Every business should have a business plan no matter where the business is in its' business journey. It is just as important for an established business to have a business plan as it is for a new start up venture. A business plan should essentially include an outline of the goals of the business, a strategy to achieve the goals, credentials of key personnel along with projected financial information (projected Profit and Loss, Balance Sheet and Cash Flow).
Business Plans do not have to be set in stone. A good business plan can be amended as much or as little as necessary and goals can be re-set to reflect changing circumstances of the business or to reflect different business scenarios. A number of plans can be created to reflect 'what if?' or different scenarios. For example: 'What if the business adds another service or product line?' or 'What if the business takes on 10 new staff?' or 'What if prices are increased by 5%?'. The business plan will show the impact on profitability and cash flow under the different scenarios.
The financial information is based on a number of assumptions (best estimates based on known information/estimated information) and should include a forecast Profit and Loss account measuring the profitability of the business, a balance sheet measuring the net worth of the business along with a cash flow forecast. This information is vital for the smooth running any business. For example, a cash flow forecast is vital for seasonal or cyclical businesses. A cash flow will highlight peaks and troughs in the business cash flow and will identify when cash is most constrained. This will enable a business to plan in advance to cope with this and to arrange a short-term overdraft if necessary.
So why is it so important to have a Business Plan?
1) Goal setting
Every business should have clearly defined goals. We cannot measure success or failure without setting clearly defined goals; both financial and non-financial. We need our business to have direction and structure and to be able to monitor progress by comparing actual performance versus the business plan.
2) Start up finance
The majority of new businesses will require a capital injection of some kind to kick-start the business. A business plan is a pre-requisite for obtaining any kind of start up finance.
3) Setting price structure
A business plan should be the starting point for establishing price structure. It is vital to set a price structure which is competitive in the market and one that ensures that adequate profit is achieved. (Particularly relevant to businesses selling to consumers with the recent increase in VAT. Businesses on tight margins have not been able to absorb the VAT increase and have had to increase sales prices).
4) Break Even Point of Business
A business plan should reflect how much the business needs to turnover in order to cover fixed costs.This can be measured in headline financial terms, so £10,000 per month or in unit terms, so 20 IT consultations per month or 10 marketing packages per month. This information is vital and can be used to drive the business forward every month.
5) Measuring actual performance against a forecast
A business plan is the perfect tool to measure goals set against actual performance. Actual performance can be compared to the business plan at regular intervals (monthly, quarterly, six monthly) and shortfalls in profitability/turnover can be analysed and addressed earlier rather than later. Also, positive variances can be analysed (for example, income better than forecast, costs less than forecast) and improved upon where possible.
6) Platform for Expanding a Business
A business plan is vital for established businesses too. If an opportunity to expand the business occurs, for example, a joint venture proposal, receiving a large offer for new business, the plan can be updated to show the impact on profitability, margins and to indicate whether additional finance will be required. A business may fail due to 'over-trading' which is expanding too quickly and not having the necessary working capital in place to cope with growth.
To summarise, a good business plan will ground a business and help steer it through the ups and downs of its' business cycle. It can be used as a planning and decision making tool and can be revised to give clarity to the business at uncertain or difficult times. The initial investment in preparing a business plan will pay off in the long-term for the above six reasons.
If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.
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