Business Planning

Several economies now have a significant numbers of small or medium-sized enterprises (SMEs) with fewer than 250 employees (the definition of an SME may differ somewhat across countries). As well as providing a living for their owners, SMEs make a significant contribution to the economy generating significant employment and annual turnover in the private sector.

Strategic objectives and performance

The performance measures of a business should be designed to evaluate the extent to which the strategic objectives of the entity are being achieved.

The focus in the literature is on large companies where it is assumed that the maximisation of shareholders wealth (profit) is fundamental in satisfying their objectives.

The phrase ‘increasing shareholder value’ is often used in corporate reports.

Strategic objectives and stakeholders’ goals

Systems are designed to reflect the business’s strategy objectives, which are linked to various groups of stakeholders’ goals (Kaplan and Norton, 1996).

Stakeholder theory states that the objectives of creditors, customers, employees and society as a whole should be included.

The balanced scorecard and other performance measures capture the wider interests of stakeholders (Kaplan and Norton, 1992; Neely et al, 2002).

But stakeholder theory is not reflected in the main finance texts and the decision-making techniques they advocate (eg NPV and CAPM) or in the annual reports of PLCs.

Strategic objectives of SMEs

In SMEs, the focus is on the owners’ objectives:

• Many small businesses are the psychological extension of the owner-manager or entrepreneur
• So their personal motives and objectives will be crucial in assessing success or failure (Stokes and Wilson, 2010)

In micro-entities, the owner(s) is likely to be very influential in determining the strategic objectives of the business.

In terms of sustainability cash flow will always be an important the focus!

Preparing to write a business plan

A plan for a new business usually includes a statement of business’s goals, reasons they are attainable, and plans for reaching them.

Main points to cover:

• Type of business entity and the business idea
• Key people (owners/managers)
• Market and customers
• Industry and competition
• Business objectives and strategy
• The financial analysis is a major component

Reasons for Business Failure

Failure is often seen as the result of owners and managers not making plans or having very limited plans that do not capture important issues relating to the viability and sustainability of the business.

Business closures almost match the rate of business start-ups in most countries/

10% of business enterprises close each year and most are small or micro-entities. 66% of businesses close within the first five years (Stokes and Wilson, 2009)

Note the word ‘closure’ rather than ‘failure’.

Main reasons for closure:

• Sold 35%
• Not meeting the owners’ objectives 30%
• Financial failure 20%
• Technical closure (reopened in another form) 15%

(Stokes and Wilson, 2009)

Finance and the finance gap

Finance is:

‘The capital involved in a project, especially the capital needed to start a new business.

A loan of money for a particular purpose, especially by a financial house.’ (Law, 2010, p. 185)

The finance gap is the situation where a business has profitable opportunities, but is unable to raise the finance to exploit them (Jarvis and Schizas, 2012)

Typically a problem for SMEs, but it may not be the most important problem.

Importance of the finance gap

If a gap in funding exists it may seriously be a threat to sustainability and growth of small business entities.

Government intervention/initiatives.

Market intervention/initiatives.

Nature of equity and debt gaps.

Accounting for Profit and Cash: their importance

Cash: recognised when there is an inflow or outflow of ‘actual’ cash.

Profits: recognises when the businesses has made contractually a sale (but you may have not received the cash!) and recognises expenses (you might not have paid cash as yet!).

Both are critical to the sustainability of the business.

Numerous examples where a business may be making a profit but is unable to pay its bills and becomes insolvent.

Cash focuses on liquidity of the business.

Profit on performance – how well the business is doing.

Accruals accounting and cash accounting: an example

Purchase of a machine for £1,000 which is paid in cash immediately.

The machine has a life of 2 years

In terms of Accruals Accounting for establishing Profit and Losses the concept of depreciation is introduced.

£500 is charged to against income for both years (although the cash is paid out immediately).

Thus the revenue generated from using the machine over two years is matched by the cost of using the machine to generate the revenue.

Information about cash is very important.

Imagine that you have £200 that you use to buy a computer from another student. You advertise it in the newspaper, which costs £10 cash. You sell it for £300, but the buyer can’t pay you straight away, so you give him one month’s credit. You have no other business transactions.

What is the cash position of your business at the end of the month? What is the profit for the month?

Think of situations when a sale or an expense does not result in an immediate receipt or payment of cash ?

Cash Flow Forecasts

A cash flow forecast is similar to a cash flow statement, but instead of showing the actual movements of cash over the period, it shows forecast or budgeted figures.

Cash inflows expected from capital, loans and revenue.

Cash outflows expected on purchases of inventory and other expenditure.

Timing of the cash flows (important because transactions can be for immediate cash or on credit).

Purpose of a cash flow forecast or budget

At the start-up stage, a cash flow forecast can be used to plan the amount of capital required.

Once the business has started cash flow forecast/budget helps management:

Plan the investment of cash if there is likely to be a cash surplus.

Anticipate the need for additional finance if there is likely to be a cash deficit.

Monitor actual cash flows against the forecast/budget, investigate reasons for any significant adverse variances and take remedial action to ensure the business meets its financial objectives.

Business Plan for Start Ups (from a financial perspective)

Start up: Financial Analysis Stage (1)

Funding requirements:

• start up capital
• working capital
• asset capital
• timing of cash flows
• risk and reward: risk / return trade off
• security offered

Start up: Financial Analysis Stage (2)

Cash flow:

• six month forecast
• receipts
• payments
• balances over time / identification of surplus and deficits

Forecast profit or loss for a year:

• Balance Sheet: uses of funds, sources of funds
• Ratio analysis
• Sensitivity Analysis

Funding Sources

Where are to raise the capital to start the business?

• Own savings
• FFF (Friends, Family and Fools)
• Banks
• Business Angels
• Venture Capital
• Partnerships
• Issuing Shares to Employees
• Leasing and hire purchase
• Alternative sources of finance e.g. crowd funding

Debt finance: Overdraft, loans and mortgages, Trade credit, Debentures (companies only)

Asset-based finance: Hire purchase (rental & purchase agreement), Leasing (rental agreement), Invoice finance (raised against receivables)

Equity: Ordinary share capital/ Owners funds, Corporate venture capital, Venture capital from business angels

Alternative finance: The model

A high proportion of models operate solely via websites designed to meet customers’ needs.

Example: Peer-to-peer (P2P) lending.

• Customers interested in a loan complete application form
• Using online data and technology, the platform quickly assesses risk, determines credit rating and assigns an interest rate
• Successful applicants receive offers in minutes and can evaluate loan options
• Individual or institutional lenders select applicants to whom they wish to lend, and earn monthly returns

Other Financial Considerations

Other financial considerations in preparing a Business Plan.

Reasons for holding Cash

• The transaction motive: being able to meet payments when they fall due
• The precautionary motive: to meet unexpected outgoings
• Speculative motive : cash should be kept to take advantage of any unexpected beneficial opportunities.

Variable and fixed costs

Variable costs: are the same per unit of activity and therefore total value variable costs will increase and decrease in direct proportion to the increase and decrease in the activity level. The activity will depend upon what is to be measured.

Fixed costs: A cost is fixed if it does not change in response to changes in the level of activity.

Break even analysis:

BEP = Fixed Costs / Contribution per unit.

Structure of the Business Plan

A detailed business plan is an essential element in the implementation of a business idea. The plan must consider company resources, identify specific markets, and establish specific plans for dealing with marketing, legal, manufacturing, personnel, and financial elements. Finally, it must include a schedule for implementing the plan.

I. Executive summary

• A. Key elements of the plan
• B. Description of business and target markets
• C. Brief description of management team
• D. Summary of financial projections

II. Business history

• A. History of company
• B. Products-services offered and their unique advantages
• C. Domestic-market experience
• D. Foreign-market experience
• E. Production facilities
• F. Personnel-international experience and expertise
• G. Industry structure, competition

III. Market Research

• A. Target countries
  1. Primary
  2. Secondary
  3. Tertiary
• B. Market conditions in target countries
  1. Existing demand
  2. Competition
  3. Strengths and weaknesses of the economy-barriers to entry, etc.

IV. Marketing decisions

• A. Distribution strategies
  1. Indirect exporting
  2. Direct exporting
  3. Documentation
  4. Direct investment, strategic alliances
• B. Pricing strategy
• C. Promotion strategy
• D. Product strategy

V. Legal decisions

• A. Agent/distributor agreements
• B. Patent, trademark, copyright protection
• C. Export/import regulations
• D. ISO 9000
• E. Dispute resolution

VI. Manufacturing and operations

• A. Location of production facilities for exports
• B. Capacity of existing facilities
• C. Plans for expansion
• D. Product modification necessary to adapt to local environment

VII. Personnel strategies

• A. Personnel needed to manage exports
• B. Experience and expertise of existing personnel
• C. Training needs of existing personnel
• D. Hiring needs in the short term and long term

VIII. Financial decisions

• A. Pro forma financial statements and projected cash flows assuming export activity
• B. Identification of key assumptions
• C. Current sources of funding-private and bank funding
• D. Financial needs and future sources of funding
• E. Tax consequences of export activity
• F. Potential risk and sources of protection

IX. Implementation schedule