ORGANIZING AND PLANNING
Organizing and planning a business entails strategic planning to create marketing, operations, administration, and financial management plans including a business plan and a budget for running the business.
Strategic planning and its importance
You can start and run a business in any way you can and many have been started and succeeded that way. But to create and administer a business well, you need to engage in strategic thinking and planning. Strategic planning is the process of gathering intelligent information and data, brainstorming and evaluating the information/ideas, selecting viable options, and using the information so gathered and processed to prepare a business plan to guide starting and administration of the business.
Creating and building a business requires creative and strategic thinking at all stages. Whether it is selecting a business idea, name or a legal structure, developing marketing strategies or administrative structures, strategic thinking is necessary. Strategic thinking allows you to deliberate on all possible ways and factors, set aside anything that does not work and use only smart ideas to plan your business. Strategic planning may be elaborate or a quick brainstorming session but any form of strategic planning will increase overall chances of success.
Engage in strategic planning
Once you are settled on a business idea and you want to implement it, one of the next steps is to have a strategic plan and a business plan for the business. Most successful businesses work with plans that look several years ahead. That is why you hear about strategic plans, business plans and budgets. You therefore as a matter of good practice need to engage in strategic planning at the start of your business. Strategic planning is about planning your business (whether starting or improving it) in a strategic manner using information that has been generated from a strategic thinking process. It is about developing a smart game-plan for the future of the business and planning its execution. You have to do this so that you can be off to a good start. Benjamin Franklin (one of the founding fathers of USA constitution) once said, “If you fail to plan, you are planning to fail.” Sir Winston Churchill (former UK Prime Minister) also said: “Those who fail to learn from the past are doomed to repeat it.”
Strategic planning is essentially an exercise or a process carried out to come up with a smart road-map for the business. The process is not a document or a plan but the written output of this process is a strategic or business plan. Strategic planning is basically about strategic thinking and business planning. It is to say that you plan all aspects of your business in a strategic fashion using information that has been gathered from strategic thinking exercise. In a nutshell, strategic planning is just a thinking process that is used to find superior pathways of starting and operating a business rewardingly.
So what is strategic thinking? Strategic thinking can be viewed as a process through which a person applies the mind to think about, review, and evaluate a situation, factors, facts and information and out of this process he or she comes up with smart methods that if implemented can create an alternative future, usually a better future position, for themselves, others or a business. Strategic planning usually involves simple or comprehensive researching, brainstorming, thinking, evaluating and judiciously selecting smart options and ways of doing things. Strategic planning is in this sense an information-gathering exercise that will inform the development of many other plans to start or reform a business. Strategic planning can be done as part of the initial stage of researching the business idea or later on when planning the business in detail before commencing business.
Strategic planning exercise can focus on finding objectives and strategies to create or reform one aspect of the business such as marketing only or to create or improve aspects of the business as a whole. It can be as simple or as comprehensive as you like so long as it identifies the key things that you should focus on to forge ahead competitively with your business towards success. For sure not all this “fuss” about strategic planning is always necessary but strategic planning of any depth helps. Where one is conducted, it is always useful to give a thought and come up with some ideas and plans to help create or reform the following key areas of starting and running a business successfully:
- Searching for a peerless and appealing business idea.
- Research methods for researching the business idea.
- Formalization of the business in terms of legal format (as in sole proprietorship, partnership or company), logo, trademarks, website domain name and registration of all these.
- Mission, vision, values, goals, objectives, strategies, and action plans.
- Business plan.
- Marketing, branding, sales, distribution, and customer service plans
- Operations plans.
- Administrative, management or governance structures.
- Financial management systems.
- Sources of financing the business.
- Starting up costs.
- Operating budget.
- Compliance with regulatory matters
- Profitability management
- Growth and continuous improvement strategies.
- Business exit strategies when the time comes.
Strategic plan versus a business plan
A strategic plan and a business plan are often interchanged and used as synonyms. However, notwithstanding this synonymy (equivalence in meaning), there are some subtle differences between strategic planning and business planning. Strategic planning is an exercise that involves creativity, vision, generating a competitive advantage and recognizing and taking advantage of opportunities. Activities of a strategic planning process include imagination, creative ideas and SWOT (strengths, weaknesses, opportunities and threats-see sections below for a fulsome explanation of SWOT) analysis, benchmarking and market research. The outputs of strategic planning inform the formulation of a business plan. The document that is produced after strategic planning (thinking) and business planning is a business plan which can also be interchangeably referred to as a strategic plan.
Business planning, on the other hand, is about thinking and deciding ahead of time, what is to be done, when it is to be done, how it is to be done, who is going to do it, the resources required for desired aims to be achieved, and documenting these coherently and logically. Strategic planning is about creating strategic information and business planning is about using this information to create a business plan or a road-map. This is the connection between strategic planning and business planning. There can be a strategic planning exercise that does not lead to the writing of a business plan but there should never be a business plan that is not informed by strategic planning exercise. Of course, a business plan can be prepared anyhow but it is always better when this is informed by strategic planning exercise which usually generates strategic information.
Strategic planning process
A fully-fledged strategic planning process is normally a mammoth task that involves the following work and aspects:
- Setting a framework for decision making during planning.
- Developing mission, vision, core values.
- Reviewing current or past strategic plan.
- Identify strategic issues or problems that need to be solved to start or for an ongoing business to thrive.
- SWOT analysis (SWOT stands for strengths, weaknesses, opportunities and threats.
- Market research.
- Estimation and forecasting of data.
- Analysis of financial data.
- Scenario planning.
- Sensitivity analysis.
- Goal and objective identification and setting.
- Strategies identification and definition.
- Business modelling.
- Laying out action plans.
- Risk identification and analysis.
- Business planning.
- Preparation of budget.
- Development of implementation mechanism.
- Development of monitoring and evaluation mechanism.
- Putting in place financial and management accounting systems to help gather data for information and decision making.
You can learn more about strategic planning in a PDF article entitled “How To Prepare a Business Strategic Plan”.
Let us now take each of the above strategic or business planning aspects one by one.
A mission statement is a brief description of a company’s fundamental purpose of being in business. It answers the question, “Who are we and why do we exist or why the business is being brought into existence in the first place?” In a nutshell, a mission can be seen as what people are presently doing or ought to do in the business to achieve an aim or vision. The mission or purpose of the business is defined by how it is serving or meeting customer needs and not by the industry or business name. For example, a bus company is in the transport business and not the bus business. The main purpose of a mission statement is to clarify to the employees and other stakeholders the primary purpose and other measurable objectives of the organization. A mission can be stated simply as “To provide the best service possible within the micro-finance sector for our clients.” It should just capture what the business idea is all about in a few words. To come up with a good mission statement, you need to engage in strategic thinking and planning around your business idea so that you can be sure about your value proposition.
A vision is a statement about what the organization wants to become. Visioning is the ability to see that which is not there yet. The vision articulates your dreams, aspirations and hopes for you and your business. It answers the question “Where are we and where do we ought to be going and what should the result look like?” The main purposes of stating and documenting a vision are:
- A clear vision serves as a means of communicating the aspirations of the business to all stakeholders (internal and external).
- It also functions as an anchor that constantly reminds, motivates and inspires people in the organization to continue working towards the desired goals.
- It assures and holds positive promises to customers and stakeholders. Vision expounds the mission in the sense that vision states that given the mission that has been espoused, this is what we want to become in the process of achieving that mission and this is the direction that the business will take to attain that mission in the best possible way.
Vision boils down to what the business wants to achieve ultimately after the mission is completed or implemented and it is there to inspire and motivate the owner and employees to aspire to higher and noble calling. An example of a good vision is a statement like “Five years from now, Computer Services Ltd. will have annual revenues of over US$1 million by consistently providing timely, reasonably priced repair and instructional services”.
These are the rules that guide behaviour in the business. They are the moral cornerstones that the business pays special attention to and abides by in day to day operation of the business. They are, if you like, the code of conduct within the business. The sole purpose of having and stating values is to guide behaviour within the business and relationships with customers, planet, and people (society). There are no right or wrong values so long as they are understandable and inspire the internal people and are not repugnant. Some values that would not hurt to espouse include integrity, responsibility, reliability, innovativeness, customer care, respect and fair-mindedness, and care for planet and people or society.
Goals and Objectives
A goal or objective is a description of the destination where a business wants to be or targets that need to be achieved for a purpose. Goal or objectives are often used interchangeably but they are somewhat different. Both terms state desired outcomes an organization is trying to achieve. However, a goal is a broad direction where a business wants to go. It is often general, intangible, conceptual and strategic. Objectives, on the other hand, are components of a strategic plan that can be assigned to a department, units, and individuals in an entity. They are in fact goals that are turned into specific, measurable, attainable, relevant, time-bound (SMART) milestones. Objectives are often referred to as strategic objectives. A goal tends to be descriptive while an objective usually contains elements of measurements and targets in them A key component in setting goals is desired specific outcomes such as market share or rate of return on investment (ROI) to be achieved in the short-term to medium-term. ROI is simply net profit after tax divided by capital invested or to be invested in the business. This is usually computed in an iterative process when preparing the budget until a budget position (sales units, prices, and costs) is arrived at that returns the desired profit. Goals should, therefore, be established with the desired ROI or other targets in mind. For instance, a goal can be to have sales of US$50,000 in the first year or grow sales by 25% and attain an ROI of 20% or a market share of 15% in the next two years. Strategies and action plans will then explain in detail how these goals are to be attained. See table 1 below, which compare goals, objectives, strategies, and actions. Goals or objectives or goals are usually set when one wants to start, upgrade, expand, renew or energize a business.
Formulation of goals and objectives is one of the main reasons for engaging in strategic planning and is also the main output of strategic thinking and business planning exercise. The setting of goals is at the centre of building and managing a business. To start anything, to create anything, to reform or improve anything, to implement anything or to achieve anything in business, you need to set a little bit stretched goals and objectives to on a daily, weekly, monthly and yearly basis.
Objectives speak to the key aims that you have carefully selected to be implemented to start your business successfully or compete effectively with ongoing business in the current market space (red ocean) or move your new or ongoing business to a new market space (blue ocean). W. Chan Kim and Renée Mauborgne (2005) define, in their book “Blue Ocean Strategy”, a red ocean as an existing market space that has been bloodied by fierce competition and a blue ocean as a new market space that will not have competition for a good while. They argue that the aim is to create a product or service that is so different that it creates a new market and owns that market. In formulating objectives for a red ocean, you have to focus on how to exploit gaps or shortages in the supply of the product or service you are targeting to supply in the market. Alternatively, you can identify competitive advantages or strengths that you possess and can leverage to allow you to gain or increase your market share.
In formulating objectives, it is important to make them SMART-specific, measurable, attainable with a given amount of resources, relevant to the mission, and time-bound. To set smart and SMART goals, you need to engage in SWOT, benchmarking and market research.
An example of the development of a SMART goal may read as follows: I will, within the next three months, contract five new supermarkets to stock my mushrooms in addition to the existing list of customers by expanding production using excess and my currently free afternoon time to find the customers. This expansion will lead to an increase in sales and net income as desired. Notice that this statement embodies strategies illustrating the point alluded to in the paragraph below that strategies are embodied in goal statements.
A strategy is any thought, idea, method or plan of action which if implemented yields desired results as hoped for by the bearer of the thought. In a business context, strategies are any number of broadly defined main strategic methods, techniques or smart pathways (ideas) that a business will use to accomplish its mission and move toward its vision. Strategies are a description of a carefully chosen or formulated set of key methods that if implemented faithfully are expected and should deliver a unique mix of value or desired results such as achieving a goal or solving a problem.
Strategies are similar to actions but are long-term in nature and have elements of creativity, competitiveness, cost-effectiveness, and logical cause-and-effect. They are nothing but smart steps that are deemed smarter, cleverer, superior or advantageous than other alternative methods for achieving an aim. Strategies should allow for things to be done first before anyone else, to be done differently or better than anyone else.
Goals, objectives and even actions have elements of strategy in them. When you choose a certain mission and vision over another alternative vision, that choice is a strategy. When you choose one marketing method over another method, the chosen method is your strategy. If one location is, for well-considered reasons, preferred over another possible location, the preferred location becomes the strategy. A policy that requires sales staff to wear a navy blue suit when they come before customers, such a policy is stating a chosen strategy. A strategy is, therefore, an idea, a method, an action or a statement that carries in it an advantage, smartness or competitiveness, which are all factors that can yield desired positive results. Strategies are, therefore, part and parcel of any vision, mission, values, goal, objective, and action statements. Mission, vision, and a set of chosen values, goals, objectives, and actions are strategies. The document that contains these strategies is a strategic or business plan.
Implicit in the above explanation of a strategy is that a strategy should be both cost-effective and competitive (advantageous). If these two elements are missing in the idea, the results, if the idea is faithfully executed as planned, will be costly and uncompetitive (or unattractive). Such an outcome means the “strategy” was indeed a bad strategy and therefore not a strategy in the first place. In this sense, a bad strategy, though it may be called or look likes a strategy at the planning stage, is not a strategy at all. Any thought, idea or method that does not advantageously achieve desired results is not a strategy or is a poor strategy at best.
Strategies can be formulated for an area or all areas of the business that require creating or reforming to create and run a business that delivers what customers need or want and that satisfy the aims of the business. For this matter, the whole of the business plan can be regarded as nothing but a set of strategies. That is why a business plan is often referred to as a strategic plan.
Having said all these about strategies, what then is the main difference between a goal/objective and a strategy? Goals, objectives and even actions have elements of strategy in them. A goal is a broad main outcome that you want to target to achieve something like the mission and ultimate vision. A strategy, on the other hand, is the approach you take to achieve a goal. It is like a tool or tactic you use in pursuit of an objective or a goal. Strategies are ordinarily not stated on their own. They are normally stated as part of the goal or an action statement (see an example of a SMART goal statement in the Goals section of this write-up).
Strategies can only be judged to have been truly smart strategies after they have been implemented and have produced desired results. You can beforehand preview possible success by estimating sales, costs, and profit at the strategic planning stage to see if strategies are likely to produce desired results. You do this by preparing a trial budget that can be adopted once estimated realistic sales and costs that can deliver the desired profit are identified. That is why budgeting and business planning are important when crafting a strategy.
Action plans also known as tasks or initiatives are the specific concrete hierarchical (sequential) steps that need to be taken on day-by-day, week-by-week and month-by-month basis to achieve the objectives and the vision. They are in fact goals, objectives and strategies turned into actionable steps to be undertaken daily. If you like, they are objectives and strategies broken down into the detailed day to day tasks to be performed to implement the overall strategy to realize the mission and vision. Actions too like goals should be SMART (specific, measurable, achievable, relevant and time-bound) and identify specific actions, responsible action parties (department, sections, units, and individuals); resources needed for each action and expected outcomes of the actions together with yardsticks to be used to ascertain achievement.
Table 1 below illustrates the relationship of goals, objectives, strategies and actions:
Table 1: Relationship of goals, objectives, strategies and actions
|Reduce costs to increase profit||Reduce operating costs by 15% in 15 months.||Incentivize cost-centres to lower costs without compromising quality and services by offering 10% of costs saved as a bonus to all participants.||Finance Department to prepare detailed action steps to cut costs to increase profits.|
|Increase sales to grow profits||Increase sales by 20% in 24 months.||Create a bonus scheme that rewards creative marketing and sales ideas that boost sales within commensurate costs.||Marketing Department to come up with detailed steps to increase sales and profit.|
|Enhance employee skills in customer care||Conduct a training program for all front-line and selected back-end staff within 6 months.||Create a powerful sense of exclusivity and importance for being among the first to be trained in customer service and to be often positively commended by customers.|
Encourage customers to give feedback about service and staff and reward staff who are often commended by customers.
|Human Resource Department to hire an expert trainer to train the staff.|
Preparation and implementation of a strategic plan
Conventionally, strategic planning has been the preserve of senior management and a few other managers. However, wisdom suggests that everyone in the business should be involved. There are several reasons for this wider involvement:
- One is that it is beneficial to have more minds and eyes scanning the environment than just a few smart guys. It is not humanly possible for a few people to see and think about everything.
- Two, the people on the shop floor and field who interact with the actual work and customers are likely to know more than the far removed top guys.
- Three, involvement empowers people with information about the strategy and the business as a whole and this enhances their performance.
- Four, involvement enhances buy-in and ownership of the strategic planning process and the outcome and reduces resistance to change.
Analysis of the Business Environment
To come up with pertinent data for business planning, it is necessary to research and analyze the business environment. This is a systematic exercise that involves scanning the overall environment that covers the internal aspects of your business, competitors, your industry and the macro-environment including customers and business partners. The macro-environment can be analyzed using several tools that include:
- S P E C C T R E analysis: This is the analysis of social, political (government), economic, corporate, cultural, technological, regulatory, and environmental factors to identify strategic issues that require strategies for dealing with them.
- M E Porter’s 5 Forces: This involves considering threats of new entrants, substitutes, bargaining power of suppliers or buyers, and extent of rivalry in the market to formulate strategies for dealing with whatever is more of a threat among these.
- Strategy Canvas developed by Chan Kim and Renée Mauborgne: This is a canvas that is used to map out the current factors your competitors invest in and compete on. The canvas is also used to plan to eliminate factors that the industry you are operating in offers but do not add value to the product, reduce other not so important factors to well below industry standards, raise other factors way above industry standard and create others that the industry has never offered to create a blue ocean market space with the competition.
- SWOT analysis: SWOT stands for strengths, weaknesses (internal factors e.g. talented employees, a patent, superior technology or lack of capital), opportunities, and threats (external factors e.g. absence of substitutes, an unfulfilled niche, or low barriers to entry). The analysis is an exercise carried out to reveal the existence of these factors to formulate strategies to take advantage of strengths and opportunities and to mitigate weaknesses and threats.
It is the only implementation that can move the strategic plan from where it might sit in the shelf and turn it into actions that can realize the objectives. Without an effective implementation plan, nothing will happen despite the existence of a robust strategic plan. A good strategy normally addresses the what and why of the plan while an implementation plan addresses who, where, how and when. If these questions are not properly tackled, the strategy is bound to fail. Competent people, resources and a framework of implementation and monitoring are needed for successful implementation of a strategic plan. See detailed article on how to prepare a business strategic plan for more help.
Complete Strategic Plan Document
As strategic planning is a process, the process is complete once you have done and documented the following:
- Carried out appropriate research to obtain the necessary information.
- Thought about and brainstormed all the ideas that you have gained from the research, SWOT analysis and any other means about what/how to start or change to improve your business.
- Have applied the information to identify strategic issues or problems that need to be dealt with to start or improve your business.
- You have used all the useful ideas to develop a mission, vision, and values. You have also applied the data to develop objectives or goals that you can aim to achieve to make progress. And have also crafted strategies (smart methods/moves) and weaved these into goals, objectives and actions (steps) that you need to implement (daily, weekly, monthly, yearly, etc) to achieve the goals and have put all these into an implementation framework like a matrix. Do not be baffled by goals, strategies, and actions. These can be simple reasonable and actionable statements rolled into one or more statements that simply state what needs to be done, how it is to be done and when to be done. Goals, strategies, and actions need not be distinctly separate unless you can easily and do so. They only need to be smart, transformative and actionable statements.
- For a business, you will need to define your product, your customers (market), competition, marketing plans, sales plans, delivery plans, internal processes and systems needed, resource requirements and financial forecasts like the budget.
- However beautifully written, a strategic plan will not deliver unless deliberate steps are taken daily to implement the stated actions. It is actions and only actions that deliver the desired results and not the beauty of the strategic plan. This is what former prime minister of UK, Sir Winston Churchill meant by saying “Amateurs focus on strategy, experts on logistics”. By logistics he meant actions.
After all the above, a complete strategic plan should be expressed as a business plan containing an executive summary, mission, vision, values, goals, strategies, critical success factors, SWOT analysis, start-up resources, marketing/selling strategies, management arrangements, a financial plan that includes projected financial statements, company profile, implementation plan (that includes actions, responsible parties, performance measures, outcomes, and timelines) and appendix, all as explained in the business plan section of this write-up.
Refreshing the Strategy
The results of strategy implementation should be evaluated regularly to ensure that things are still on track. Winston Churchill, the former Prime Minister of the United Kingdom has been quoted to have observed that “no matter how beautiful the strategy is, you should occasionally look at the results”. This requires assessing the results of each strategy regularly (annually or quarterly) to determine how the strategy has been implemented and whether it has produced desired results or needs replacement by a new strategy to meet a changed circumstance, new technology, new competitors, new economic environment, or new social, financial or political environment. The review should be to determine what works and what does not work to make changes as necessary. The environment should constantly be kept in view and new goals and strategies should accordingly be set to take advantage of existing and potential opportunities and to counter emerging weaknesses and threats.
Strategic planning is an ongoing process and should be refreshed as often as is warranted. In any case, good business requires continuous improvement all round and this means the strategic plan should be reviewed as often as is necessary to compete and provide great service to customers. However, a strategy can also be prepared covering three years and implemented over that period with only minimal changes during the period after which a fresh strategic plan covering the next three years is prepared, unless of course there are drastic changes that call for an overhaul of the strategy before the end of the three years. Another way is to refresh the three-year strategic plan yearly whereby as goals, strategies, and actions of one year are completed, goals, strategies, and actions of the remaining two years are critically reviewed and another future one year is also added in a rolling fashion so that the strategic plan is always covering three years ahead at a time.
Unless you are a monopolist or selling a necessity that is in short supply, you have to make marketing plans to help you push your product from your shelves to the end-user shelves.
“The aim of marketing is to know and understand your customer so well that the product or services that you offer fit them and products sell themselves”. Peter F. Drucker.
Marketing involves the activities that are targeted at finding, attracting and retaining customers while sales is turning a prospect into a buying customer. Unless your business is a monopolist, most businesses’ goods or services have to be driven out of the shops of the businesses to the shelves of consumers. The thing that does this is well thought out and executed marketing, sales, distribution and customer service plans, and activities. You, therefore, have to prepare marketing plans when starting a business. Even when the business is ongoing, you also need to engage in strategic think and prepare marketing plans for continuous improvement as things are ever-changing and need to keep innovating to stay competitive. Marketing is the process that makes sure that the right product gets to the right market place at the right time at a competitive price. It is about attracting attention and building a loyal customer base for the product or service. To do this, you need to research potential customers to understand their needs and pitch your product and marketing strategies towards satisfying their needs.
If your products and services require to be marketed, then you require developing marketing strategies. To do so, you need to engage and make plans around the following areas:
Industry analysis (synopsis)
This involves analyzing the size of the industry, major players, competitors, sales and your own proposed position in the industry.
Market research and analysis
This is the practices of studying a market you are interested in to gain knowledge about your potential customers and their needs. This is done to facilitate the development of effective marketing strategies. The main aim of market research is to discover potential customers of your products and service and to learn about their needs, or where they are under-served by other suppliers in terms of products/services, delivery systems and customer care. Once you know them, you can then come up with creative marketing activities to reach and persuade them to buy your products.
Use of demographics and psychographics in marketing
It does not make sense to target all types of customers or segments of the market. So you need to define your target market or ideal customer, for example, in terms of demographics and psychographics. Demographics are the dry and static data of an individual or population. These factors include age, income, education, gender, disabilities, occupation, employment status, language, religion, mobility, location, contacts, etc. The factors usually explain who the person is and to use marketing language, who your buyer is. Psychographics, on the other hand, are the soft facts about a consumer which include behaviour, personality, values, interests, opinions, attitudes, tastes, hobbies, etc. These factors explain why the individual behaves the way he does or in marketing language, why he buys what he buys.
It has been proven that once you have known a person’s demographics, you can tell their psychographics well enough. When you know who buys your product or service and why they buy, you can target your marketing messages appropriately and you will not miss the target. Using the information gathered, you can choose what products or services to provide, how to reach possible customers, and where to carry out your marketing. You can tailor your products to suit the customers.
Here are some tools that you can use to determine demographics and psychographics of your target or ideal customer: GFK MRI, Ipsos Mendelsohn, Media Audit, Neilsen Scarborough, Comscore, Google Analytics, Sizmek, Burreles Luce, Cision, and SM2. Try them, big companies like Macdonald’s use them, so why not you.
In doing your research, you need to remember that there several players in the purchasing process. The first is the end-user who may be interested in the handling aspects of the product and the price. The second is the person who makes the specifications such as functionality, delivery, and other such factors. The third is the buyer who may be interested only in delivery logistics and price as the budget holder. The fourth is the influencer such as a doctor who prescribes your product. You need to gather relevant information from these players and decide whom to target with your product.
Competitor analysis is important for developing strategies to beat or avoid competition. You also want to know what messages competitors are sending to your customers or to the consumers of the product you want to introduce.
After you are done with market research, you now apply the knowledge gathered about the market to develop market access strategies. In developing the strategies, you have to consider a principle called marketing mix consisting of four original factors that are under the control of the business, namely, product, promotion, place and price (i.e. 4 Ps of marketing). Three other Ps have since been added which are people, processes, and physical evidence. In reality, there other factors that are outside the control of the business which includes changes in legislation, state of the economy, new and powerful market competitors, and changes in technology. The 7Ps that have to be well-mixed in market access strategies are as follows:
A self-selling product would be wonderful to have. But if you do not have such a product, you can use the knowledge gathered from market research to create something close. You then describing it vis a vis comparable products or services by extolling its superior qualities and benefits or what unique problems the product will solve in the market. The total of what makes a good product is features and benefits. Features include design, specified functionality, range, brand name, performance, reliability, quality, consistency, colour, smell, touch and feel, safety, packaging, appeal, availability, delivery, payment terms and methods. Benefits of a product include saving time, saving money, reducing worry, getting rid of a problem, enhancing status, after-sale service, ease of use, portability, durability, etc. When marketing a product, you have to explain these features and connect them to benefits that the features will give to the customer. Whereas features may appeal to buyers, customers buy benefits. The benefits that people look for include means to acquire wealth, power, influence, and fame; relationships; knowledge and information; security and defence; and entertainment and pleasurable experience.
This concerns thinking about the rationale for the chosen price, which should take into account the costs of bringing the product into being, competition, and the desired or target return on investment. The basic formula for pricing is: variable costs + Indirect costs (or fixed or overhead costs) + Profit + Tax (value-added tax) = Selling price. Market research should guide you on a possible pricing strategy. Pricing strategies include:
- Cost-based/cost plus markup: The price is based on the cost of production or how much it would cost to replace the product.
- Market-based: The price takes into account the price of other similar products in the market. It can also take into account demand (demand-based) and this can be changing on a real-time basis.
- Net present value: This pricing method takes the net present value of the series of cash inflows generated by the product over its useful life as the price.
- Unique characteristics of the product: A product in an affluent neighbourhood or with connections with a celebrity may fetch a higher price than one that is in a less prestigious location. This method can be used in conjunction with the above methods.
This is about defining and strategizing on how the product will be distributed and delivered and where the customers will find the product. The focus is on the location or place of sale, distribution and delivery channels and the rationale for preferring one channel instead of another, which could great location, cost and effort required to distribute and motivate customers to sign up, ease of reaching customers, and a chance of locking out competitors out of a channel. Distribution channels include wholesale, retail (supermarket), cash and carry, mail order, door-to-door (hawking), and of course online (internet).
Promotion is about the methods that will be used to inform the customer about all the other aspects of the marketing mix (product, place and price). Without promotion, customers would not know about the product, its features and benefits, and the price it sells for and where it can be found (place). The main aims of promotion are to inform, introduce new products, create a brand image, compete with competitors, improve company image and generally to attract attention, arouse desire, call to action, and retain customers. Promotion mix includes advertising (newspapers, magazine, radio or TV), visual merchandising, public relations, publicity, direct one-to-one selling, sales promotions, and online marketing through the website, email and social media channels.
This is about the delivery of service that will satisfy customers and give them a positive experience. This boils down to the people assisting you to operate the business, which includes employees, suppliers, and financiers. The employees that you require should be knowledgeable, skilled and with the right attitude. They are then to be trained, motivated, regularly appraised and rewarded. They are to work under clear and written terms of service that comply with labour laws.
This is about having processes and systems that allow you to effectively and efficiently produce and deliver your products or services to the customers. Effective and efficient systems include accounting systems and systems that make it easy for customers to interact and do business with you online without setting foot in your premises.
vii) Physical evidence
This refers to everything that a customer sees when interacting with your business including cleanness or neatness of your environment and employees, packaging, branding and the evidence that lets the customer confirm that product or service has been delivered to them.
Successful marketing strategies focus on the following aspects:
- Marketing message must have the customer’s interests at heart and at a time they are prepared to hear it and not, for example, at 3.00 am.
- Message and product must be remarkable (notable) to attract attention.
- Message and product should target a probable customer who is well suited to what is being offered.
- The marketing message should pull the customer away from his present preoccupation, create curiosity, and arouse concern in him.
- The marketing message should focus on the desired result (benefits) and not just the features of the product. People don’t buy the light bulb; they buy the light that is produced by the bulb.
- Message and product should target people who are at the verge of entering market-e.g. new-born needs and expectant mothers or farm inputs and a farmer at the start of the planting season.
- Message and product should target a market that is easy and cost-effective to access.
- Message and product should aim at what people already want to acquire and convince them that what you are offering will give them what they want.
- Experiencing is far better than just seeing or hearing. Aim at getting people to visualize such as having practical experience by test-driving or actuality using the product.
- Focus on critical details while minimizing unnecessary details.
- Offer valuable things for free to attract attention.
- Make use of a tagline. A tagline is a sentence or a phrase that conveys a product’s primary benefit such as “the speed of an aeroplane for the ticket-price of a bus”
- Create an urge to act by creating an impression of exclusivity, limited availability and making the action process hassle-free.
- Create positive or constructive controversy by taking a well-supported position that not everyone agrees with to attract attention to yourself or product. President Donald Trump appears to use this strategy quite a lot.
- Create a positive view in the eyes of the market (reputation) by creating a product with clear consistent benefits coupled with customer care, professionalism and effective marketing.
This aspect of a business is about developing strategies for selling. Marketing is the strategic thinking and activities behind selling. Selling is getting the prospective customer to order, sign the paperwork, pay and carry the product. Qualities you should cultivate as a salesperson include a positive attitude, listening skills, persistence, effective communication, truthfulness, problem solving and reliability. You need to be able to tell the customer about the features of the product and how the features will benefit them.
For this to be successful, you need to research the target customer to understand him or her, discover individual needs, reach out by calling and making an appointment, present solutions to their problems, subdue any opposition, negotiate, and close the sale. These selling efforts should be supported by the following other aspects: well-designed visual presentation of the business, well-written and designed selling (customer interaction) systems, and accounting system for recording, tracking, measuring, analyzing and reporting all selling efforts for analyzing and continuous improvement. You need to look at all issues and hitches that can frustrate a customer or hinder buying before purchase, during purchase and after purchase and address them all before they occur. As you look at them, compare the issues with those of competitors and customer expectations and remove the pains.
You can learn a lot by reading How to Sell Anything to Anybody by Joe Girard (1977-renewed 2005).
Negotiating is parting of selling and it is important for business success. You, therefore, need to think about it as you plan to start and run your business and learn how to negotiate. Negotiation is about compromising and not winning against your opponents. I order to do well; you should lay down your goals and set your lower and upper limits before going into any negotiation. You should also consider your opponent’s interests, show your keenness to negotiate and remember you are there to solve a problem and not to outwit each other.
Among the best books to learn more on this subject is one entitled You Can Negotiate Anything by Herb Cohen (1980).
CUSTOMER SERVICE PLANS
When starting a business or thinking of improving an ongoing business, customer service plans should be prepared. Below is an overview of what customer service is about and what sort of plans should be made about it.
What is Customer Service?
Customer service is the quality of help and courtesy granted to the customer during service and after service delivery and the degree to which the customer is satisfied with that service. Customer service is the act of serving, helping and assisting those who buy or plan to buy from your business. Excellent service is where the customer has been served in such a way that he or she is satisfied and feels that the service was beyond normal expectations. Tangible aspects of customer service include value for money in the product and intangible aspects are about how the customer is treated in the course of being serviced.
Importance of a Customer
Most businesses exist to sell products and services to customers and in the process make some profit. They exist because of people (customers) who want their products and services and hope to make money out of the people. The focus should be on the external customer or the buying customer. A business exists only for the customer and not the other way round. The first order of any business should be to create and keep this external customer.
Importance of Customer Service
In business, profit can be boosted by having a desirable high-quality product, boosting sales through superior marketing and advertising strategies, cutting prices or costs. These methods can indeed deliver results but up to a point. Beyond this point, competitors can copy and produce a more superior product or engage in high-powered marketing that out-smarts your ways. Competitors can cut prices too. There is also a limit as to how far you can spend on advertising or can cut costs to boost profits. Customer service on the other hand as a way of boosting the bottom line is unique, equally effective and is hard to copy. This is why excellent customer service is a much better method for boosting and maintaining sales. Marketing and advertising costs are not only more than the cost of offering customer service but it is also much easier to provide excellent customer service than to engage in excellent marketing. It is also certainly much easier to provide good customer service than to cut costs that may already be too tight.
In an organization, it is employees who mostly dispense customer service but customer service is so important it cannot be left just to employees. Customer service culture should be driven by the CEO through managers to everyone in the organization. Employees should be very well-trained in customer service and should follow a well-laid out customer service charter and customer service policy. The charter is about promises of service made by the business to the customers and customer service policy is about how customers will be treated by the internal employees of the business.
Handling Customer Complaints
Complaints in business are inevitable and they are good feedback for early correction before something worse happens. Have procedures for handling complaints and make it easy for customers to lodge complaints which you then follow up, apologize and urgently resolve them without apportioning blame and with empathy. Have a clear product return and refund policy. Avoid words like we will call you tomorrow, call another number or office, I don’t know, we don’t do that, that is not possible, it is the policy, I don’t care, you are wrong, I am the expert and so on. Don’t argue back or defend yourself or your position.
Learn more about customer service in a PDF article on How to provide great customer service
Business management concerns planning, organizing, staffing, directing and controlling and management plans define and create management structures and organs. It is about the things that managers and employees do and the tools they use to run the business on a day-to-day basis. These functions of management are to vaying degrees exercised at various levels of management in the business. A supervisor for example wil do a lot of controlling and a bit of organizing as well. The main actors in business management are the owner or CEO and employees who make decisions and use organs such as office organization structure, facilities, systems, processes, policies, procedures, and manuals to exercise the functions of business management i.e. planning, organizing, staffin, directing and controlling. The purpose of these organs is to facilitate the effective and efficient performance of functions of business management. Effectively is about achieving desired results while efficiently is about achieving results using the least possible resources (cost-effectively). Before creating and describing management plans in the business planning process, it is first important to understand what managing a business entails. The sections that follow below explain what business management is all about.
Functions of Management
Business management is a structured process that is used to achieve the aims of a business effectively and efficiently. Business management is about the things that managers and employees do and the tools they use to run the business on a day-to-day basis. Business management involves planning, organizing, staffing, directing, controlling, and making decisions in the business on a day-to-day basis. Briefly, these aspects of management are as follows:
Planning: The planning entails engaging in strategic planning to identify what is to be done, why, by whom, where, when, and how. This is where mission, vision, values, goals, objectives, strategies, and actions come from.
Organizing: Organizing a business entails looking at the business plan to determine the activities that require carrying out to achieve aims, needed resources, and setting out how to achieve the aims.
Staffing: This is about determining the needed number of employees to carry out the planned work of the organization and the knowledge, skills and experience required and how the employees will be managed and compensated.
Directing: This is about leading, guiding, coordinating, influencing, encouraging, appraising, and motivating employees and other stakeholders to achieve the goals set out in the strategic plan.
Controlling: Controlling is about monitoring, measuring, evaluating and correcting activities to keep the plans of the organization on track.
Decision-making: In the process of managing, leaders and managers have to make decisions daily in a structured and logical manner.
Levels of Management
The people who perform functions or tasks of business management include the board of directors if there is one, and the following cadres of employees:
Top management: This usually consists of the president, CEO, executive vice presidents, managing director, or some such titles. Main work for this is strategic thinking and planning.
Middle-level management: This consists of heads of departments such as marketing and sales, finance, HR, or positions like that. Main work for this is organizing, staffing and assigning work.
Lower level management: This consists of levels like supervisors, section heads, etc. Main work for this level is controlling.
Technical level: Technicians are the people who get things done in a business. These foot soldiers do the work.
A business needs all the above skills and the owner of a business should have all these skills in some proportions. Where the owner does not have all the required skills, he could hire competent people to provide the skills he does have. Better still, the owner should automate, mechanize, digitize, and systematize systems, processes and procedures in the business in such a way that the systems all work together with little human intervention. Above all, the systems can work with ordinary people’s skills. The aim should be for the owner to contrite on strategic thinking and planning and leave the rest under the care of assistants and orchestrated systems.
Effective and efficient business management requires an office organization structure. Because of specialization and division of labour, the business requires organizing into departments according to the strategy and core business of the enterprise. The office structure is the positions’ establishment of the business and depicts the positions and reporting relationships and relative authorities from the board, CEO, and departmental managers to the lowest levels in form of a chart like the one in figure 1 below. Each department may have a structure like figure 1 with the head of the department taking the box of the CEO with boxes of his reportees below his box. For accountability and delineation of deliverables of each department and positions in each department, there should be a clear description of the functions of each department and job description for the positions in each department. The positions in the departments need staffing with people with knowledge, skills, experience and positive attitude to exercise management functions to produce and deliver goods to customers. Departments commonly found in most business organizations include:
This is the box below the board in the office organization structure and is responsible for general administration or management of the whole business. All other positions below this position directly or indirectly report to this position. The owner in case of small business and a CEO in a large outfit is the head of business administration as depicted by the office organization structure in figure 1 below. He, with the help of senior managers and other levels of management, coordinate the planning, organizing, staffing, directing, and controlling everything that goes on in the business. The owner or the CEO is, in collaboration with the heads of departments and HR department, responsible for staffing departments and the people deployed in the departments do the planning, organizing, directing, and controlling across all the core functions of business namely strategic planning, marketing, operations, and financial management. The owner or the CEO together with the managers in the departments collectively administer the business using their time, facilities, tools, knowledge and skills to plan, organize, direct, control, decide and execute. All heads of departments can report to the CEO or related departments can be grouped under two or three general managers who report to the CEO. The owner or CEO should concentrate more on strategic thinking and business planning and leave the other functions of management and the day-to-day running of the business to managers and orchestrated systems.
The people in this role do strategic thinking, strategic planning, and business planning to conceive and put together creative ideas for implementing to create value for sale. The owner of a small business performs this role but in a large organization, each department can do their planning and organization in collaboration with finance department or any other department that coordinates strategic planning for the whole business.
Production or product creation
The people in this department create products, services, and ideas for delivery to customers. Typically, the role involves planning, designing, buying raw materials, and scheduling production, producing products, managing inventory, making sure products and services meet the required quality, and availing needed problem-solving products for delivery to the market.
Operations in business are actions, activities, and decisions that create, market, sell, and deliver the goods where customers want, the way they want, and when they want at a competitive price. Operations use facilities, equipment, premises, logistics, systems, computer software, policies, procedures, manuals, and people to perform the core functions of a business namely production, marketing, selling, customer service, financial management, and administration. Operations department can, therefore, be a support unit that develops, provides, manages, and maintains operating resources for all departments in collaborations with the departments. Alternatively, each department can have a mini-operations unit to develop and maintain facilities, systems and procedures that it needs to deliver its mandate. Procurement, transport, and security units often fall under operations department.
This role is responsible for developing, implementing, providing, maintaining, securing, and promoting the application of technology in performing functions across the organization.
Marketing and sales
This role is responsible for finding, attracting, and retaining customers through strategic pricing, and promotional activities, and selling and delivering products using distribution/delivery channels such as wholesaling and retailing.
Finance and accounting
The finance function is concerned with obtaining money for funding the operations of the business and ensuring prudent and profitable deployment of funds and resources across the enterprise. It also entails recordkeeping/accounting, monitoring cash in and outflows, and measuring business financial performance in monetary terms, and reporting this information for decision-making.
Human Resources Department
The main role of this function is staffing all the departments of a business to ensure that the various departments have the right staff numbers with desired knowledge, skills, integrity and right attitude. The HR function also deals with staff communications, behaviour, motivation, labour laws and performance management, in a structured and formalized manner. HR department exercises these roles in collaboration with the other departments and the CEO or owner. In a small outfit, the owner with a few assistants exercises these functions.
A properly functioning business needs to have a well-defined ownership structure. The ownership structure is about the legal format of the business such as sole proprietorship, partnership or a corporation. It also needs to have internal and external resources that include a board of directors, a CEO, internal audit, delineated departments, employees, external auditors and identified service providers like an advisory board, suppliers, contractors, vendors, accountants, bankers, advocates, business advisors and coaches, and external auditors.
For a small business, the owner and a few assistants can manage the business with any structure or no structure at all. A large outfit may require formal structures and organs. A formal office structure may look like the one in figure 1 below.
Figure 1: Office organization chart
What are Operations and Operating Plans?
Operations are actions that create and deliver goods to clients and operations plans establish the activities, facilities/systems that facilitate the actions. Operations use facilities, equipment, premises, logistics, systems, computer software, policies, procedures, manuals, and people to perform the core functions of a business namely production, marketing, selling, customer service, financial management, and administration. Operations plans therefore concern creation and management of these facilities, systems and organs and the activities that turn the resources to products and services. This is about planning the need, acquisition, development and deployment of physical and non-physical resources that a business requires for producing and delivering the products or services. This covers all the things and logistics needed in the value addition chain ranging from material acquisition through processing to delivery of products and services to customers. The goal in operations management is, therefore, to have needed facilities, systems and processes and to use them effectively and efficiently to create products and services and deliver them the way customers want, where and when they want and at an affordable or competitive price.
Once a business has decided what activity to engage in to produce goods or services, it must then decide what product to produce, where this will take place, the processes and facilities required, the layout of the facilities and the technology to drive the transformation process. Other processes that include supply chain main, quality management, and operating systems, policies and procedures have also to be considered. Under operations or operating plans, the following have to be considered:
Production of goods and services
Creation of a product or services requires location, premises, facilities, facilities, processes, information technology, and supply chain, inventory and product quality management.
Operating systems include production, delivery, accounting, procurement, inventory management, asset management, payment, HR, office workflow, marketing and sales, PABX, and a host of other operating systems.
Risk, business continuity and ISO
Risk and business continuity management require systems, processes, policies, and procedures for identifying and mitigating risks and resuming business activities with very little loss of assets, people and time when a disaster occurs. The same is also required for embracing ISO.
Policies, procedures and operations manuals
Policies, procedures and manuals are guidelines that direct performance of activities and conduct of employees in all areas of the business.
FINANCIAL MANAGEMENT PLANS
Financial management is the exercise of setting goals, identifying means of financing the goals and controlling operations to achieve the goals as planned. It is a housekeeping activity that a business owner or management of a company must engage in and put in place systems that help in the management of assets. Financial management activities include acquisition of necessary assets, safeguarding the assets, monitoring the performance of the assets, and measuring of asset values from time to time. This activity also entails deployment of assets profitably, measuring financial performance and ultimately distributing profits. The entire financial housekeeping tools need not all be in place or elaborate but it is good to think about them and have them on a need to have basis.
Consideration for what measures to have for or reform in financial management within the business should take place at the strategic planning stage. To start and run a business successfully or to make effective financial plans when preparing a business plan, it is useful to understand the elements that go into financial management. To this end, the concepts that need appreciating in the financial management arena are as follows concepts:
Financial management concepts and principles
Financial management relies a lot on accounting, which is the art of keeping, and analyzing financial records for information and decision-making. Records can be kept manually using registers or by use of computer machines and software. Accounting is governed by rules that are set by international accounting standards setting-bodies such as the International Accounting Standards Board (IASB) that set international accounting standards (IAS) that were replaced in 2001 by international financial reporting standards (IFRS). In some countries like USA other rules like Generally Accepted Accounting Principles (GAAP) are followed. The main concepts and principles that guide accounting include:
- Double-entry: All transaction entries must be recorded as debits and credits.
- Business entity: A business entity is regarded as a separate entity from the owner.
- Historical cost: Assets of the business should be recorded at their historical cost.
- Going concerned: The entity will be viably in business for the foreseeable future.
- Monetary unit: Financial transactions be recorded in quantifiable monetary value.
- Matching: This requires that expenses and the related revenue should be matched.
- Accrual concept: Revenues and expenses be recorded upon occurrence.
- Accounting period: Reported accounts be for a period like a month, quarter or year.
- Conservatism or prudence: Estimates of revenue and expenses be realistic.
- Consistency: Accounting procedures and policies should be used consistently.
- Materiality: Transactions that can affect the decisions of an information user be reported.
- Objectivity: Transactions be recorded objectively and supported by unbiased evidence.
- Realization concept: Sales be recorded upon delivery goods expenses are recognized on receipt of once goods, services or works.
- Cash versus accrual accounting: The cash method recognizes revenue only upon receipt of the money and expenses only on the payout of cash while accrual method recognizes revenue when it is earned even if not yet received and records expenses of goods and services the moment they are incurred even if not yet paid.
- Financial records are classified as assets, liabilities, revenue, or expenses.
- Depreciation: Depreciation is a reduction of the value of an asset over time due to use that causes wear and tear. The portion of the reduction in value in a year is recorded as an expense in the year.
- Gross margin (GM) and profit: GM is sales minus cost of goods made (or sold) while profit is GM minus all other expenses (or sales minus all expenses of doing business).
Internal financial controls are any checks and balances that are in place to safeguard assets, prevent and detect frauds and errors, maintain quality of products and performance, ensure accuracy and completeness of the accounting records, and promote timely preparation of reliable financial information and reporting of the same. The main controls that are usually put in place include:
Standards and benchmarks: A standard is a principle, a rule, a reference point, a norm or a measure set by the organization or the industry and used for implementing practices and procedures and evaluating outcomes.
Internal controls: The main internal control measures include separation of duties, setting access controls, having data backups, physical verification, regular financial audits, use standardized documented policies and procedures, preparing Trial Balances, regular account reconciliations, co-signing and approval of transactions and commitments, use of checklists, quality controls and quality checks, having reported, maintaining a risk register, and supervision.
Policies, procedures, manuals, rules, and regulations: These are guidelines that document and standardize the availability of information about how financial tasks are performed and they ensure proper behaviour, use of resources, safeguard assets, prevent and detect frauds and errors, ensure accuracy and completeness of the accounting records, and promote timely preparation of reliable financial information and reporting of the same.
Financial management tools
The activity of financial management applies systems, processes, tools, policies, procedures, and manuals to capture, control and monitor transaction as they occur and to analyze the financial records and prepare necessary reports therefrom for information and decision-making. Conduct effective financial management requires the following reports, tools, and activities:
Cash-flow statement: This report shows sources and uses of cash in the past or future one-week, month, quarter or year. A forecast is prepared to help have a plan for foreseen cash shortfalls or surpluses.
Income statement (statement of comprehensive income): This is a tabulation of revenues and expenses every month to measure the financial performance of the business for information and corrective actions where there are deviations from plans. Revenue minus expenses equals net profit.
Balance sheet (statement of financial position): This table shows assets and liabilities of the business at any point in time such as the end of a month or year for information and corrective actions where there are deviations from plans. Assets are things of value that the business owns and liabilities are things of values that the business owes to other parties. Assets minus liabilities represent the net worth of the business. In a statement of financial position, assets = liabilities + equity. If liabilities are more than assets, the business is insolvent.
Budget variance report: A budget variance report is a template that compares actual revenue, expenses, and profit or loss with the corresponding budget amounts of these items over a week, a month or a year and reveals deviations of revenue and expenses from the budget for necessary corrective actions.
Cashbook reconciliation: A cashbook is an office record of cash inflows and out outflows, and has the bank account as its mirror record. Cashbook reconciliation is a weekly or monthly schedule that compares cash transaction postings in the office cashbook with the postings in the bank account to highlight differences caused by time lags, bank entries, errors and even fraud, for interrogation and necessary actions.
Payroll report: Payroll is often a standalone system for processing salaries for employees. In a large organization with many employees, it is useful to compare payroll expenditure of the current month with the expenditure of the previous month to pick out differences caused by errors, omissions or commissions.
Financial Policies and procedures: Financial policies and procedures are a set of guidelines that explain how to perform a task or handle a matter. Key areas of operations that require the guidance of financial policies and procedures include:
- Accounting processes.
- Payments: Policies and procedures are necessary for this area to guide preparation, counterchecking and approval of outbound payments.
- Handling of cash.
- Recurrent budget making and budget variance analysis.
- Capital allocating or budgeting procedures.
- Asset, depreciation and inventory management.
- Debtor and creditor management including granting of credit to customers.
- Procurement management.
- Investment appraisal.
Other Financial Management Tools
- Working capital: This is like a cash flow statement but includes cash and other near-cash assets and liabilities.
- Beak-even analysis: This is a point in revue units or sales value at which revenue equals expenses (Cost of goods sold, variable and fixed costs) and at this point, there is neither a profit nor loss. Knowing this point from time to time helps in setting costs, prices and production capacity and operating facilities. The formula for computing break-even point is PQ = F + VQ, where P represents the selling price per unit, Q represents the number of units of goods produced and sold, F stands for total fixed costs and V represents variable costs per unit. Learn more about this important concept of business costs and break-even analysis in an article entitled Guidelines: How to start and run a business successfully.
- Analysis of various ratios like cash ratio, net income to sales, return on investment, etc using income statement and balance sheet amount balances.
- Setting benchmarks, targets and key performance indicators (KPI).
- Cost-cutting and control and tax management exercises.
- Cost-benefit analysis: This is an approach of weighing the costs against benefits of available investments, projects or alternative ways of achieving desired objectives.
What is a Business Plan
A business plan is a document that defines what needs doing and why when to be done, how to do it, who is to do it and the resources to achieve the set goals. It is one of the end products of strategic planning. When starting a new business or seeking to expand or refinance an ongoing business, a formal business plan is necessary. Business planning is about planning your business using information that has been generated through strategic thinking or planning process. This process of planning writes and documents exactly, how to accomplish a specific goal. The goals to be achieved and the informing that is necessary to make this planning process coherent are identified through strategic planning (thinking) process. Strategic planning and business planning, therefore, go together in the sense that one feeds the other.
However, strategic planning and business planning are not completely synonymous. Strategic planning is an exercise that involves thinking, brainstorming and creativity while business planning is about the application of the information from the strategic planning into an organized and coherent game plan. The outputs of strategic planning inform the formulation of a business plan. The document that is produced after strategic planning (thinking) and business planning is a business plan which can also be interchangeably referred to as a strategic plan. Strategic planning is about creating strategic information and business planning is about using this information to create a business plan or a road-map.
Business planning is financial oriented and involves projecting resources required and future operating results based on analysis, experience, data collection and mixing these with strategic ideas that originate from the strategic planning process. Business planning is more structured, fact-based and financially analytical than strategic planning and the final written product is a document that is mainly used as a communication tool to communicate the mission, vision, values, goals, strategies and action plans of the business to all stakeholders. It is, therefore, more of a communications document that presents the game plan coherently and logically.
Purposes of a Business Plan
A business plan serves five main purposes:
- It is a road map for managing the business and as a road map, it must put together in writing all the plans, activities, resources, forecast financial data, and finances required to commence and run the business or to upgrade or expand the business.
- Like a roadmap, it is a communication tool that articulates and communicates how the business will work to serve the purpose and achieve the vision.
- It serves as a tool that can be used to solicit financing for the business. Few if any financiers will lend their money without looking at the business plan. A financier has to see exactly how your business will run and make money and whether it has the potential to repay the loan that is being sought. The business plan must show exactly this in words and cash flow numbers to the financier.
- When done properly, the business plan can also serve as a motivation tool that can be used to motivate staff because it conveys the aims and aspirations of the business.
- Because it has targets, the business plan can also be used as a control tool to monitor progress and get the business back on track fairly quickly if anything is seen to be going out of plan along the way.
Contents of a Business Plan
The main elements of a business plan that are usually contained in 20 to 30 concisely written pages include:
Table 2: Elements of a business plan
|This captures the essentials of the proposed business and should tell the overall game plan concisely and precisely in two to three pages. This summary section is written last after the sections below.|
|Strategic Plan||This is a description of your contemplated business in strategic terms. Ideally, it should cover mission, vision, values and main objectives (goals) and strategies. Duration of the plan such as three to five years is stated here.|
|Critical Success Factors||These factors are essential in your business and would make or break your business.|
|This describes the legal format of the business (sole proprietorship, partnership or corporation), name, location(s) and ownership structure including details of the directors.|
|Operations||This explains how the business will operate on a day to day basis in terms of location, facilities and systems. This section should capture the resources necessary to start and operate the business.|
|Marketing, sales and distribution/delivery Summary|
|This is about plans and strategies for creating awareness and demand, converting potential customers into buyers, placing products in customers’ hands or locations near them, and offering customer care. Market and competition can also be analyzed in this section.|
|This section features governance and management of the business and will include management team; organization structure and establishment; employee numbers, their roles or positions, qualifications, skills, experience and salaries. Suppliers and all other service providers the business needs or has to work with are captured here as well.|
|This section reduces everything above into numbers and covers funding requirements, sources of funds, forecasted accounts and financial statements (i.e. statement of comprehensive income, statement of financial position and cash flow projection), budget, inventory list, gross margins, forecasted profit potential and break-even analysis. The financial statements are projections of how the business will look like financially on day one of business and at each year-end over the next five years.|
|Implementation Summary||This contains an overall detailed implementation plan (action plan) and actual operational activities that have to be carried out to get the business up and running.|
|Appendix||This could contain references, assumptions and other detailed write-ups, financial tables, figures, charts and details of service providers like bankers, lawyers and accountants and insurance covers.|
What is a Budget
A budget is an expression in figures of the activities to be performed in a given year to achieve desired goals that also state revenue, expenses, and profit. Before embarking on a business, it is advisable to have a budget looking ahead one to three years. Activities to be budgeted for are derived directly from the strategic planning process and the budgeting process seeks to finance the selected strategies (ideas) in the strategic plan.
A budget is part of the strategic planning process and usually comes at the tail end of the process to allocate funds to any activity in the plan that needs funding. A budget is an important financial management tool and it is prepared at the start of new business as well as at the beginning of each year for an ongoing business. A budget may also be prepared at the initial researching stage to determine the viability of the business idea.
A budget has only two main projections, income and expenditure. Expenditure is usually in two parts namely recurrent or operating expenditure (OPEX) and capital expenditure (CAPEX). The difference between revenue and expenses is profit or loss. It is useful to prepare a CAPEX budget as well. OPEX is operating expenses while CAPEX is capital expenditure. CAPEX is expenditure for acquisition of one-off durable assets that will be used in the business for more than one year.
Purpose of a Budget
The main purposes of a budget are:
- To allocate funds to prioritized activities as part of a business plan.
- To see in advance whether there is a return or not if planned activities are implemented as planned.
- It is used to monitor and control spending through analysis of variances between budget and actual turnouts of revenue and spending.
Estimate Starting Up Costs
Starting up capital is the one-off seed money needed to start the business. For some, nothing much is required to start but for others, substantial sums may be needed. Typically, start-up capital includes money for such things as company formation expenses, plant and equipment if applicable, office or premise setting up, furniture, fittings, office equipment, initial stationery and other one-off expenses that are necessary to be paid up before business can commence.
Included in starting up costs are recurrent expenses for the period that you think will take the business to break even, which is usually at least six months and more. During this period, you will partly be financing the business using savings or borrowing.
Estimating Recurrent Costs
Recurrent expenses which are costs that are incurred regularly as the business operates such as rent and salaries. Recurrent costs fall into the following sub-categories:
- Variable costs are costs that vary depending on how many units are produced and sold. Included in this category are the cost of goods produced (sold), selling and delivery costs, and any other cost that vary with output but cannot be associated directly with any unit of output.
- Fixed costs are costs such as rent and administration expenses that do not change whether anything is produced and sold or not.
When preparing a recurrent budget for more than one month, income and expenses should be placed in the months they are expected to occur. Where revenue and expenses occur, depends on the plans are in place and the varying conditions and seasons that the business undergoes. The information in the business plan is used to prepare the budget. Previous year’s numbers and reasonable assumptions based on prevailing market conditions are also used. The budget should be presented in the form of a detailed statement of financial position featuring itemized revenues and expenses. Using the desired rate of return on investment (ROI), the budget is prepared iteratively to arrive at a future appropriate level of income and expenses targets that can deliver the desired ROI. The main elements of a budget namely revenue and expenses can be adjusted in an iterative budgeting (prioritization and allocating) process until a desired but realistic and attainable profit position that can be adopted is established.
Contents of a Budget
Below are examples of one-off and a monthly budget:
Table 3: One-off outlays (US$)
|Formation: For registration, or partnership deed or incorporation||250|
|Consultancy: Any third party services such as accounting or legal||200|
|Rent Deposit: First-month rent and 3 months deposit||1,000|
|Redesign, refurbishing, restructuring and decoration of premises||2,500|
|Licenses and permits||100|
|Stationery: Letterheads, logos, business cards and office stationery||500|
|Utilities: Internet, electricity and water connection deposit fees||100|
|Initial marketing and sales material||100|
|Website development costs||500|
Table 4: Monthly revenue and expenditure statement (Budget)- US$
|Cost of Goods Sold||26,112||27,250||28,030||30,650||31,295||32,215||32,265||32,265||32,465||32,465||31,173||33,815||370,000|
|Non-operating Income|| |
|Profit Before Tax||7,261||27,223||27,683||24,783||32,158||30,772||25,302||36,166||32,749||23,806||33,754||27,647||329,304|
|Provision for Tax||2,178||8,167||8,305||7,435||9,647||9,232||7,591||10,850||9,825||7,142||10,126||8,294||98,791|
FINANCING THE BUSINESS
Once you have thought about the business idea, formed your business, and have carried out strategic planning to figure out your strategies for marketing, sales, distribution, customer services, operating facilities, financial management, and administration, it is time to think about the money for starting and running the business until it is self-sustaining. To think through this, you need to estimate starting up costs and consider the various sources of raising capital.
Find the necessary funds to start
Once you know how much you need to start, you have to figure out where the seed funds will come from. Common sources of funds include:
- Own savings, family, and friends’ savings.
- Bootstrapping- which is about purposely starting in a lean manner and pulling together your resources and using any means that minimizes expenses. For more on lean starting, read The Lean Start-Up by Eric Ries (2011).
- Crowd-founding- this involves raising money using online campaigns from fans of products and services that you want to create. Kickstarter and Indiegogo are common sites for this type of thing. There are other crowd-funding sites too.
- Credit union loans- credit unions are non-bank member-based savings and credit groupings or societies. Common credit unions are employee-based.
- Credit cards.
- Debt or equity- debt is where you borrow money from an individual, individuals or an institution and return the money over an agreed period with interest. Equity is where you trade a portion of ownership of your business for money.
- Microloans- this is where you borrow money from a deposit-taking or credit only (non-deposit taking) microfinance bank. Micro means small mostly under US$10,000.
- Barter financing- this is where you trade your services for material or asset you need for your business. If you need computers or office space, for example, you can offer to service computers of the customers of a computer seller or the seller’s computers in exchange for the computers or office space you need. If you are a landscaper, you can offer to landscape and maintain the lawn of a lawnmower seller in exchange for one or two land mowers.
- Bank loans- borrowing from a licensed deposit-taking institution (bank).
- Angel investor- these are individuals or associations of individuals willing to lend money to creative and promising ventures for a return and sometimes just to help such creative startups. Online sites such as Gust and AngelList and local associations can assist to connect you with potential Angel investors in your line of business.
- Venture capitalist- these are individuals or institutions willing to lend money to promising startups usually looking for huge profits after developing and growing the startups and selling them for big money later.
- Small-business grant. Some governments offer small-start-up grants. Check these out with your government and see if you qualify.
- Start-up incubator: Business incubators are set up to assist budding business people to start and run small businesses successfully. Many of them offer free resources such as starting up assets, business management training, networking openings, and marketing services and in some cases money too.
- Bargain for advance financing from a customer: Some customers may be so interested in your product that they are willing to partner with you to produce the product and put it in the market. White-labelling agreements are common types of this arrangement. The white-labelling arrangement is where a manufacturer of a product allows another business like a retailer to sell the manufacturer’s products under the retailer’s brand, name or logo as if the retailer is the manufacturer of the products.
Using a business plan to solicit funding
You use a business plan to solicit funds. Any lender will want to know what your business is all about and how it will make money to be able to repay the loan. They want information as to how the business operates and how the money will be used to create, market, distribute, and sell the product or service. They also want to know who and how the business is managed. To be able to answer these questions, your business plan should contain the following:
- Executive summary: This is a one or three-page highlights of the business particularly why the business deserves funding and what is in it for the lender.
- Mission and vision: Mission is a few words or a paragraph that states the main purpose, aims or mandate of the business. Vision is also a few words of what the business aspires to be in terms of progress and excellence.
- Description of products and services.
- Description of the competition and your competitive advantage over the competition.
- Short and long-term goals and challenges if any.
- Marketing, selling, distribution and customer service plans.
- Forecast financials that include an income statement, balance sheet, cash flow and budget (both starting up and operating costs) covering two to five years. This budget and cash flow should demonstrate the need for financing and the ability to repay what is borrowed.
- Administrative structures, ownership profile, employee team and their qualifications, and service providers and supplier team.