Tag Archives: Business Planning

Why is a business plan necessary…?

Everyone who is in business (and most of those who aren’t) have heard of Business Plans.

To some people they are a mythical work of art, produced by the “elite” amongst businesses – a document they may aspire to have… but only if their business reaches the heady heights of “big” business.

Others may consider them an unnecessary exercise – produced only by people who “don’t really know their own business”.

To others they are an essential tool in the life and growth of their business.

And to most business people who don’t have one they are something they have thought about, considered completing, but never got round to doing.

A viable and current Business Plan is the most important document on which your company will spend time preparing.

Planning is key to a growing business – but a plan must not be set in stone, it must grow and develop with the business.

What is it that makes the Business Plan so important?

  • It helps you to keep focused
  • It focuses on your objectives
  • You can see when you’re going off track
  • You’ll need it if and when you need to arrange funding

So, what is a Business Plan?

A business plan is a written statement of your business. It is a plan of what you want to achieve and how you plan to go about doing it.

It should outline the structure of your business, the product or service, the customer, the growth potential, potential barriers to achieving your goals and how you will overcome them, and the financials.

However a good business plan is more than just information about your business…  It should inspire you, as the manager, and everyone else involved in the business.  This inspiration will form the foundation to the blueprint for your future.  It will give you, and everyone else in involved with your business, a clear understanding of how you intend to get there.

However, It is very important to remember that the world does not stand still and neither does business.  Business Plans must be “organic” and evolve over time.  You can’t control the future, and the outside circumstances, for example the economy or strikes, will have an effect on the shape and direction of your business. But a good business plan will give you a clear direction to aim for, and help you to plan for the unexpected..

Every business should have a plan whether it is to open a second shop or float on the stock exchange.

It is why you are in business. It helps you to define strategy and, if properly used, will help you involve and motivate key members of staff.

It allows you to work out how to make your business a success and can help you avoid failure by plotting the pitfalls along the way.  It should outline a realistic target for how that can happen while remaining flexible enough to make changes along the way. By setting out a plan and some targets, you can also monitor your progress and get the business back on track fairly quickly if anything goes wrong.

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The Bank Manager and I

Bank managers…  a business’ friend or a business’ nemesis?

Often banks, and, more particularly, their managers, are viewed with caution, or even fear. Bank managers are viewed by many business people with suspicion and a potential reason for business failure. But do they truly deserve the reputation?

One man I met as a potential client spoke with venom as he blamed his bank for the failure of his business. Despite my attempts at investigating the true reason for the struggling enterprise he would tell me no more than that the manager would not extend his overdraft so he could not buy food for his poultry.

A sad tale?  Or was it?

The attitude of this man was one of defensive attack when questioned about his problems. He was unable to recognise that he had a hand in his business’ demise, instead blaming the easiest person – his bank manager.

When the opportunity arose his wife informed me that the “businessman” would drive 70 miles to London to deliver a tray of strawberries or eggs to a customer if they ran out between their normal daily deliveries. Good for customer relations? Yes, but not when you do it three days a week! The result was that his profit was wiped out, but he didn’t realise it, and worse still he refused to accept it when his business’ problems were pointed out to him.

Why do people blame banks for their problems?

Often the first person to make a business realise that they have cash flow problems is the bank manager. Usually the manager will contact the businessman and explain the financial situation to him. Sometimes the businessman accepts the advice offered, sometimes they don’t.

Banks usually identify these problems before it is too late for the business to save the situation. It is at this stage that the business needs to act, with the help and advice of their bank.

Remember bank managers are human… Yes, human. They can and will help the business to identify the cash flow problem and potential routes forward. They will also help to identify the most appropriate sources of advice to help the business identify the most suitable course of action.

Businesses don’t fail because of their bank… but they may fail in-spite of their bank.

The moral is to talk to your bank and to work with them. Use the manager as a source of information and advice. Work with them and reap the benefit. Usually a business which works with it’s bank can and will survive. However, in situations where the business cannot be saved working with the bank instead of against it will help the businessman to preserve the maximum amount of assets that are left for the owner after the business is closed and all debts are paid off.

And what of the strawberry and egg man? I did not take him on as a client and he lost more money through his failure to accept facts. Fortunately for him and his family the banks refusal to extend his borrowing facility meant that he was left with some assets  –  had his bank continued to lend he would of lost everything.

Banks do not like to see businesses go under. Banks are only successful if those who bank with them are successful therefore they try to help businesses. Banks also have a duty of care

The Money-Go-Round

“My bank is bouncing cheques on me just when I’m making more profit than ever before. Why do banks do that?”

Does that ring bells with you? Too many of the businesses I work with say just that to me when I first see them.

The business does on the face of things look good. It is profitable and plenty of work is coming in. Nothing could possibly be wrong… could it? It’s just the bank being awkward… isn’t it?

Well, obviously something is wrong, but what?

Firstly lets get one possible cause out of the equation straight away. It is highly unlikely to be the bank. Why? Because, whether you like it or not, banks are NOT in the business of being awkward to their customers. Quite simply that would not be good business for them. They need their customers to succeed otherwise they (the bank) cannot and will not make money. Cheques will be bouncing because of an under lying problem in the business not the bank.

If it isn’t the banks fault what is the cause of this problem?

Ask yourself the following questions…

  • Do you always open your bank statements and check the payments and receipts that you think you made against the ones shown on the statement?
  • Do you offer credit terms? What are they? Who do you extend them to?
  • When do you send out your invoices?
  • How do you chase up late payers?
  • What are your credit terms?

All of the answers you make to these questions can have potentially damaging implication on the cause of a business’ problem at the bank. The all affect a business’ cash flow.

You need to be proactive in your approach to rectifying and issues that arise from your answers to these questions.

If you don’t open your bank statements, how can you identify a problem at that is on the horizon before it hits you like the intercity on its way to London? If you don’t have time to open them now, you will soon have plenty of time on your hands when your business closes!

If the figures in the statement don’t agree with what you think they should, why don’t they? Investigate!

If you offer your customers credit terms, ask yourself does YOUR business benefit from them or is it just your customer who benefits?

Do you send out your invoices regularly and check up to see that they are paid on time? Too busy? You soon won’t be!

Do you receive credit terms from your suppliers? Are the terms better or worse than the terms you offer your customers. If you are regularly paying out for goods and services before you are paid you are most surely heading for trouble?

You can have a profitable business, but have poor cash flow. The world has seen many profitable businesses come and go when, with care they would have thrived.

What is Profit?

Most owners of small businesses are not accountants, and, they do not need to be as it is more cost effective for them to employ a professional whilst they concentrate on what they are most skilled at – their every day work.

The accountant will, if required, carry out the entire accounting function – producing the maintaining the cash book, producing VAT and tax returns and producing management accounting figures, as well as producing the annual financial statements (the Trading, Profit and Loss Account and the Balance Sheet). Obviously it is cheaper for the business if they carry out the basic day to day book keeping themselves.

All too often the reader of the statement can be easily mistaken into thinking that if the figure at the end of the accounts is positive (a profit), it is “money in the bank”. This is not necessarily the case. It is possible to show a profit in a set of accounts whilst the amount of money in the bank has declined during the accounting period in question. Therefore, although, as I have said it is not necessary for the business owner to undertake these functions for themselves, it IS essential that the owner understands the information that is within these statements.

What are the main statements that the small business owner will encounter? They are the Profit and Loss Account and the Balance Sheet.

As an effective manager one must be able to utilize the information that these documents contain.

The balance sheet is essentially a snapshot of a business at a precise moment in time, showing the business’ actual value at that time. It lists the total value of the business’ assets against the total value of the business’ liabilities. To the business owner the most important part of the balance sheet is the figure at the bottom which shows the net assets of the business… or, to the business owner, the value of the business if it is sold at that moment in time – essentially this is the amount of cash that would belong to the owners of the business if all of the business’ liabilities were cleared. If the total liabilities exceeds the total value of the assets the business clearly owes more money than the whole business is worth if it were to be sold. At this time the business is insolvent and should not be trading.

When the Profit and Loss Account is considered, a business owner will easily recognise that if the expenditure of a business exceeds the income, then that business has made a loss, and visa versa. But, remember that this is not the actual amount of cash received by the business – this figure will be based on the value of sales and purchases made and will not take account of any monies owed either to the business or by the business (by debtors and to creditors). To get a true picture of the monies that the business has in the bank then the business owner must look at the cash flow (which we discussed a couple of issues ago).

Neither the Profit and Loss account or the Balance sheet are highly detailed documents. However, it is possible to extract useful information from them which will help the business owner to determine how well the business really is doing. For example, we can extract sufficient information from them to allow us to compare the performance of the monies invested in the business against investing the same amount of monies elsewhere, for example, in the bank. This is called the Return on capital employed and is calculated as follows:-

(Profit before tax and interest / Capital Employed)x 100 = Return on Capital Employed

This is a useful and quick way of determining the effectiveness of an investment in a business.

Useful definitions

Assets – The elements of the business which are owned by the business and worth money. For example Land, machinery, cash in the bank, debtors and goodwill.

Liabilities – What the business owes. For example mortgages, loans, and creditors.

What type of Business do You Run?

The question that must be asked of every business owner and manager is… What type of business do you run? Most of business people reading this will probably swiftly reply that they are in a specific industry or sector. Essentially you are right, that is the industry/sector that you operate in, but in more simple terms businesses (ALL businesses) can be split into four broad types: growing businesses, cash cow businesses, lifestyle businesses and failing or declining businesses. This can be applied to any business from a shoeshine business on the street corner to a software company.

A discussion that I have had on many occasions with business owners follows the basic pattern of… “it is a way of life not a business…” Whilst in many ways that is true, and can be for many businesses, to view your business as a way of life is potentially a huge barrier to progress and success.

A business can be a way of life, but turn this idea around and consider it from a different viewpoint – without the business there is no way of life!

The closest that you can get to my farmer clients’ view of a business being a way of life without running a very real risk of the business failing is to be a lifestyle business.

At this point some readers may be thinking that I have just contradicted myself but I have not. A lifestyle business is one where the owner/s consciously decide that they will run a business that can give them a desired standard of living and also be a business that they enjoy. This could be a business in almost any industry sector. Many people run “successful” life style businesses. But it should be remembered that often these “lifestylers” have had successful careers before entering the lifestyle business arena and are often financially secure before they start – a major benefit if they are competing against others who have not got that fortunate head
start.

If you are reading this, then it is likely that your business either is, or you should be aiming to be, in one of two categories – either a growing business or a cash cow business.

What, I can hear some of you saying, is a cash cow business? It is essentially a business which has an established product or service which it is selling into an established market with the minimum of effort. Coca Cola and Pepsi Cola could be considered to be this type of product.

Businesses that are in the position of having a cash cow are fortunate. Time will tell if your business will get to the same position.

Businesses in growth are often obvious, both to the owner/manager and also to the onlooker. The business is seen to be seeking out new work and/or continually busy. Often it will be employing additional staff – either on a permanent or temporary basis. The main problems that these businesses have is that of too rapid expansion or competition. In the case of competition, this can mainly be of three types – the well established, the business in growth stage or the business that is coasting (or in decline). A well-established competition can spell the end to a smaller business’ expansion plans unless the market place is also growing (look at the mobile phone market… still experiencing rapid growth with lots of businesses entering the market).

If the market is not growing and you want to grow your business you need to have a unique selling point (usp) – particularly if there is an established player in the market. More so if that player has a cash cow. At this point the manager of the growing business must ask themselves two very searching and serious questions – do they have that usp and can they afford the cost (both financial and emotional) of what may turn out to be a full blown battle with the established player? It is often the latter question which many over look – all too often to their detriment!

If the owner/manager doubts either that they have a usp or that they can afford the cost, then they should seriously look at their motives for entering the market and, most likely, look elsewhere to expand the business. A large and established competitor can and will eat them up and spit them out.

Rapid expansion can be good for the growing business, but only if it is strictly controlled and planned. Those businesses that grow fast and in an unplanned way are often inherently unstable at their core – they have an unsustainable level of business. Often in service orientated businesses (contracting for example) the initial level of business that is encountered is high and the manager wrongly over estimates the level of sustainable demand having wrongly interpreted the initial interest from customers and grown the business rapidly to match.

Care must be taken when you are interpreting the initial level of demand. Consider whether it is sustainable, and why it is at the level it is when you start your growth drive. Always look at the potential for growth conservatively. However, that does not mean that the level of demand that you encounter at first will always be inflated; sometimes it is the reverse – effective market will show where the trend is likely to be.

The final category is that of the failing or declining business. The two are similar, but not the same. However, both will result in the business closing.

A declining business is often one where the owner/manager is reaching the end of their working life or have lost interest in the business and are just letting it come naturally to an end; slowly, without deliberately shutting it down over night.

The failing business however is the on where the owner/manager has lost direction by taking their eye off the ball. This could be for a number of reasons, for example they may have little or no knowledge of the current changing market place. Alternatively they may have failed to react appropriately to changes in the market place and have therefore been overtaken by competitors.

People who consider their business to be “a way of life” often do not react to change. I have seen too many of these businesses who tell me that the way they do business is right “cos my grandfather did it this way and ‘is father afore ‘im” fail. Our forefathers wore skins and hunted with spears… but they evolved and welcomed change – if they hadn’t we would not be where we are today.

A successful business can become a way of life, but a way of life does not become a successful business.

Who needs a strategy?

“Strategies? Who needs ‘em?! When I started my business I didn’t need a strategy, I just did what I’m good at. I knew it would work! I’m a businessman, I don’t have time to write a strategy.”

All to often I hear retorts of this type. But can a business really survive without a strategy? Without a strategy where will your business go? Wouldn’t it bump from one idea to another, never achieving it’s full potential?

As I sit here typing, dog beside me, I am recovering from a week working with two very different organisations, neither of whom have effective strategies in place. One is a relatively small company of under 20 people, the other employs over 700. Neither really knows where to turn next. One knows what they want to achieve, but not how to get there efficiently. The other doesn’t even know where it is going!

The smaller of the organisations is typical of so many small and medium sized organisations. It was established by someone who has a passion for the area of business he is in. He truly sees it as his opportunity not just to make a living for himself, but also to make a positive contribution to his staff and, through his ethical beliefs, the community. However, the business does not know how achieve these aims and is in danger of going under if it does not change. This organisation has no strategy, but it’s leader has vision…

The larger organisation does not know what it wants to achieve, and, obviously has no idea how to get there (where ever there may be!). It does not have the benefit of a leader who has a vision.

What could a strategy add to either of these organisations?

Simple!  It would give them clear direction.  It would put down, on paper, the route that the organisation will tread and how it will get there. “What good is that”, I hear you say. I agree that most businesses (those that will survive) know what they want to achieve as an ultimate goal. But many do not know which path to take through the jungle of today’s world. It is all very well knowing that you want to be the best tree surgeon or the best widget manufacturer, but unless you know how you are going to achieve that goal you will flounder – and you will flounder fast.

Strategies do not have to be long tedious affairs. They must suit the organisation they are for. They need to be functional documents which you can pick up and refer to easily and quickly. They must be precise, setting out the aims and objectives of the organisation, and how these will be achieved. Clearly the more complex the organisation the more complex the strategy may be, but it should not be complex for the sake of being complex.

The problems that the small of the two organisation I referred to earlier would have been eased if it had had a strategy earlier in life.

This organisation is not currently making a profit. Why? In part this is due to the lack of pricing strategy (no price rises in over three years even though raw materials and fuel have increased considerable) – incredibly the lack of price change is partly due to the fact that a vast quantity of leaflets, with prices, were printed and “had” to be used up! Another reason that it has not made a profit in over three years is the unplanned, ad-hoc expansion – during which little or know thought has been given to the effect of such expansion on the rest of the organisation.

This is all due to the business bouncing from one point to another, following a no defiant route. Making decisions “on the hoof”. Changing direction to match today’s trend rather than following a long-term goal. A strategy would of helped the business stay on track. If the business had kept on one track and adjusted its prices to match the true cost of commodities and fuel, it may have been in profit. Having a strategy to refer to would of helped to ensure that they stayed on track.

The large organisation has money. It spends. It has goals. However it changes direction regularly. It is driven by a continual change in policy. It is reactive not proactive.

Organisations are driven forward and prosper under a good leader. Would you travel the length of Great Britain without a map? No. You may not get the map out of the glove compartment, but it is there for reference in case you come to a junction in the road. A strategy forms that map.

It makes the leaders of the organisation think about where they are going and how. Then, whilst on the journey it will identify the direction to turn at junctions in the road.

What are the two organisations mentioned? The smaller one is a land-based business founded on strong moralistic and ethical beliefs. With a strategy for development it is now looking at regulated expansion as and when it can afford to. It is looking at its product range and pricing. It will grow.

The large organisation? A public body. Where will it go? Where ever policy changes take it.

Get a strategy… Everyone needs a strategy. It is your map!