Business Planning

For startups, a well-written business planning document is important to source capital from banks and venture capitalists. A business plan also provides a clear direction for business growth. But how else does planning affect businesses? What does a good business plan contain? Let's look at the answers.

Business planning definition

To understand why business planning is important for businesses, Let's first define the term.

Business planning usually involves the key stakeholders collating ideas into a formally written document which summarises the current state of the business, the state of the business market, and steps to improve business performance. This document is called a business plan.

A good business plan helps a business focus on its short-term and long-term goals. It also helps business owners focus on the specified steps in place to help the business succeed.

Importance of a good business plan

A good business plan can help a company:

• track its growth and stay in line with its stated business objectives. If something is going off track, the managers can review the business plan and steer things back in the right direction.

• notify investors how the business is operated and if it is worth investing in. A good business plan attracts investors and sells them the idea of your business.

• provide a unified working structure among employees and business owners. It keeps employees and business owners on the same page about strategic actions needed to be taken.

• help startups attract investment or get loans without a proven financial record.

Elements of a good business plan

During the business planning process, there are some crucial business planning elements that need to be considered. These include:

1. Executive summary

This business planning element provides a brief description of the business. It gives information on the business leadership, its employees, operations, and location. It also provides the business mission statement, goals, and vision.

2. Products and services offered

This element provides a description of the products and services offered by a business. It includes production information, information on patents (if available), research and development, product or services pricing, and consumer benefits.

3. Market analysis

Good business planning requires a well-written market analysis showing demand and supply. A SWOT analysis provides detailed information on business strengths and weaknesses along with details on the business competitor and market opportunities available.

An example of a good business plan market analysis is presented in a SWOT analysis carried out by a local shirt production company called 69 Shirts (a fictional company).

Table 1. SWOT analysis example, StudySmarter

4. Marketing strategy

This element provides information on how the business intends to distribute its products and services, for example, what marketing strategies and channels they will use. Fundamentally, it shows how a business intends to build and keep its audience.

Again, let's take the example of 69 Shirts. Here's a possible marketing strategy:

• Using social media marketing and influencer marketing - the business aims to reach the audience by telling the story behind the products and how they can help the customers. The company also focuses on price, product distinction, product promotion, and customers’ feelings.
• Running a guerrilla marketing campaign in train stations and on public transport - this is done with the aim of letting people know as much as possible about the products and how beneficial and memorable it will be for them to own the product.

5. Financial plans

Here, the business projections and estimates are included for startups, and for an established business, balance sheets, financial statements, and important financial information should be added. This attracts investors, banks, and venture capitalists.

6. Budget

A good business plan always includes a business budget. The planning process is never complete without budget planning. A business budget includes costs of paying staff, production processes, marketing, expanding, logistics, development, research, and all other business-related expenses.

Plan length varies, as does the type of plan, but a document usually ranges from 15 to 20 pages.

Basic financial terms

During the planning stage, business owners must know some basic financial terms:

Profits

Profit refers to the financial benefits realized in a business activity, where the revenue generated exceedsw expenses, costs, and taxes involved in sustaining the activity. In general, Profit is calculated as the Generated Revenues minus Total costs:

Profit = Generated Revenues - Total Costs

Loss

Loss is the direct opposite of profit. It occurs when the revenue generated from a business activity doesn’t cover the expenses incurred during the operations of that year.

Revenue

The term refers to the income generated by businesses from their business activities. It is calculated as:

Revenue = Product price x Number of units sold

Costs

This refers to the finance needed to effectively run a business activity. It includes variable costs and fixed costs.

Variable costs

This term refers to any business-incurred cost that depends on the number of goods or services produced. Variable costs either increase as production increases or decrease as production decreases. Examples of variable costs include labour, production materials, and utility expenses.

Variable cost = Output x Variable cost per unit output

Fixed costs

Unlike variable costs, fixed costs remain constant regardless of business production. This means that fixed costs do not change with changes in production. Examples include rents, property tax, insurance, and interest payments.

Total cost

Total cost is the sum of all costs involved in running a business or producing a product or service.

Total cost = Total variable costs + Total fixed cost

Figure 2. Total costs

In conclusion, creating a business plan provides a roadmap to launch your business and reach the specific objectives intended during startup. A good business plan provides business owners with accountability and keeps the different teams in the business working in tandem in order to achieve the business vision.

Sources:

1. Blooming boutique, bloomingboutique.com, 2022.

2. Jared Lindzon, The importance of a business plan, waveapps.com, 2022.

3. Susan Ward, What is business planning, thebalancesmb.com, 2020.

4. Staff, Business plan basic elements, bizally.com.au, 2022.

5. Rich Longo, Why you need a business plan, sbdc.duq.edu, 2019.

6. Staff, Effective business plan, lancasters.uk.net, 2022.