The Importance of Business Planning

While business plans are synonymous with start-ups, business planning is important for all businesses, regardless of their age or maturity. A business plan is essentially a future-oriented description of how you intend to trade as a commercially viable operation.

Given that the plan is essentially predictive in nature, it will need to contain a number of assumptions which the reader will need to accept as being plausible in the context of the opportunity being described. Once you are trading, it is a little easier to forecast data as you will have some historic facts upon which you can estimate with greater certainty. However, we all face uncertainty in our daily lives which is precisely the reason we need to embrace business planning.

The process of business planning is, in and of itself, a worthwhile pursuit as it forces the manager to remove themselves from the day-to-day tactical and responsive mode in which many managers operate. In particular, they must take into account the resources at the company’s disposal and plan to maximise the return on capital, with the resources at their disposal.

The following is a list (by no means exhaustive) of some examples as to why business planning is so important:

1. Ensure staff is focused on key activities
It is important that all employees are aligned and focused on achieving the same goals. Rather than spending time reacting to emails, phone calls and the like, a company needs to proactively focus on goals and the key tasks which contribute to the key aims of the company. By committing your thoughts to paper, you can understand your business better and also chart specific courses of action that need to be taken to improve your business. A plan can also detail alternative future scenarios and set specific objectives and goals along with the resources required to achieve these goals.

2. Manage cash flow
Alongside the risk of reduced sales numbers, credit management tends to be the next biggest issue during tough times; debtors take longer to pay, or worse, some debtors go out of business. If you have a high percentage of sales on credit you will need to reconsider the payment terms, ensure you invoice immediately and maintain contact with those who owe you money. There is no need to panic; it is simply opportune to revisit all elements of your credit control system, from invoicing, to bank overdraft facilities, to the debt collection process you have in place, to make sure that you are on top of your cash flow.

3. Manage performance
A business plan can also be used as a management tool to assess actual results against ‘planned results. The plan can assign milestones to specific individuals and ultimately help management to monitor progress. By committing the plan to paper, all other options are effectively marginalised and the company is aligned to focus on key activities, with individual responsibilities clearly outlined.

4. Manage exposure to external conditions
As a small open economy, we in Ireland need to ensure we maximise the market we can serve, and hence many businesses are reliant on overseas trade. Given our nearest neighbour, the UK, trades in a different currency, we need to build exchange rate fluctuations into our forecasts and we need to ensure any significant downside exposure is managed through appropriate financial products.

5. Manage vulnerabilities
The recent economic problems we have faced have been particularly painful in certain industries. All business is cyclical. Companies that had been planning their cash flow or sales forecasts were better placed to spot the market decline and would have been best placed to diversify or take more urgent remedial action than those who lack a plan and are essentially rudderless.

Friday 29th October 2010, 4:23 pm

By Alan Gleeson

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