THE BUSINESS PLANNING PROCESS

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THE BUSINESS PLANNING PROCESS

• You are neither right nor wrong because the crowd
  disagrees with you. You are right because your
  data and reasoning are right.
• Always invest for the long term.

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THE BUSINESS PLANNING PROCESS

• Last part of syllabus YOUR PLAN
• the business planning process
• sources of planning ideas
• situational analysis
• vision, goals and/or objectives
• vision
• business goals
• long-term growth
• organising resources
• operations
• marketing
•  finance
• human resources

• forecasting
• total revenue, total cost
• break-even analysis
• cash flow projections
• monitoring and evaluations
• sales
• budgets
• profit
• taking corrective action

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Why do people fail to plan?

• What sort of excuses to people make?

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Reasons business owners fail to plan

• lets get on with it straight away
• Planning costs too much
• You have to be an academic to plan
• Im only a small business owner
• What do they tell me that I dont already know?
• Ill do it later I dont need it at this stage
• ...what are the common elements of a business
  plan?

Chapter 12, The business planning process, FIGURE
12.2, pg. 394
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Chapter 12, The business planning process, TABLE
12.1, pg. 395
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What are the benefits of developing a business
plan?
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2 different tasks

• Small business owners question involving
  interview
• OR
• Extended response practice

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Extended responseBusinesses do not plan to
fail they fail to plan

• Critically analyse this statement

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task

• Interview (with iphone or camera) a local small
  business owner to INVESTIGATE the following
  aspects of the business
• The planning options that had to be considered
  when starting the business
• The purpose of the business plan
• The role of the business plan within the
  operation of the business
• The importance of planning to the overall success
  of the business
• The government departments and/or private
  organisations that offered assistance in
  developing a business plan

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Business planning overview summary

• It is vital that a SME owner completes a
  business plan. Businesses do not plan to fail,
  they fail to plan.
• A business plan is a written statement of
  the goals for the business, and the steps to be
  taken to achieve them. It is a summary and an
  evaluation of a business concept in written form.
• A business plan will also assist the SME
  owner when arranging finance for the business.
• A typical business plan may include, as a
  minimum, an executive summary, an operations
  plan, a marketing plan, a financial plan and a
  human resource plan.
• The planning process acts as a link or
  bridge between the business owners ideas and the
  actual operation of the business.
• ...to make sure it is not just a pipe
  dream
• Planning is the process of setting goals and
  deciding how to achieve them

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Sources of planning ideassituational analysis

• The internal and external business environments
  are sources of planning ideas.
• Information is the essential ingredient needed to
  prepare a business plan.
• A situational analysis (SWOT) is a good technique
  for gathering information for use in the business
  plan
• (SWOT covers both internal (SW) and external
  (OT)
• SWOT is an acronym for? Strengths, weaknesses,
  opportunities and threats
• At what stage of the planning process should this
  be used?

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You should ask the following questions about your
business
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Vision, goals and/or objectives

• Vision statement broadly states what the
  business aspires to become its purpose and its
  function.
• Vision statements may relate to customers or
  employees. A clear vision statement should be
  concise, creative, focused and realistic. It may
  contain any special features of the business,
  what it values and what it hopes to achieve.
• Vision statements purpose to guide and direct
  the business owners, managers and employees. It
  creates the culture within the business and acts
  as a benchmark against which to measure all the
  businesss decisions and operations
• E.g. NAB We will be a leading international
  financial services company which is trusted by
  you and renowned for getting it right.
• Yarrawollen Designs To be the regions most
  respected architectural design company, providing
  innovative solutions and the best customer
  service experience.

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Goals and/or objectives

• Once the vision has been formulated a business
  can determine specific goals.
• Goals for businesses could include the following
• To become the largest business in the market
• To improve market share
• To provide a reasonable return for investors
• To contribute to the wellbeing of the community
• Goals are the MOTIVATING FORCE behind the
  business
• After establishing goals then you must decide how
  to achieve them by developing an ACTION PLAN.
• This breaks down goals into OBJECTIVES specific
  statements detailing what a business needs to
  achieve in order to accomplish its vision
• Business will often set STRATEGIC GOALS which
  focus on long-term broad aims and apply to the
  business as a whole.
• Middle management set TACTICAL OBJECTIVES which
  are mid-term and departmental goals
• Front-line managers or supervisors set
  OPERATIONAL OBJECTIVES focused on short-term
  issues and aim to achieve tactical objectives
  e.g. Marketing manager wants 20 customers to
  attend a focus group

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What is the relationship between vision, goals
and/or objectives
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FINANCIAL, SOCIAL AND PERSONAL GOALS

• FINANCIAL GOALS
• Profit
• Market share
• Growth and diversification
• Share price
• SOCIAL GOALS
• Community service (sponsorship, support
  educational, cultural, sporting and welfare
  activities)
• Provision of employment family members
• Social justice adopting policies to ensure
  employees are treated equitably and fairly (EEO,
  non-discriminatory policies)
• Ecological sustainability
• PERSONAL GOALS
• Achieving higher income/greater financial
  security
• These personal goals not included in business
  plan or mission statement

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Vision, goals and or objectives recap

• The vision statement broadly states what the
  business aspires to become.
• Vision statements guide and direct the
  business owners, managers and employees.
• Once the goals have been established, a SME
  owner determines the objectives.
• Objectives are specific statements detailing
  what a business needs to do to accomplish its
  vision.
• Strategic goals, tactical and operational
  objectives are determined by different levels of
  management.
• Many businesses strive to achieve three
  broad goals
• financial chiefly maximising profit
• social benefits for the community
• personal individual preferences
• Longer term growth is the ability of a
  business to continually expand.
• Longer term growth depends on a businesss
  ability to develop and use its asset structure to
  increase sales, profits and market share.

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Business planning processORGANISING RESOUCES

• Once the SME owner has formulated the
  vision, goals and objectives, the next stage in
  the planning process requires organising the
  resources human effort, time, money, equipment
  and materials needed to fulfil the plan
• Organising is a device that SME owners can
  use to gather resources for getting things done.
• Resource allocation refers to the efficient
  distribution of resources so as to successfully
  meet the goals that have been established
• Each of the key business functions
  operations, marketing, finance and human
  resources require specific resources which need
  to be effectively organised

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Organising resources - operations

• Operations function of a business involves
  transforming different types of inputs (raw
  materials, labour, equipment and other resources)
  into finished or semi-finished goods or services.
  
• To produce either a good or service, therefore, a
  business needs to have essential equipment and
  knowledge
• What type of equipment and raw materials are
  needed?
• Which suppliers will be used to purchase the
  equipment and raw materials?
• How much money needs to be allocated for the
  purchase of the raw materials and resources?
• What storage, warehouse and delivery systems are
  required?
• What level of technical expertise will employees
  need to achieve maximum production from the raw
  material and equipment?

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Organising resources - marketing

• A marketing plan will only succeed if all
  sections of the business are involved in
  satisfying a customers need and wants, while
  achieving the businesss goals.
• The marketing plan needs to become integrated
  into all aspects of the business.
• Adequate resources must be devoted to the
  marketing plan
• Where existing employees do not have the
  expertise or levels of skills required,
  additional training may be needed to bring them
  up to the levels needed
• Additional funds may be needed to accomplish all
  the marketing objectives given to a specific
  department or team
• E.g. Sales consultants, advertising personnel,
  market research staff, distribution people and so
  on must be provided with the informational,
  financial and physical resources to perform their
  jobs

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Organising resources - finance

• New business ventures require funds to operate
• One of the most important questions the SME owner
  needs to answer is What will be the most
  appropriate source of financing?
• DEBT (loans from family, friends, bank) VS EQUITY
  (personal savings from family)
• KEY QUESTION Amount of equity (ownership of the
  business) and potential control a SME owner must
  hand over to obtain the necessary financing.
• Frequently SMES that are aiming for relatively
  moderate growth use mainly debt capital with the
  owners retaining most or all of the equity.
• GRANTS monetary or financial assistance that
  does not have to be repaid grants usually
  provided for
• Expanding a business
• RD
• Innovation
• exporting

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Organising resources human resources

• Often new businesses require extra help
  EMPLOYEES besides the owner/entrepreneur
• Since each employee in a SME represents a large
  percentage of the businesss workforce, a
  specific individuals contribution can be
  especially important to the success of the
  business
• SME owners must consider the need to comply with
  LEGISLATION relating to anti-discrimination and
  equal employment opportunities.

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Chapter 12, The business planning process, FIGURE
12.13, pg. 410
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Chapter 12, The business planning process, FIGURE
12.13, pg. 410
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Forecasting

• Total revenue, total cost
• Break-even analysis
• Cash flow projections

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Forecasting

• Means trying to predict what will happen in the
  future to facilitate forward planning. IN most
  cases it involves giving values or financial
  projections for sales, output, expenses, quantity
  and/or quality or resources, time, growth or
  market share.
• Forecasting tools include break-even analysis and
  cash flow projections

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TOTAL REVENUE, TOTAL COST

• Business needs an accurate estimate of what its
  total revenue and total costs will be in the
  operational period. This will provide them with
  a guide to what their expected profit levels will
  be. This will have a large bearing on the
  possibility of gaining further equity and debt
  funding to continue their growth in the future.
• Total revenue is the sum of all monies received
  by the business (From sales, fees and interest
  earned) For sales it is calculated as total
  revenue price per unit x number of units sold.
  Total cost includes all of the coast incurred in
  the operation of the business. This would
  include inventory, wages, utilities, freights,
  rent and interest paid on loans.
• Total revenue total cost profit

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BREAK-EVEN ANALYSIS

• Used to forecast how much of a product has to be
  produced and sold in order to cover costs.
• helps determine how much profit may be made at
  different levels of sales.
• WHY DO WE USE IT?
• AS IT..
• May show you that you wont make enough profit
  from a venture and would be better investing your
  money elsewhere
• Alternatively, it may show you that you need to
  borrow a large sum of money to set up the
  business and that it would therefore be
  unprofitable

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BREAK EVEN ANALYSIS

• It shows the relationship that exists between the
  REVENUE FROM SALES and all the COSTS OF PRODUCING
  GOODS and the level of resulting PROFIT or LOSS
• BREAK-EVEN POINT
• TOTAL REVENUE TOTAL COSTS
• Important to understand that a break-even
  analysis is based on assumptions.
• If one of the assumptions (often based on
  expectations of current prices projected into the
  future) is incorrect, then the whole analysis
  falls apart and needs to be redone.

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BREAK-EVEN ANALYSIS

• Can be done for a new business
• When you want to introduce an additional product
• Total costs variable fixed costs
• VARIABLE COSTS any costs that vary with the
  level of output e.g. Bakery the amount of eggs,
  sugar and flour will vary with the of loaves of
  bread baked
• FIXED COSTS do not vary with output e.g. Loan
  repayments, rent and lease payments. Baker still
  uses oven whether baking 200 or 2 loaves
• Any change in price, variable costs or fixed
  costs can be included in the calculation of the
  new break-even point.

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BREAK-EVEN ANALYSIS

• A firm wishes to sell lipsticks at 5 each.
  Management has completed a break-even analysis
  based on the following information
• Variable cost 2.50 per unit
• Fixed costs 500

B-E point (volume) Total fixed costs/ unit
price variable cost per unit
Sales volume (units) Total fixed costs () Total variable costs () Total costs () Total revenue () Profit/Loss ()
0 40 80 120 160 200 240 280 320 360 400 500 500 500 500 500 500 500 500 500 500 500 0 100 200 300 400 500 600 700 800 900 1000 500 600 700 800 900 1000 1100 1200 1300 1400 1500 0 200 400 600 800 1000 1200 1400 1600 1800 2000 -500 -400 -300 -200 -100 0 100 200 300 400 500
500/ 5-2.50 200 units to break even!
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How would we draw this?

• GIVE IT A GO DRAWING UP X AND Y AXIS (cost and
  revenue () and Sales volume (units))

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CASH FLOW PROJECTIONS

• Involve establishing future cash inflows and
  future cash outflows for the business.
• Forecasts need to be made to show how much money
  is needed by the business, when it will be needed
  and where it will come from.
• Should reflect time frames, such as weekly,
  monthly and quarterly or even yearly time periods

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CASH FLOW PROJECTIONS

• It is crucial that we use realistic sales and
  revenue figures, with reasonable projected growth
  rates and a fully researched target market
• Historical records of past performance will
  provide a guide for forecasting
• For a new business, forecasting is more difficult
  to do and carries a greater risk.
• Production figures need to be capable of meeting
  the sales and revenue figures established in the
  planning tools.
• IF it looks as though sales will exceed
  production then the analysis is flawed and needs
  to be redone

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MONITORING AND EVALUATIONS

• A written Business Plan will include a system of
  monitoring the firms progress on the strategic
  path set out in the plan
• MONITORING is the checking or continuous
  recording of the performance of the business
• The firm needs to evaluate its progress by
  comparing actual performance with planned
  performance and make judgements about its level
  of success
• Strategic planning establishes the strategic
  goals to be achieved
• Action planning lays out, in smaller steps, how
  these goals will be accomplished
• Action planning will specify who is responsible
  for a particular activity and when it needs to be
  done by monitoring will involve knowing what
  has been done and by who and when
• Without monitoring a firm will not be able to
  function properly as employees would go about
  things their own way, causing fragmentation in
  the organisation and making the management
  coordination impossible

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Chapter 12, The business planning process, FIGURE
12.19, pg. 417
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MONITORING AND EVALUATIONS SALES

• SALES REPORTS provide managers with statistical
  and financial information to allow them to
  monitor total sales (cash and credit sales),
  individual items sold and the productivity of
  sales representatives as well as online sales
  methods
• Planning will have been based on certain levels
  of anticipated sales so monitored results are
  regularly compared with the forecasted or
  budgeted figures
• This helps managers identify areas where sales
  may not be reaching expectations and provide
  managers with reasons for shortfalls
• Managers can then correct the process to
  eliminate problems
• E.g. Increase advertising, cut staffing etc

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MONITORING AND EVALUATIONS BUDGETS

• Budgets are usually included in strategic,
  tactical and operational plans.
• Budgets specify how the money will be allocated
  and could refer to staff, equipment or materials
• Many types of budgets
• OPERATING BUDGETS to forecast a firms
  activities throughout the year
• CAPITAL INVESTMENT BUDGET for the purchase and
  operation of a major asset, such as computer
  technology
• PROJECT BUDGET for the development of a new
  product
• CASH BUDGETS for cash flow and cost flow
  projections for a short period of time relating
  to payment of accounts and inflow of revenue
• SALES BUDGETS to give projections of expected
  sales revenue over a specific period of time
• MARKETING, OPERATIONS, HR and FINANCE budgets

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MONITORING AND EVALUATIONS PROFIT

• Profits are forecasted as a result of forecasted
  sales and costs.
• How do we assess profitability?
• GROSS PROFIT sales COGS
• NET PROFIT gross profit all other expenses
• ROE net profit/total equity x 100/1
• Businesses can put several control measures in
  place such as...

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Profit and control measures

• Minimising costs e.g. Outsourcing non-core
  functions to reduce costs
• Negotiating discounts with suppliers
• Rationalising suppliers (reducing the number of
  suppliers that they deal with in return for a
  better deal)
• Changing to a cheaper supplier
• Self-service by customers
• Sharing resources with other businesses
• Using JIT inventory control
• Shedding staff and processes that do not add
  value to the product
• Cost cutting measures effectively increase profit
  levels!

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TAKING CORRECTIVE ACTION

• Modification is the process of changing existing
  plans, using updated information to shape future
  plans.
• Changing the plan itself
• Providing staff with additional training
• Instigating a tighter credit policy to control
  the slow-paying credit accounts
• Finding other suppliers in response to
  inconsistent quality or availability of supply or
  a drop in the quality of stock or inputs
• Improving inventory control to eliminate old,
  damaged or expired stock
• Decreasing expenditure in response to going
  over budget

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Ethical issue

• Does the clear communication of business goals
  and increased emphasis on reporting and budgets
  present unfair pressure on managers and staff to
  constantly improve and achieve the right
  results?

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RECAP

• Forecasts are the businesss predictions
  about the future.
• Total revenue is the total amount received
  from the sales of goods or services.
• The total cost of producing a certain number
  of goods or services is the sum of the fixed and
  variable costs for those units.
• Break-even analysis determines the level of
  sales that need to be generated to cover total
  production costs.
• The cash flow projection shows the changes
  to the cash position brought about by the
  operating, investing and financial activities of
  the business.
• SME owners need to monitor and evaluate the
  businesss performance by asking themselves
• Is my business performing as planned?
• Has the performance of my business improved
  over time?
• How does the performance of my business
  compare to that of similar businesses?
• Budgeted sales should be compared against
  actual sales.
• The budget should regularly be compared with
  actual revenue and expense amounts to detect any
  discrepancies.
• When using indicators, the main types of
  analysis are
• comparing figures within one financial year
• comparing figures from different financial
  years.
• Profit levels are an indicator of a
  businesss performance and should be carefully
  monitored and evaluated.
• Modification is the process of changing
  existing plans, using updated information to
  shape future plans.