Business Planning is synonymous with start-up’s, however its use is more prevalent amongst established companies than is typically understood.
Planning is about looking to the future and making decisions today based on your assessments of likely future events. It is also about trying to minimise risks by using information available today to help you make better decisions that affect your future. The following represent a list of some of the more typical areas that established firms utilise business planning in its various guises.
Managing Costs from Key Suppliers
If your firm is reliant on the supply of certain materials to deliver the final good or service, you can be vulnerable to price increases. The price of your final product will be based on certain input prices and if they increase, margins will be squeezed. Ryanair, the popular low cost European airline is particularly vulnerable to increases in the price of oil (as indeed are all airlines), as this is the largest input cost it has. Hence the airline has a team who are responsible for buying financial products such as futures to lock in supply at particular prices so they can plan with greater certainty.
Managing the Supply Chain
An over reliance on one supplier can lead to problems if there are supply shocks or disruptions to the delivery of your supply. Similarly from a negotiation stand point, it is easier to negotiate more favourable commercial terms if there are credible alternatives. Again looking at the airline industry, there are only 2 major suppliers of aircraft so companies with large fleets have stronger bargaining power if they keep their options open and are not locked into one provider.
Managing Cash Flow
Good Cash flow management is a vital process for any growing business. At the start up stage costs and expenses typically exceed sales for a number of months until break even is achieved. Hence companies need to ensure that they have sufficient credit in place to ensure that they do not become insolvent.
Similarly once the business is running, cash can be consumed by illiquid assets such as stock, and sales on credit can result in cash flow problems as expenses are typically paid before the cash from sales comes in. Business planning in general and cash flow forecasting in particular helps firm understand the impact sales on credit (and the average time taken to collect) can have on the businesses finances. Insolvency (or the inability to meet payments as they fall due) is a significant problem for companies who sell on credit and have a high cash burn rates/ illiquid assets.
For business plans to be effective they need to include SMART objectives (Specific Measured Achievable Realistic Time bound) and need to include milestones assigned to named individuals within the company. Once actual events occur and real figures are available, management can undertake variance analysis plotting actual figures against planned figures. Any variances between these figures can then be discussed in the context of causes and potential remedies so as to help ensure the company gets back on plan / track. Business planning is an ongoing process, where top line goals are set and named individuals are entrusted then with achieving same.
Managing Exposure to External Risks
In an increasingly globalised economy numerous external factors can impact on a firm’s performance. Effective business planning can help firms identify such risks and help firms put in place processes to minimise any negative effects. One such risk could be exchange rate movements. Many companies in the Eurozone who trade with British firms have suffered as a result of the recent decline in the euro/sterling rate. Companies can lock into FX rates in advance or take alternative steps to mitigate against negative risks by diversifying their customer base in non Eurozone countries.
Strategic Decision Making and Resource Allocation
All firms deploy resources in the pursuit of the company’s primary objective. How resources are allocated is an important strategic decision, as resources are typically allocated to maximise a company’s return. A business plan should ensure all resources are aligned in pursuit of such goals. If a company has numerous strategic options, a business plan can be used to ensure that the company pursues the strategy that is most likely to result in the greatest return. Deciding on the optimum strategy and ensured all staff are focused on its attainment also effectively relegates competing options.
Contingency planning and scenario analysis
In recent years we have seen the effects of a number of what Nicholas Taleb describes as ‘black swan events’ i.e. high impact catastrophes that seemingly had a low probability of occurrence before they actually occurred e.g. Swine Flu, 9/11 etc. As a result companies are increasingly undertaking ‘what if’ scenario analysis to ensure that their company can continue to function in the event of a serious disruption.
In summary, business planning takes many shapes and forms and the importance of planning should never be underestimated whether you are an established business or a brand new start-up.