Piecing together your business plan puzzle
Thursday, August 19, 2010/
It is widely acknowledged that business plans are out-of-date as soon as they are written and yet we still persist on doing them and need them for bank loans and raising equity finance. Perhaps we should simply accept that they help us understand a lot about the integrated nature of a business operation and leave it at that but we should not undervalue what it tells us about what is going on around us.
For any business plan to have meaning, it needs to set out a basic set of assumptions about its internal and external environment. The exercise of uncovering and analysing those underlying assumptions is one of the most useful outcomes of building the business plan.
Think of the impact of some basic trends on your business. Some are very slow such as population growth, demographic movements, life expectancy, infrastructure changes, global warming and so on, but these will impact your business over a 10 to 20-year period. Then there are abrupt changes such as elections, man made and natural disasters, and competitor bankruptcy, which will impact you suddenly.
You also need to give some thought to aspects of your business over which you have no control, such as legislative changes on health and safety, working conditions, currency and interest rate movements, input cost changes, etc.
Even after you have dealt with all those, you still need to have estimates for elements of your business which you can partially influence, such as employee retention rates, general salary increases, office rental rates and so on.
Even small changes in some of these items can have a major impact on your business. It is not sufficient to throw them all in a spreadsheet and pretend that your job is done once you have generated your plans for the following year. The major benefit comes from testing out different sets of assumptions to identify just how sensitive your business is to different scenarios.
The more sensitive the business is, the more analysis you need to do of the underlying factor and the more work you need to do to mitigate the effect or take advantage of the opportunity presented.
What you need to do is to take a range of possible, or more pragmatically, probable outcomes. Thus while you might look at the impact of a borrowing rate of 20%, it is sufficient to look at a range of 5% to 8% around the current rate.
You could examine retention rates of 50% but if your normal experience is 80%, then a rate of 70% is probably sufficient. Sales might be growing at 5% but it would be a useful exercise to look at 8% to 10%.
While you should be sensitive to negative impacts and build contingency plans for those, you need to watch out for the opportunities. What changes can you take advantage of? What would you need to have in place to react quickly to a positive change? The business plan activity is your opportunity to protect your business as well as improve it.
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