How to Build a Planning in Small Business

‘It is impossible to plan in this business’ is a cry that one often hears from the small businessman, and yet he will later go on to suggest that he intends to purchase new plant costing say £30,000. These two statements are manifestly contradictory. By indicating his intention to purchase new machinery the busi­nessman is, perhaps subconsciously, planning for the future. This is not to imply that the average businessman takes invest­ment decisions lightly, but that on some occasions this type of decision is taken solely to resolve today’s problem, without per­haps considering its full implications in the future.

‘Planning’, as somebody remarked, ‘is a hazardous business, especially when it involves the future.’ There is no divine right by which a company repeats its successes of yesterday. As major decisions taken today will influence the future success of the business, it is apparent that most small businesses would bene­fit from a more systematic approach to planning. In the case of the businessman wishing to purchase new plant, he was, de­spite his protestations to the contrary, planning for the future, so why not do it systematically? Certain assumptions were being made regarding the future pattern of trading, and consid­erable benefit could be derived from making these assumptions explicit and testing them systematically and continuously against what occurs.

Planning  Small Business

In summary, what is the case for planning, in a small busi­ness? The pros outweigh the cons, though the doubters would suggest that ‘we have managed without planning so far, so why start now?’ or, alternatively ‘the future is uncertain anyway, so why waste time and effort looking ahead?’ These arguments are entirely subjective and are outweighed by the positive factors:

1. If a form of unconscious planning is undertaken anyway, why not do it in a formalised manner?

2. We live in a changing world and a company has to react to that change if it is to survive and be successful.

The introduction of a planning system can boost the morale of management and staff alike, producing a feeling that ‘we know where we are going’ and giving the business a renewed sense of direction. As the effectiveness of management and staff are the key to corporate success, this is a vital factor. 4. A planning system can integrate the management effort by defining individual areas of responsibility and functions to be performed towards the achievement of the overall corporate objectives.

If the case for the need for planning in a small business is accepted, an outline of the way in which planning should be in­troduced into a small business is necessary. Initially, the small businessman must define his (and thus the company’s) objec­tives. Objective setting is the responsibility of top management; it cannot be delegated. It can also be a difficult task and it may be appropriate to attempt to identify the constraints that operate within the business. This inevitably involves an assessment of strengths and weaknesses of the company. As a first step in this analysis, a review of company performance over the past few years should be undertaken, coupled with an assessment of the business’s potential, using the existing resources. It would be appropriate to consider such aspects as productive, administra­tive, management and sales capacities in relation to premises, plant and people. Analysis here tends to give advance warning of the possible need to acquire new premises or plant, recruit further management or labour, etc to facilitate the achievement of the corporate objectives. Moreover, it is necessary to review the market place in which the company operates, bearing in mind the effects of pricing and any technological change which may influence the life of the products.

This approach may seem a little grandiose, but if realistic objectives are to be set it is self-evident that the constraints operating should be clearly identified. For example, there is little point in a businessman deciding that he wishes to increase sales to £750,000 in the next financial year if the constraints operat­ing in terms of premises and plant restrict the productive capacity of the business to £500,000 per annum in sales terms. Similarly, if the market for the company’s products is declining, it would seem unlikely that a sales objective could be set to increase vol­ume by 50 per cent during the next trading period unless the initial sales base was insignificant in relation to the size of the market. These two examples are over-simplifications, but they emphasise the need for general planning.

Following this appraisal it should be possible to set realistic, quantified objectives in terms of sales and profit in the short and medium term. As company success in the final analysis is dependent on profitability and liquidity, it would seem relevant for the objectives, as defined, to be formulated into a capital expenditure budget and operating budgets for sales profit and cash for an initial trading period, bearing in mind such factors as productivity and product mix. A further major constraint may be cash, and, if the availability of this vital ingredient is re­stricted for any reason, it may be necessary to reappraise the targets for sales, profit and capital expenditure in the short term.

Planning Small Business

Assuming that the appropriate levels of cash are available, the various budgets and forecasts may be evolved into forms of action plan for the individual members of the management team within the business. This ensures a measure of involve­ment by these managers in the achievement of the overall corporate objectives, coupled with that other vital factor -accountability. It is of paramount importance that company performance is monitored and compared with the various budgets and forecasts in order that variances can be identified, thereby enabling corrective action to be taken, as appropriate. It may be necessary to make mid-course adjustments in the various targets in the light of performance. This suggests a further important factor: that corporate objectives should always be flexible.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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