Small business planning is the exercise of translating the thoughts and ideas you have about your small business into a workable and clear action program. You have some preliminary thoughts about your small business, such as:
- I want to do something where I would benefit from my skills and hard work.
- I want to be financially independent and make at least ten thousand dollars a month.
- I will make Product X (or render Service Y) that seems to have a good demand.
You start working on these preliminary thoughts and ideas by gathering information. You would thus gather such details as:
- What is the competition in the market for Product X (or Service Y)? What prices do these competitors charge?
- Where can I get the best technology for making the product (or rendering the service)? What will it cost?
- What would be my direct production related costs? Do the selling prices cover these costs by a good margin?
- What would be my overhead costs for running the business? How much would I have to sell to generate margins needed to cover these overheads?
When you have gathered the above information, you would know the basic requirements for profitability. You would also have a good idea about the competition. With this background, you start working on more specifics.
- How would you compete against your competitors? Do you know how to develop a competitive marketing strategy?
- What equipment, physical facilities and manpower would you need? What would these cost?
- How much additional money would you need to keep going till you reach profitable levels of sales?
- How would you raise the needed money?
The above kind of small business planning exercise would help you to:
- Think through the important issues involved,
- Assess and raise the finance needed for startup and operations, and
- Establish milestones to check progress, and standards to check performance
The Small Business Planning Document
Your findings would need to be put down into a formal business plan document. It is with this document that you approach prospective investors and lenders for money. The small business planning document would typically include:
- A description of the market and your “business model” indicating how you will earn your profits
- Marketing Plan explaining your marketing strategy and setup
- Facilities Plan listing all physical resources needed
- Manpower Plan listing personnel requirements
- Profitability estimates showing sales, costs and profits
- Working Capital estimates for planned levels of operations
- The Financial Plan showing finance requirements and sources and
- The government regulations you would have to comply with and the licenses you would need
You should indicate how you would organize each of the above requirements. The reader of your plan should get the feeling that you know the ground realities and could succeed with the business.
Let us now look at each of these components.
It is quite easy to get immersed in details and forget to look at the overall viability of your business operations. Hence, you have to consciously direct your attention to the issue of how you would make money with your business.
You do this by working out a business model. A business model starts with a clear idea of how much gross margin you could get with prevailing selling prices. You then work out how many units you must sell to accumulate a total gross margin that would cover your overheads – standing expenses like salaries, rent, depreciation on equipment, interest on borrowings and so on.
Once you know how much you should sell and at what prices, you have to think about the marketing set up that would be needed. You might not be able to sell sufficient volumes if you do the selling yourself. Hence, you would have to think seriously of how you are going to market needed volumes. You might have to engage brokers, sales intermediaries and even a full-fledged sales force.
In a competitive market, the business model would also involve developing a definite competitive marketing strategy that would help you sell your product or service.
You would start by collecting information about market conditions as explained in the Small Business Marketing article. Based on your findings, you would write your marketing plan indicating:
- Your market and the different segments in it. The customers in each segment would be profiled and the competition would be described
- Your marketing strategy – the USP you plan to use or the market niche you plan to target and the sales messages you would use. Also the prices you plan to charge
- Your marketing setup – the people who would implement the marketing strategy and the way your product or service would be distributed in the market
- Sales estimates for the first three years – by product, area and period. The estimates would be made monthly for the first three months, quarterly for the next three quarters and yearly for the two years thereafter.
The marketing plan is your starting point and all the other plans would tie in with it.
The Facilities Plan
You would develop a cost effective way to deliver your product or service to your customers. This would involve:
- Technical know-how with full documentation on how to make and deliver the product or service
- Premises at a suitable location
- Equipment and/or fittings to make the product or organize the service
- Support services needed for the main activity – power/fuel and water supply, maintenance, storage of materials and records, cleaning and so on
- Facility requirements for marketing – communication, offices, transport, publicity materials and other
- Administrative office and personnel facilities – such as workstations, conferencing/communication facilities, record storage, rest rooms and canteens
The article on Technology discusses the issue of technical know-how and its sources. The technology adopted would determine the equipment, fittings and support services you have to arrange for.
The operations involved in the production or service process would be listed first. Against each, the equipment required for that operation would be indicated. Finally, the support facilities needed to operate the equipment would be listed.
A full layout plan showing various buildings – factory, services, warehouse, administration, security and any other – and the positioning of equipment, workstations and fittings in each building would determine space requirements.
The facilities plan would list all of the above under appropriate classifications and would indicate the estimated costs and supply sources for each. The detailed lists would be summarized and a summary plan would show the costs for each major category.
Running a business successfully involves attending satisfactorily to a number of different functions and activities. For example, most businesses have to:
- Keep uptodate with market conditions and adopt approrpriate strategies to meet changing competition and consumer tastes,
- Ensure that operations are carried out at economic costs with acceptable quality results,
- See that working conditions in the organization result in high productivity and low level of grievances,
- Collect money due to the business in a timely manner and check that required finance is available for uninterrupted operations, and
- Generate performance reports that tell how well the business is doing.
If one person tries to do all these, the result would almost certainly be chaotic. It needs persons with specialist skills to attend to the different functions of running a business.
Small business planning for manpower involves:
- Identifying the key functions that need attention,
- Assessing the skills needed to attend to each function, and
- Planning for recruitment, training and compensating needed personnel.
The manpower plan would typically include:
- An organization chart indicating the positions and their reporting relationships,
- Job specifications for each position indicating what a person in that position is responsible for,
- Person specifications indicating the skills and other requirements for persons in each position,
- A statement of personnel policies for recruitment, training and retention of needed persons, and
- A manpower budget showing the number of persons in each position and the pay and other expenses estimated to be incurred for each.
Businesses need profits to stay in business. Hence, your small business planning exercise would involve examining when you would start making profits.
Profits are the excess of sales revenue over your operating expenses. Estimating profits thus involves estimating sales and expenses. Sales are estimated as discussed earlier under Marketing Plan. You have to estimate the expenses now.
Expenses are of two kinds –
- Costs that vary more or less with production and sales, and
- Establishment expenses that tend to remain at a constant level.
Raw materials consumption, direct wages, power & fuel, shipping costs and sales commissions are examples of costs that vary with production and sales. Rent, local taxes, administrative salaries and depreciation are examples of establishment costs. Travel, communication, publicity and interest on working capital finance might have both variable and fixed elements.
You examine the relationship of variable expenses to production and sales. You might find that raw material expenses are 60 percent of production value and shipping costs average 3 percent of sales. Next you estimate the expenses for each month, quarter or year based on the production and sales estimated for each period.
Establishment expenses are estimated on the basis of commitments you have already made, or some other valid criterion. Thus rents are estimated on the basis of rent agreements while general travel might be estimated on the basis of the average for the last three months.
After estimating all the expenses likely to be incurred, you compute the profits by deducting these expenses from estimated sales for the priod. You would then have estimates of profits by month for the first three months, by quarter for the next three quarters and by year for the following two years.
The profitability statement would tell you when you would start making profits. If the profit levels are not satisfactory, you would have to rework your whole plan. For example, you might have to install higher production capacities and/or expand the marketing setup.
See the article on Breakeven Analysis to get a clear picture about the relationship between sales volumes and profits. This is not as simple a relationship as you might think.
Working Capital Estimates
You have arrived at an acceptable level of profitability and computed the costs of the setup you have to establish for achieving it. The next element of your small business planning is to estimate the level of working capital you should maintain to achieve the planned level of operations.
In a typical manufacturing business, working capital consists of the following:
- Inventories of raw materials and supplies
- The material and other expenses incurred on the work lying unfinished in the plant
- Inventories of finished products waiting sale
- Moneys receivable from customers who have availed credit
- Miscellaneous payments like deposits and advances that you have made
As you can see, all these require money. A portion of it could be met from the credit you yourself would receive from suppliers and others. For example, part of the raw material inventories might not have yet been paid for. You would have to find finance for the remaining requirements, and this is the working capital amount that you should include in your financial estimates.
Working capital is typically estimated as the requirement for so many months. For example:
- Raw materials required for three months’ production
- Half a month’s production cost as work-in-process
- Two months’ sales quantity in finished products inventory
- One month’s value of sales as accounts receivable
- One month’s value of purchases as accounts payable
A statement is prepared showing the working capital requirement for each plan period – month, quarter or year – based on the sales and relevant expenses for that period.
With all the sectoral plans completed, your small business planning exercise would now involve consolidating the financial aspects into a Cost of Project estimate. Cost of Project estimate has the following major elements:
- The cost of facilities for making and selling the product, called the fixed capital cost. This would come from the facilities plan.
- The net working capital requirement as estimated in the working capital section above.
- The initial ‘cash’ losses revealed by the profitability estimates. Cash losses are net losses (if any) before charging depreciation as an expense.
All the elements except cash losses have been already explained. We look at cash losses now. As mentioned, these are computed before charging depreciation. Depreciation is simply ‘expensing’ the cost of fixed facilities over their useful life. As we have already included the facilities in our project cost estimate, including depreciation would be double counting.
These initial losses would also have to be financed and hence these are included in the project cost estimate. The total project cost is the amount of money we have to find to get the business going and run it till profits begin to appear.
In addition to the Cost of Project estimate above and the Profitability estimates discussed earlier, you have to prepare two additional statements to complete the financial plan. These are:
- Cash flow statement showing estimated cash inflows and outflows, and
- Balance Sheets showing assets, liabilities and owner’s equity as on the ending dates of the months, quarters and years of profitability estimates.
These statements are discussed in more detail in the Small Business Funding article mentioned in the next paragraph.
We discuss the sources of finance in a separate article Small Business Funding. Generally, these sources consist of your own savings, borrowings from friends and relatives, government grants if available and different kinds of finance from banks and other institutions.
The Business Plan Document
Documenting your small business plan in an attractive format is the final element of your small business planning exercise. This document would typically include the following chapters:
- Executive Summary
- Marketing Plan
- Facilities Plan
- Manpower Plan
- Profitability Estimates
- Working Capital Plan
- Cost of Project
- Sources of Finance
It is in the appendices that the various statements discussed above would be included. The main body of the small business plan document would bring out the essential features of these quantitative plans in a readable narrative form. The interested reader could get a quick overview of each plan from these narratives and go to the relevant appendix for details.
We have already explained most of the components of the small business plan document. Let us now look at the remaining items.
- Executive Summary is simply a total picture of the small business plan. It consists of brief summaries of the other narrative sections and includes the key figures such as total project cost, financing proposals and profitability.
- Introduction would introduce you and the project to the reader. Your name, contact details and background would be explained. The basic features of the project would be included next.
- The Appendices would contain the quantitative statements we have already discussed and also any exhibits supporting any claims or important narrative statements in the body of the small business plan.