Why businesses plan

If you were starting a business tomorrow, would you spend weeks writing a plan first, or just start? Doing one properly can take weeks of evenings: research, forecasts and spreadsheets. Some people who built successful businesses say they never wrote one. Others say theirs saved them. Both groups have a point, so when are the weeks well spent? The answer depends on what those weeks buy you.

Business planning means deciding in advance what a business will do and how. A business plan is the written result: a document setting out the business's aims, how it will reach them, and the forecasts behind it. You will never be asked to write one in the exam. You will be asked why businesses write them, and whether a particular business should. Some reasons are about money. A plan helps a business raise finance, because a bank, or investors buying a share of the business, will want to see how their money will be used and paid back. Some reasons are about thinking it through. Planning helps set up a new business, set its objectives and organise its functions, such as marketing and finance. It identifies the market and the resources needed, which reduces risk and helps the business succeed. And some are about running the business once it opens. The plan becomes a management tool: the owners check what actually happens against it, and keep spending in check. It helps with decisions, and it shows the vision of where the business is heading. Now a quick one. A cafe that has traded for twenty years wants a loan to open a second branch. Does it still have a reason to plan? Yes. The bank will want a plan for the new branch, so established businesses plan too. Expanding, opening a new site, launching a product or borrowing all give the same reasons a start-up has. Take a nursery that is just starting. Pebble and Pine is a new outdoor nursery for children aged two to four. The owners want a forty thousand pound bank loan to build a heated cabin, and they hope to fill thirty places at fifty-five pounds a day. A question asks for two reasons why Pebble and Pine would write a business plan, each explained. Two students each give their pair of reasons. A: to get a loan, and to show the bank. B: to get a loan, and to check enough families will pay fifty-five pounds a day. Which pair is better, and why? Pair B. Getting a loan and showing the bank are the same reason in two coats. B's second reason, reducing risk, is a different job the plan does. So explain each one. First, to obtain finance. The bank will want to see how the forty thousand pounds will be spent and how it will be repaid, before it lends. The plan's forecast of fees shows where repayments come from. Thirty places at fifty-five pounds a day is one thousand six hundred and fifty pounds of fees on a full day. Now the second reason is yours to explain. If the plan checks that families will pay fifty-five pounds a day, what does that let the owners do before they build? Planning makes the owners check whether enough families nearby will pay fifty-five pounds a day, before they spend money on the cabin. Which means they can change the price or the number of places before it is too late. One examiner's report says some students lost marks when they failed to explain the reason and just described what it was. The habit that fixes it: after each reason, say which means, and what it does for this business. Another examiner's report notes reducing risk as by far the most common correct answer on one question about plans. If that reason is already yours, spend your care on making the second one different.

Planning has benefits, and each one runs as a chain. A plan with forecasts makes a lender more likely to say yes, which means the business has the money to open. Writing it forces the owner to think through costs and customers, which means problems show up on paper, before they cost real money. And the plan gives targets to check against, so spending is kept under control. Now the other side. What could make all that planning a waste of effort? It takes time, and it can cost money if an adviser is paid to help. The forecasts are estimates, so they can turn out wrong, and the plan can go out of date as things change. A neat plan can also give false confidence. Problems in producing a plan are a separate list. They are what gets in the way while you write it. A new business has little reliable information and no trading history to base forecasts on. The owner may lack the skills to produce forecasts, and it all takes time. Here is one in a case. Jade is about to open a phone-repair kiosk in a shopping centre, and she has never run a business before. Jade has no trading history, so she has no past sales figures to base her forecasts on. She has to guess how many repairs she will do each week. Which means her revenue and cash-flow forecasts could be far too high or too low, and the plan may mislead the lender and Jade herself. Now a different answer to the same question about Jade. A student writes: her plan might have mistakes in the financial section. Why is that the wrong kind of answer to a question about producing the plan? Because it describes a fault in a finished plan. The question asks for a problem Jade meets while she is producing it. One examiner's report says many students, instead of focusing on a problem when producing a business plan, gave examples of what could be wrong within the plan, such as not having accurate financial information to show the bank. The way to stay on the right side is to start from the moment of writing: what does this owner not have, or not know, yet?

The last skill is a judgement: should this business write a plan? Hollin Farm Shop has traded profitably for nine years. The owners want to open a cafe in the old barn, which needs a sixty thousand pound loan. One owner says: we know this business, so we don't need a new plan. Should Hollin Farm Shop write a new plan for the cafe? Decide, and name the fact that decides it. Have a go at this one before I show you. A strong answer opens with one line on what a plan is: a document setting out what the cafe will do, and the forecasts behind it. Then both sides. Against writing one: the owners have nine years of experience and know their customers, and writing a plan takes time they could spend getting the cafe ready. For writing one: the cafe is a new activity with new costs, such as staff, kitchen equipment and food safety, which their shop experience does not cover. And the bank will want a plan before it lends sixty thousand pounds. The judgement: Hollin Farm Shop should write a new plan, because it needs the sixty thousand pound loan. The bank is unlikely to lend without forecasts for the cafe itself. Nine years of shop sales show the owners can run a business, but not that a cafe in the barn will make money. If they could fund the cafe from their own savings, a short plan would be enough. One examiner's report says some students made no attempt at justifying their decision, simply ending with a phrase like therefore Sam should, or should not, write a new business plan. It calls this not good examination technique. So end with because, and the one fact from the case that tips it.

Now test yourself on the whole video, starting with the basics.

What is a business plan?

A written document setting out what a business will do, how it will do it, and the forecasts behind it.

Now the reasons. What are two distinct reasons for writing one?

For example, to obtain finance from a bank or investors, and to reduce risk by checking the idea first.

Now a new person. Tom has never run a business and is writing a plan for a coffee cart. What is one problem he faces while producing it?

He has no trading history to base his forecasts on, so he has to guess his sales.

Now the downside. What is one drawback of planning?

Forecasts are estimates and can be wrong. It also takes time, and the plan can go out of date.

Another case, for a judgement. A student sells bracelets online, funded with fifty pounds of her own money. Does she need a full plan?

Probably not a full one, because she needs no lender, the risk is small and she can test the idea quickly. A short plan would still help her.

So, back to the choice: spend the weeks, or just start. Spend them when you need a lender's money, when the risk is high, or when there are many moving parts, as with Hollin's cafe. For a small, cheap idea you can test quickly, a short plan may be enough. And any plan is only as good as its forecasts.

If you could judge Hollin's plan question on your own now, thumbs up, and there's no need to see this twice. If not, leave it, and come back to it later in the week.

Next in the chapter is What goes in a business plan. Hopefully that's next in your feed, but if not, search for ScholaFly B U oh three, oh six.

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