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Planning a Business

The need for business planning

• Business owners need a "map" or a vision of where they want their business to go and how they intend to get there, a process to measure the progress of the business, and some ideas on how to adjust their business as unforeseen opportunities and problems arise.

Business Plan Samples compiled by About.com.

Benefits of business planning

• Planning enhances communication among the business owners.  Through business planning, the owners gain a better understanding of each other's vision; what they agree upon and on what points they differ.  They are prepared to explain their vision to others, such as investors, lenders, and key business suppliers and customers.
• Planning clarifies what the owners want to accomplish, and produces a vision for how the business will achieve these objectives. Effective planning provides the owners a better understanding of their business.
• This vision also provides criteria for making decisions; that is, the group will be better prepared to assess alternatives and identify the alternative that will allow the business owners to reach their goals quickly and efficiently.
• Planning saves time by preventing the owners from having to totally reassess their objectives every time a decision must be made.  Planning helps maintain the owners' focus on the overall purpose of business.

Process of business planning

• Business planning is a continuous process; the objective of planning is not to develop a "fixed plan;" instead, the process facilitates ongoing planning even as the business is operating, and as opportunities and challenges arise.
• Planning involves several steps.  The order in which the steps are completed can and will vary; however, each step needs to be completed.
  • For example, business planning includes 1) develping an inventory of the business, 2) assessing the interest, skills and experiences of the business owners, 3) analyzing the business environment, 4) assessing the business' current progress, 5) setting goals, 6) identifying and assessing alternative strategies and selecting a strategy that will fufill the busines goals, 7) devising a plan to implement the strategy, 8) establishing benchmarks by which to measure the business' progress in achieving its goals, 9) identifying risks and planning responses to uncertain events, and 10) documenting the business owners' thoughts and sharing appropriate portions of the plan with others, such as lenders and investors.
  • Business Plans Planning Guide Royal Bank of Canada

• The process is probably more important than the document because the process requires ongoing communication, discussions and refinements, even as the vision is being implemented.

• The process involves identifying appropriate questions and developing answers to those questions. 

  • These materials will suggest questions, but will not answer them.  Only the business owners can answer the questions, make the necessary decsions and develop the busines plan, even though they will likely rely on others for information and suggestions.

• Even though there are several questions to address as part of the planning process, owners needs to think about their business, and identify and answer questions that pertain to their situation.

  • During the planning process, the owners will likely need to pose additional relevant questions.  Likewise, some questions suggested in these materials will not pertain to every business discussion; those questions can be disregarded.

• An important question to consider early in the planning process is "who should be involved in the planning process."  Who should develop the answers, pose additional questions, and most importantly, make the decisions? 

  • Generally, the answer is "the business owners" but depending on the situation, key employees or the owners' family members may also need to be involved in the planning process.

• A considerable amount of information about the business will be assembled during the planning process, which leads to question "how much of this information should be documented."  Generally, all the information does not need to be documented; however, the owners will want to record enough information to document their thoughts and decisions.  Such documentation will be helpful when the owners share their vision with others, such as investors, lenders, key suppliers and buyers, and when they review their decisions.  Information they relied on, assumptions they made, and rationale for their decisions are examples of what owners should document.  Another guiding thought is to document enough information so future decisions can be made without having to reassemble past information or repeating the process of establishing criteria for making decisions.

• Information from several sources will likely be used during the planning process, such as the firm's private information, public information, and possibly proprietary information acquired from other private sources.  Responsibility for assembling the information will likely fall on the business owners, employees working under the owners' direction, or consultants hired for that purpose.

Discussion questions

• Why do you want a business plan? 
• What do you intend to accomplish by developing a business plan? 
• How will you use your business plan?
• Who do you want involved in your planning process? Why?
• Who will make the decisions as the planning occurs?  Why?
• What criteria would you use to make decisions during the planning process?

Preliminary questions

A thorough business planning process is likely to grow complex as the owners discuss broad directions, as well as details about the business.  Also, the planning process does not need to be completed in a particular order, even though these materials may suggest an order.  For these reasons, identifying categories of topics or questions may help organize the process.   Three basic questions, for example, are

• What is the current status of the business (where are we)?
• What do we hope to accomplish by operating this business (where do we want to go)?
• What business strategies will we pursue (how will we get there)?

The owners may determine that it is not necessary to address all the suggested questions, but they may also find they need to address other relevant questions.  Likewise, the owners may find it easier to not answer the questions in the order they are presented here; instead they may find it more logical to answer some questions in one category, move to another category, and then come back to the first category.  They may also find they will want to augment or refine an answer after discussing other questions.

What is the current status of the business?

Four steps may answer this question.

1.  Inventory of business assets -- the purpose of this step is to assess the business' resources.

• Generally describe the business' land, buildings, equipment and other tangible assets.   Which of these items are owned and which are leased?  Indicated the condition of the assets or their remaining useful life.  
• Generally describe the business' labor force, such as number of employees, their skill levels, whether they are employed part-time or full-time, and the wage schedule.  Also describe the management team, its responsibilities (these may include purchasing, production, marketing, staff supervision, financial affairs, and the coordinating role of a general manager) and the managers' experience and training. 
• Prepare a balance sheet to show the amount of debt capital and equity capital used in the business.  The balance sheet should also reveal the business' working capital and the business' capacity to borrow additional capital (credit reserve), if necessary.
• Summarize the type of information the business possesses, such as production technology, information about input sources, and customer markets.  It may be helpful to indicate whether this information is public or proprietary.
• Two measures of a firm's ability to bear risk is its amount of equity and its ratio of debt-to-equity.  This information is available from the business' balance sheet.  Other factors influencing the business' capacity to bear risk or withstand a loss include insurance and contractual relationships; a summary of these legal arrangements enhances the planning effort.

 

2.  Owners' interests, skills and experiences

• If the business owners are involved in the daily operation of the business, their roles probably involve management.  A brief statement about the owners' (especially owners who are active in the business operation) interests, skills, experiences, and training will reveal opportunity to continue or expand their involvement. 
• A statement of the owners' willingness to bear risk may also reveal opportunities or limitations.  The owners willingness to bear risk, coupled with the business' capacity to bear risk, are critical in identifying business opportunities.

 

3.  Business environment

• Information about current and expected consumption for the business' products also provides insight into opportunities for the business.  Similarly, information about the availability of inputs (that is, the production of suppliers) and the activities of competitiors should be considered during the planning process.
  • Example -- U.S. Honey Production
• The owners should discuss current and expected technology that will impact the industry and whether that technology is public or proprietary. 
• The business' legal environment includes the laws that regulate the industry, its product, its operations, and its access to domestic and foreign markets.
• Owners will want to consider the strength of overall economy in deciding whether to expand or redirect their business.
• Another consideration is what resources are available should the owners decide to pursue a strategy that requires additional inputs.  For example, what type of land, labor, capital (lenders (see web site) and/or investors), information (production and market), and risk takers (investors) are available in the community.  The ability to access addtional resources would be vital for an expanding business. Conversely, growth would be difficult, if not impossible, if a critical resources (such as labor) is not available.  An other example could be information; that is, how would needed information be acquired -- from public sources, developed through the business' own research, purchased from a consultant, or acquired in conjunction with another service or input?

 

4.  Current business strategies and performance

• How is the business currently organized and who are the owners/investors?
• What are the current production practices/technology; what is the current strategy for purchasing inputs, and what is the current marketing strategy ?
• What strategies are being used to manage the business' financial affairs and its risk exposure?  What are the current labor management practices, including hiring, training, and reviewing employee performance?
• How has the business performed financially?  What profits has it earned (as reported on an income statement) and has it paid its obligations in a timely manner?
  • Evaluating Financial Performance (see handout)
  • Also see Financial Statements CCH Business Owner's Toolkit

Discussion questions

• Based on your experiences, what do you think is the environment for your business?  What is the basis for your observation? 
• What additional information do you want to gather about the business environment?  How would you use this information in your planning process?

What do we hope to accomplish by operating this business?

This question involves one major consideration -- setting goals for the business.

• This stage in the planning process involves stating the target for the business: where do we want this business to go?  What do we want to accomplish with this business?
• One step to answering this question is to prepare a short mission or purpose statement; e.g., "This business will produce and process innovative honey products."
• Another step would be to set goals for the business
  • Goals should be specific, measurable, challenging but realistic, time specific, and addresses key result areas.
  • "Earn a 12% return on assets by the third year of operation."
  • "Introduce a new honey product within 24 months of beginning operation and introduce another new product every 18 months thereafter."
• Goals become the criteria by which decisions are made; that is, "which of our alternatives will take us to most quickly and efficiently to our goals?"

• As goals are set and prioritized, an open discussion of the reasons these goals were specified provides valuable insight into each owners' thoughts about the business.
• How do the business goals align with the owners' personal goals?  The deamnds and success of a business impacts the owners' personal well-being.  As an owner works toward and achieves the business goals, will that effort complement or detract from the owners achieving their personal goals?  Owners may not discuss this in detail with their business partners, but it is something to keep in mind and discuss with their family.
• In another step in the planning process, the owners will be asked to consider how they will determine whether they are making progress toward their goals; that is, what benchmarks or intermediate goals can be used to measure progress to the overall goals.

Discussion questions

• What is the purpose of your business? 
• What do you hope to accomplish by being involved in this business? 
• How does the purpose of the business relate to your personal or non-business goals?

What business strategies will we pursue?

This question involves four steps.

1.  Identifying and assessing alternatives and selecting a strategy

• Describe alternatives for acheiving the business goals.
• Assess which alternative will take the business to its goals, including projected profitability, feasibility (cash flow) and growth in owner equity, within an acceptable risk exposure.
• Select an alternative to pursue and explain why that alternative was chosen.  Was it chosen based on its projected profitability, feasibility, risk exposure, or because it aligns with the owners' interests?
  • Example -- Decision Aides

  Welcome to farmdoc University of Illinois

  farmdoc Finance

Discussion questions

• What criteria would you use to select among the alternatives? 
• What information would you need to assess the alternatives?  How would you gather that information?

2.  Implementing the selected strategy

• What land, labor, capital, information, risk bearing capacity and production inputs are needed to implement the selected strategy? How are these needs different than the resources the business currently has (review previous step)? 
• What additional land, labor (including management), capital (debt and equity), information (inputs, production technology and markets) and production inputs are needed? 
  • Will the land be rented or purchased?  Do additional facilities need to be purchased, built, or are they available for leasing?
  • Will the labor needs be met by hiring workers or out-sourcing the activity?  What additional management expertise is needed? Will that expertise be provided in-house or will a consultant be retained? 
  • Will the additional capital be borrowed or will investors (including current owners) need to provide additional cash?
    • Example -- Sources of credit

      Farm Credit Services of Mandan

      North Dakota Bankers Association

      Bank of North Dakota -- Beginning Farmer Loan Program

      Bank of North Dakota -- Ag PACE

  • Will the production technology be created in-house or purchased?  Will the market information be developed through research conducted by the business or acquired from an outside source?  What type and size of customer markets need to be developed?
  • Are the necessary production inputs available in the region?
• Which of the current resources are no longer necessary?
  • What resources can the business dispose of? How will the unnecessary resources be disposed and converted into necessary resources?

• What will be the production, purchasing, marketing, labor, and financing strategies? Why?

• What will be the risk management strategy?

  • Example -- Risk Management Agency USDA

    Also see handout

• How will the business be organized? Why?
  • Organization reflects local laws - who owns the product and for how long in the production process does each entity own the product?
  • Do we need to change our business structure/organization? Why?  What would a different structure accomplish that cannot be accomplished with the current structure?

 

• What is the time frame for implementing the alternative? In what order will these steps be accomplished? Who will assure that the steps are accomplished on time?
  • The project needs someone to "push it" to completion; the project needs a champion.

 

3.  Planning for uncertainty

It is inevitable that events will be different than anticipated, but the disruption caused by such events can be minimized if the business owners develop strategies for such uncertainty.

• What could go wrong?  For example, what might prevent the business from developing the necessary markets? Why might this happen?
• How would the business respond to such a disruption?
• What can be done now in anticipation of this possibility? Purchase casualty insurance?  Develop contracts with landowner, employees, lenders, suppliers and customers that address how the relationship will be affected if specified events occur?  Develop alternative markets or alternative production techniques?  Maintain a cash surplus or credit reserve?

Unexpected events are not always negative; for example. unexpected opportunities can arise and the business should be prepared to make the most of these events.

• What opportunities could arise?  How would the business respond to these opportunities? What can be done now in anticipation of new opportunities?

Discussion questions

• What do you consider the major risks for your business? 
• What would you consider the best opportunities for your business?

4.  Establishing a process to measure progress

To be successful, a business cannot assess its situation only at the start of the planning and implementing stages, and at the completion stage.  To assure the business stays "on track," management needs to regularly monitor the business to assess its progress towards the goals.  Ongoing assessment requires specifying benchmarks or intermediate objectives to be compared to the performance of the business.

• What will be measured (e.g., cost of production) and what will be the desired benchmark (e.g., less than $.11 per pound)?
• Who, how and when will progress be measured?
• What will management to do if performance varies from benchmarks ?
  • What degree of variation warrants action?  This implies that minimum variation from the benchmark will be acceptable.

Review our progress

• Are the right people involved in the planning discussion; are they the appropriate ones to pose additional questions, develop answers, and make the decisions?

• What has the planning process accomplished?  Do the owenrs feel they know more about their business?  Do they feel they know more about their co-owners' vision for the business?  Do the owners feel they are better prepared to describe their business to someone?  Can they describe where the business is, where they want it to go, and how they intend to get it there?  If yes, the planning effort is working; if no, the planning process needs to be reassessed.

• Are there questions or steps in the planning process that need to be revisited?  Are there answers that need to be reviewed and refined?

  • Now that the owners have gone through most of the planning steps, are there questions for which they can develop better or more complete answers?  For examples, do they want to review their assessment of the business environment?

• Are the right questions being addressed?

• Are there additional questions that need to be discussed?

• Is more information needed?

• Is the appropriate information being documenting?

• Have the owners recorded enough of their thoughts to remind them of why they made their decisions?  Have they adequately documented their vision for others, such as investors, lenders, key suppliers and buyers?  Does the documentation include the assumptions they made, the information they relied on, the decisions they made, and their rationale for the decisions?

• Although writing takes time, it causes one to clarify their thoughts.  Only stating your thoughts will not always clarify them; writing often forces one to present their ideas more concisely.

  • See Business Plan Outline About.com; this web site suggests and describes seven topics to address in a business plan that will be shared outside the business.

• Have the owners shared their vision with lenders, investors, key customers, key suppliers?   Owners do not have to provide all their thoughts to others; instead, the owners should decide what information is appropriate to provide to each group.  However, be sure to provide enough information so the person receiving it is not mislead.

• When will the vision be revised? Will it be revised at a specified time or upon the occurance of a specified event?  Will the review address the business' current status, owner's goals, and their strategy for achieving their business goals?

Summary

• Business planning is an ongoing process that addresses the questions of where are we at, where do we want to go and how do we get there?
• It involves assembling information about our business and the business environment.
• It involves developing criteria for making decisions.
• It prepares the decision maker to make timely yet well-reasoned decisions
• It is about communicating with ourselves and others.
• It involves asking the "right" questions and doing your best to develop answers; answers that are unique to your business and to you.

No one can plan your business for you; you are the only one who can make decisions for your business.

Last updated October 29, 2005

E-Mail agecinf@ndsuext.nodak.edu
Published by Agribusiness and Applied Economics
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