Business planning for small business

One of the most important pieces of advice that a business mentor will give you is the necessity for business planning.

A business mentor will also tell you that, as with all fashionable buzzwords, there is much nonsense talked about the subject of business plans and models. And your business mentor should clarify what the associated terms mean or do not mean.

First, you should understand what planning is not. Planning is not budgeting, and you do not achieve a plan by merely extending figures over a number of years. Budgeting is an invaluable short term management and control tool for a limited future period – normally the following year.

Planning is the process of forecasting what would happen over the next few years.  The “normal” planning period is five years, which is a time span associated with many cyclical activities, such as elections.

But why would you want to try looking into the future when it seems akin to crystal ball gazing?  Many major decisions, such as capital investment or new product launches, have a long-range impact and the least you can do is to examine how these will affect your business. Unlike budgeting, this cannot be achieved by a mere straight line extension of past figures because you will require a number of “what- if” scenarios…

A business plan normally has three elements, objective, strategy and conduct.

A business objective defines what you’re trying to achieve and is normally expressed, in terms of value creation.  These measures would typically be return on capital employed (ROCE) and return on equity. Ideally, your business objective should be a single measure so as to provide focus.

Strategy is one of the most misused and misunderstood terms in management jargon. If objective defines what you want to do, strategy defines how you’re going to do it. It is evident that a strategy cannot exist in limbo and is meaningless without a well-defined objective.

So much for all that loose talk about strategy on its own.

Business conduct is not well understood and much writing on business planning makes no reference to it. I dislike the term business ethics since this seems to imply some lofty standard of behaviour.

In real life, businesses can and do behave just like people. They can be intelligent, stupid, and so on. And it is surprising how a collection of otherwise sensible people can behave when organised collectively as a business. The importance of the people factor lies simply in the fact that they are the ones that will implement the plan. Any plan that does not take business conduct into account is guaranteed to fail.

In the process of business planning, you need an overall objective view of your business and you should certainly use the skills of your business mentor.