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Blog The importance of a business plan and how to create one – Part I

The importance of a business plan and how to create one – Part I

Without a comprehensive, up-to-date business plan and an implementation timetable, companies may be missing out on opportunities for growth and not realizing their full potential. A formal plan can be an extremely valuable tool for managing and growing a business, as it allows a company to recognize its strengths and weaknesses. Furthermore, research has shown that SMEs that have a business plan in place are consistently more profitable than those who do not have a business plan.  In this article, we will highlight the benefits of creating a business plan.

Introduction

Planning is the key to the success of any business, no matter its size or age, but nearly 30% of the UK’s small to medium-sized businesses don’t have a plan of any kind1

The majority of those without such a plan which sets out the company’s strategic direction, its main operating and financial targets, the actions it will take to achieve those objectives, the new initiatives and investments planned, and their impact on the company’s performance say they don’t believe it’s necessary. Nearly a fifth say they prefer to keep plans in their head, according to research by Close Brothers Asset Finance.

Mike Randall, CEO of Close Brothers Asset Finance, says, “It’s concerning that so many small and medium-sized firms do not have a business plan. Without clear direction, they may be missing out on opportunities for growth and not realizing their full potential.”2

He suggested that those who weren’t prioritizing it or “didn’t feel it was necessary” should rethink their approach.

“Planning is key to any business throughout its lifecycle. A formal plan can be an extremely valuable tool for managing and growing a business, as it allows a company to recognize its strengths and weaknesses.”

The study also asked those who did have a plan, how often they reviewed it. Almost two-fifths said they considered it at least once a year while a fifth said they looked over their plan every two years. Some 14% reassessed it once every two to five years. Randall said this was an area SMEs should be focusing on as “a plan is only useful if it is reviewed regularly to ensure it meets the current and future needs of the business.”

He added: “It’s vital business owners regularly review their financial strategy to ensure they have the right funding in place to meet the needs of their business, at its current stage of the business lifecycle.”

Rebecca McNeil, MD for Business Lending and Enterprise at Barclays, says, “A lack of a succession plan can put the future success of a business at risk, so this needs to be considered far earlier and more formally than the results show.

Having a business plan is fundamental, she says. “It defines exactly what you want to achieve, how you plan to achieve it across a set time period and is a sure-fire way to ensure that growth targets and plans are being met.

“Business plans are dynamic documents – meaning they should be revisited and adjusted as the business develops. In addition, a strong plan can help applications for finance from a business loan to alternative forms of finance and investment.”

She continued; “Importantly, when a business is in trouble, having a solid plan can help to steer it back to good health.”

SMEs that had a business plan in place last year was consistently more profitable (70%) than those that did not (52%), according to yet another survey, this one commissioned by business and finance software provider Exact.3

It showed that those who had a business plan in place were more than twice as successful in achieving these goals than those who did not (achieving a 69% success rate versus 31%).

Creating a well thought-through, comprehensive business plan is an arduous task. Thinking through objectives and likely outcomes which may occur many years down the line is, by nature, challenging. But it is the hard work up front which makes for lighter work down the road as all of our team of part-time CFOs will attest to.

Most CEOs and business owners simply don’t have the time to spend on quality strategic thinking or to document and communicate that thinking in a way which allows the whole business to buy into the vision.

Harder still is managing and implementing the business plan. Significant strategic course corrections are commonplace in fast-growing companies. These should be embraced. The tricky part though is in managing regular change. That requires a combination of time and specialist knowledge.

There is an art and science to effective business planning and getting it right brings a real sense of clarity and direction to business – this is where an experienced part-time CFO can make a significant contribution

Not spending quality time on strategic planning usually leads to a chaotic working environment. Our clients often talk about ‘not feeling in control’ and ‘not really knowing what is coming around the next corner’.

When the plan is weak, business owners tend to operate without the same sense of conviction as those who allocate time and expertise to the planning process.

Our part-time CFOs often find their clients have done some good planning and strategic thinking but need a devil’s advocate to ask the right questions and help to steer the ship in the right direction.

Being a CEO or business owner without a high level ‘finance person’ to bounce ideas off can be tough. CFOs often possess a different, albeit complementary, set of skills to CEOs/business owners.

It is natural for business owners to bring people into the company who see the world in the same way they do. It is often more valuable to have key members of your team who possess very different skills to your own. Constantly doing the same things in the same way as the same people will usually lead to achieving the same results.

If you are worried about whether you have the right team in place to fulfill the vision you have for your business, or whether you have the funds you require, or whether your business plan is sufficient to reach your objectives, then we would recommend you take the time out to work through the detail. It is rare to see a company succeed if it doesn’t have a robust plan.

Our part-time CFOs often work with clients who started off with intentions to run a business and have ended up working in a job. However, with the right business plan in place and a robust implementation approach, the business owner is able to run the business without getting drawn too far into the day-to-day details.

The benefits of creating a business plan and implementation timetable

Proper business planning is very liberating for the business owner, whatever their objective might be. A well-constructed and regularly reviewed business plan will instill real confidence that the goal is indeed achievable.

Writing a business plan has many benefits for businesses of any size and in any industry. It can help owners and senior managers to:

  1. Clarify objectives and develop suitable strategies. They can create a clear path for management to follow in the early stages and identify targets for performance measurement (or ‘milestones’), says David Cromwell, former head of JP Morgan & Co’s Private Equity and Venture Capital Division and co-director of Yale School of Management’s Entrepreneurial Business Planning Course. “Research forces companies to learn what they can expect to make and what the industry trends are. Where has the industry been the last five years, and where is it going? If the research indicates your idea is viable, the actual construction of your plan depends on the goods or services you offer, how much funding you need and your goals.”
  2. Understand the market. You have to research your market to understand it and that will always be beneficial. “Research is one of the big value-adds of writing a business plan,” says Joseph Ferriolo, Director of Wise Business Plans.5
  3. Identify and overcome internal and external threats Organize the company
  4. Organize the company
  5. Access external funding (banks, venture capitalists, and angel investors are unlikely to look at any funding request that isn’t accompanied by a very solid business plan.)

“A professional investor’s decision to pursue a proposed new opportunity will turn on the quality of the business plan and the accompanying materials,” says Cromwell.

“There is no chance whatsoever of raising the needed financing without a business plan. Even with a plan, the content and packaging must be excellent.

“The business plan is management’s first, best, and probably only chance to capture the attention of investors,” he adds. Investors need assurance that management has thought of its corporate goals, management team, products, strategies, competition, and the necessity of capital.

They also want to know that the management team has considered weaknesses as well as strengths, problems as well as opportunities.

“At JP Morgan & Co., we received over 4,000 business plans every year,” recalls Cromwell. “We invested only in about 1% of the incoming situations.” That ‘deal flow’ versus the rate of investment is typical for venture capital investors, he says.

“Venture investors think they are busy people. Instead of trying to find a reason to pursue a new investment opportunity, most VCs try to find a reason to kill it ASAP.”

There is no chance whatsoever of raising the needed financing without a business plan. Even with a plan, the content and packaging must be excellent.

Read our next article on the key elements of a business plan and to learn how part-time CFO can help you to create your business plan and implement it.

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1 ‘Worrying number of SMEs don’t have a business plan’, Business Matters magazine, www.bmmagazine.co.uk, May 1, 2015

2‘ Are business plans redundant? Nearly a third of British SMEs don’t use them’, Smith, Rebecca, Real Business, www.realbusiness.co.uk, May 1, 2015

3 ‘UK SMEs losing out on nearly 20% extra profit by not having business plan’, Exact, www.exact.com, Apr 10, 2014

4 ‘The Business Plan: Lecture 3:1’, Cromwell, David, David Cromwell’s and Maureen Burke’s Entrepreneurial Business Planning course, Yale School of Management

5 ‘How to Write a Business Plan: Outline, Format & Sections’, Arline, Katherine, Business News Daily www.businessnewsdaily.com, Feb 5, 2015

 

 

 

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