Making the Business Effective
Business plans
A business plan records a business idea, its aims and objectives, and the way the owner expects to reach them. It turns an idea into decisions the owner can check against later, instead of a vague hope that things will work out.
Produced before trading begins
A plan is written before a business starts up, or before it expands, so the owner plans activity in advance rather than reacting to events once money is already being spent. Someone setting up a mobile bike repair service, for example, would decide beforehand which areas to cover, what to charge per repair and how many jobs a week are needed, rather than working these out after the van is already on the road.
A working document
Planning does not stop once trading starts. The plan is a working document: the owner can review it, update it when circumstances change, and use it to monitor performance. If the bike repair owner expected ten jobs a week but is getting five, comparing actual figures with the plan highlights the problem early, while there is still time to change the prices, the area covered or the advertising.
How much detail?
The amount of detail varies with the size of the business and with whether the owner needs to raise finance. Someone funding a small venture from their own savings may write only a page or two, while a larger start-up asking a bank for a loan needs a much fuller document.
A business can be started without a plan, but the owner then works with greater uncertainty and finds it harder to raise finance. A plan reduces that uncertainty and supports an application for finance, but it cannot guarantee that the idea will succeed or that a loan will be approved.
A business idea is a clear description of the product or service a business will sell. It explains what customers will actually receive, not just the name of the business. For example, a business idea could be a subscription box of science experiments for children aged 7 to 11, containing the equipment and a step-by-step video for each experiment.
The idea should also explain what makes the product or service different from rivals. This difference gives customers a reason to choose it instead of an existing option. In the science box example, the difference might be that each box is built around a question children can test at home, such as why bread rises, so the experiments feel relevant rather than random. A rival selling a general craft box would not offer that focused science learning.
A business plan should identify the idea clearly so the owner, lenders and investors understand exactly what the business will offer and why customers would choose it. A vague idea such as “we will sell children's activity boxes” does not do this, because it does not show the product or its difference. Writing the idea precisely helps everyone reading the plan picture the same business.
Financial forecasts are estimates of the figures a business expects once it is trading, such as the sales income it will receive and the costs it will pay. A business plan should include forecasts of revenue, costs and profit so the owner can estimate whether the idea could actually be profitable.
What each forecast shows
- Forecast revenue — the income the owner expects from sales, worked out as the selling price multiplied by the number of units expected to be sold.
- Forecast costs — the money the business expects to spend to make and sell the product, such as materials, packaging, wages and rent.
- Forecast profit — what is left when forecast costs are deducted from forecast revenue. If costs are expected to be higher than revenue, the forecast shows a loss instead.
Worked example
Amir plans to make scented candles and sell them at weekend craft markets. Before he buys any wax or books a stall, he sets out his forecasts.
| Forecast | Working | Figure |
|---|---|---|
| Revenue | 300 candles × £8 | £2,400 |
| Costs | Wax, jars and wicks: 300 × £3 = £900, plus stall fees and packaging £400 | £1,300 |
| Profit | £2,400 − £1,300 | £1,100 |
Seeing that £1,100 on paper lets Amir test the idea while it is still only a plan. If the forecast profit looked tiny, or the figures showed a loss, he could raise his price, find a cheaper jar supplier or choose a different product — all before any money is committed.
Forecasts are only estimates, though. Customers may buy fewer candles than expected and costs may rise, so a forecast profit does not guarantee a profit. A profit forecast is also different from a cash-flow forecast, because it compares revenue with costs.
Minimising risk means reducing the chance that a business loses money or has to close. A business plan does this by making the owner think through each step of setting up and running the business before any money is committed — before a lease is signed, equipment is bought or staff are hired.
Testing the idea before you spend
Writing the plan forces the owner to put the idea on paper and check that it holds together. Suppose you plan to run a mobile bike repair van around housing estates. Writing the plan makes you name the customers you expect and work out roughly how many repairs a week you would need to cover the van, fuel and spare parts. If that number looks unrealistic, you find out before spending £9,000 on a van and tools. Testing the idea while it is still only on paper is far cheaper than testing it with real money.
Spotting problems early
Planning ahead lets the owner identify likely problems before they happen, such as too few customers. In the bike example, you might realise that most people want repairs at weekends, leaving weekdays empty. The plan can then set out in advance what to do if things go wrong: take bookings by phone, park near a busy supermarket on quiet days, or keep some savings to cover a slow first three months.
Targets to monitor against
The plan also sets targets the owner can compare actual results with once trading, such as 12 repairs a week at an average of £25 each. Falling short of a target is an early warning to change something quickly — the price, the estates visited or how the service is advertised — rather than discovering the problem months later.
A plan cannot remove risk, since customers may still stay away or costs may rise, but it reduces it by turning guesswork into checked decisions.
Another main purpose of a business plan, as well as minimising risk, is to obtain finance. Lenders and investors usually want to see a plan before they provide money, because it shows that you have thought through the idea and the numbers rather than relying on guesswork.
Who may ask to see a plan
Several outsiders may ask for a plan:
- a bank considering a loan
- venture capitalists deciding whether to invest in the business
- crowdfunding investors deciding whether to pledge money
- suppliers being asked for trade credit, which means paying for goods after they are delivered
What gives them confidence
Financial information such as cash-flow forecasts and profit forecasts gives a lender evidence that the money can be repaid. These forecasts turn the idea into figures that a lender can check. Market research in the plan can show that customers exist and that the business idea is sound.
For example, Asha plans a mobile bicycle repair service and asks her bank for £12,000. Her plan includes a survey of 150 local cyclists who say they would use a repair van, plus a cash-flow forecast showing that the loan repayments can be met each month. This gives the bank more confidence than a vague promise that "lots of people cycle".
Banks prefer lower-risk businesses. A well-prepared plan can reduce the risk in the bank's eyes, making a loan more likely and possibly available on better terms, such as a lower interest rate. It reduces perceived risk; it does not remove risk or guarantee that a loan will be approved.
The plan also gives information to outsiders other than lenders. A supplier deciding whether to offer trade credit may look at the plan's sales and cash-flow forecasts to judge whether the business will have cash to pay later.