Business Planning
Business Planning is about how to plan, approach and deliver a business case for your project
Business Planning
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Planning your business is more than creating a capital budget, profit and loss statement and crafting a story around them. Business planning is the critical analysis of your business idea and how it relates to the capital project. The key parts of business planning include construction of a working capital budget, sensitivity analysis, data to support your business, and the integration of these with your overall mission, vision and resources.
Working Capital Budget.
The most overlooked part of planning. Working capital is defined as the cash on hand to conduct business before a profit is realised. Most businesses forgo this planning because they feel it identifies a weakness in the plan. On the contrary, good cashflow (working capital) design and management often allows a business to thrive while others fail. To create this budget, your plan must identify the cash movements over the capital build period, the transition period (the set up of the building), and during the first 2 years of operations where many unknown expenditures are likely to occur. Understanding the cashflow is understanding the business.
Sensitivity Analysis
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Good business planning involves scenarios. This is different than plotting different plans or objectives. Sensitivity analysis is the plotting of one plan and the affects on that plan in good times and bad. Typical sensitivity analysis on the profit and loss and cashflows involves plotting a variance on the business (usually on revenues/Income) of +/- 25%. This will allow you to (1) spot problem areas of your business, (2) develop a more robust business model, and (3) create a competent working capital budget.
DATA, DATA, DATA.
The importance of data cannot be understated. The data in the business planning process and report should include both macro and micro economic influences. The data, if possible, should cover a period of at least 5 years prior and be derived from both anecdotal and research resources. Importantly, the data must relate to your story. Avoid using encyclopaedic facts to fill the pages with irrelevant macro level data (i.e. the population is 250,000).
Integration of Resources and Vision
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Business planning should involve a double check on the capital build. Your business planning should investigate and ultimately clearly demonstrate the positive relationship, in economic terms, between your social business and the capital project. Will the capital project allow you to offer new services, improved services with higher margin, or expansion of services to increase revenue? Answering these types of questions will focus your efforts on the meaningful integration of the business planning process and your social business.
Understanding the Approach
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The approach to your business plan is as important as the construction of the plan. The following are the key tenets of your approach:
- This is an investment. Whether you are receiving all grant or 100% finance, you must always approach the business planning process from an investor’s viewpoint. The primary tenet of this perspective is the creation of monetary and social value. How does your project achieve these?
- Who is the Audience? Determining exactly who the audience is will determine the kind of business plan you produce. Are you trying to convince a national grant organisation or a high street bank to support your project. Each requires a different approach. It is not possible to use one plan to varied audiences.
- What is the Return? Build your plan with a clear idea of what you expect to return to your investor in both monetary and social return.
- Eliminate the fluff. Remove all aspects of the plan that do not add value to your business case. Nice but irrelevant stories and extra data will only confuse your team and the investors to your project.
Creating a Successful Plan.
The final business plan or more aptly named business case will determine if you are successful in both raising the funding and financing and in implementation. The key tenets of the business case include:
- Clarity. Give the business plan to a friend or colleague who does not work in the 3rd sector; do they understand what you are asking for and why?
- Brevity. The first draft of your business case should be 1 page. If you cannot state your case in 1 page, you do not sufficiently understand your plan. The final draft should not exceed 20 pages in the main section and will be more effective if you can cover your case in 10 pages (including the executive summary). It is recommended that you place the reams of data and support documentation into the appendix where your audience can view as needed. It is your job to extract the relevant and correlated data into the main business case.
- Story. The business case must tell one story with several devices:
- Personal Experiences. Include real customer/client experience(s) to move the business case beyond numbers, drawing the reader into the plan.
- Format. Use formatting to tell your overall story. This includes the provision of extra white space on the page, pictures interlaced with text, and a magazine style layout. Layout is critical to both the perceived competence of your plan and the readability.
- Data. Data in itself is somewhat benign. You should use 3 dimensional data sets where possible (correlating at least 3 sets of data on a chart or graph) and the data should appear in several formats throughout the business case (charts, text, pictures).
- Construction :The business plan should cover 5 areas. These areas are:
- People. Who is implementing the plan and what is their background?
- Market. Who is the client and what is the need?
- Product / Service. What is the business model and how is it delivered?
- Finance. How does your plan work financially?
- Social Benefit. What social benefit will your plan produce?
- Exit. How will the investor exit? (Applicable for standard investment plans, but worth understanding how you intend to delivery value beyond paying the investor back.)
Business planning must be about clearly identifying and then telling your story. This can be an incredible process of discovery. But, as you are business planning, try to avoid the following pitfalls:
- Propagation of a bad business model. Don’t force the plan if it does not work. Stop and rethink the basic premise of the plan. Gathering data around a flawed model is only fooling yourself.
- Limited or No working capital. Ensure the working capital budget is robust enough to solve most of the unknowns. If it is not possible to include working capital for a funder, explore other ways in which the cash may be attracted.
- Profit and loss planning. The first thing every business must realise is that cash is king! Proper cashflow planning will go a long way towards keeping you in business.
- Scenario planning without sensitivity. Many organisations develop three scenarios and mistake this for sensitivity analysis. It is only sensitivity analysis if each scenario has the same baseline assumptions for costs and structure, but illuminates the effect on the business of varying revenue streams. (More advanced sensitivity analysis may also show the effect of variable cost streams.)
- Bad formatting. Who wants to read a boring or a poorly constructed plan.
- Not understanding you audience. Many plans are put together as if the audience is the company constructing the plan. These plans are missing critical data and forget to explain the value created by investing in them.
- Lack of Clarity. Both in story and data, poor business planning usually abstains from editing. Editing the story and the data is critical to building a plan that converts investors and supports your management team.
A few examples of how business planning can have positive and negative effects on your project.
Case 1
A start-up social business builds a business plan using the standard business plan templates. This leads to the creation of 76 page business case. All the data is there for the reader and a story is told around the benefit of the capital project. However, the plan is rejected by funders and financiers across the board. The reason: lack of clarity. For the grant funder the plan highlights data sets that diminish the case. For the private bank, the plan does not demonstrate a clear focus and appears to tackle every social problem imaginable.
What’s wrong?
This social business forgot the editor and the differences in audience in its business planning process. The start-up corrected the problems by
- editing the plan down to 15 pages
- moving the bulk of the data to the appendices,
- creating two plans (funders v financiers) that included different value creation (social v financial),
- the formatting of the plan was altered to make it more attractive and readable.
Case 2
A medium sized social business conducts a business planning process and creates a plan for a capital project. The plan is brief and includes important data. The plan is written perfectly and is formatted well. The business plan is rejected by every funder and financier approached.
What’s wrong?
The plan is built on a shaky business model and it is not clear how embarking on a capital build project will do little more than provide a fancy space in which the business will operate. Many organisations need better space provision, but funders and financiers do not want to invest in these organisations to create the new space. Why? Because the organisations in the poor provision are not likely to be the appropriate people to undertake the capital build project. If this is your situation, find a builder or developer; present them with a long-term lease offer from your organisation. Your offer to lease is usually the missing piece for a developer. With this lease, it is likely the developer can raise the investment and build or refurbish your premises with little or no risk to your organisation.
“How to Write A Great Business Plan”, by Sahlman, Harvard Business Review, 1997.
“How to Write a Winning Business Plan”, by Rich & Gumpert, Harvard Business Review, 1985.
http://www.guykawasaki.com/ (testing your idea and the message)
“Tribes” by Seth Godin, 2008. (understanding your market)