.
Summary
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 manner. One crucial outstanding feature or relationship that is ignored can jeopardize the existence of the entire business.
Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.
