WHY BUSINESS PLANNING IS IMPORTANT FOR BUSINESS SUCCESS
…Key steps in the planning process
Business planning, also known as strategic planning or long-range planning, is a management directional process that is intended to determine a desired future state for a business entity and to define overall strategies for accomplishing the desired state. Through planning, management decides what objectives to pursue during a future period, and what actions to undertake to achieve those objectives.
Successful business planning requires concentrated time and effort in a systematic approach that involves assessing the present situation; anticipating future probability and market conditions; determining objectives and goals; outlining a course of action; and analyzing the financial implications of these actions. From an array of alternatives, management distills a broad set of interrelated choices to form its long-term strategy. This strategy is implemented through the annual budgeting process, in which detailed, short-term plans are formulated to guide day to day activities in order to attain the company’s long-term objectives and goals.
From entrepreneurs and small business owners, the first step in successful business planning involves creating a formal business plan, of the type commonly used to attract investors and secure bank loans. Careful preparation of this document forces a business owner to examine his or her own goals as well as the market conditions in which the business operates. It also includes a detailed financial analysis, a look at current staffing levels and future needs, and information about management’s expertise.
All the elements can be folded together to formulate a strategic plan that focuses on where you want the company to be in the long run, and how you plan to get there. That also helps entrepreneurs focus on the strengths and weaknesses of the firm, as well as opportunities and threats
The use of formal business planning has increased significantly over the past few decades. The increase in use of formal long-range plans reflects a number of significant factors:
- Competitors engage in long-term planning.
- Global economic expansion is a long-range effort.
- Taxing authorities and investors require more detailed reports about future prospects and annual performance.
- Investors assess risk/reward according to long-range plans and expectations.
- Availability of computers and sophisticated mathematical models add to the potential and precision of long-range planning.
- Expenditures for research and development increased dramatically, resulting in the need for longer planning horizons and huge investments in capital equipment.
- Steady economic growth has made longer-term planning realistic.
Benefits of Planning
Planning provides a means for actively involving personnel from all areas of the business enterprise in the management of the organization. Companywide participation improves the quality of the plans. Employee involvement enhances their overall understanding of the organization’s objectives and goals. The employees’ knowledge of the broad plan and awareness of the expected outcomes for their responsibility centers minimizes friction between departments, sections, and individuals. Involvement in planning fosters a greater personal commitment to the plan and to the organization. These positive attitudes improve overall organizational morale and loyalty.
Managerial performance also benefits from planning. Planning focuses the energies and activities of managers in the utilization of scarce resources in a competitive and demanding market place. Able to clearly identify goals and objectives, managers perform better, are more productive, and their operations are more profitable. In addition, planning is a mental exercise from which managers attain experience and knowledge. It prepares them for the rigors of the marketplace by forcing them to think in a future and contingency oriented manner.
The Planning Horizon
Basically, there are two timetables for planning. The first is long-range, extending beyond one year and normally less than five or ten years. Often called the strategic plan or investment plan, it establishes the objectives and goals from which short-range plans are made. Long-range plans support the organizational purpose by providing clear statements of where the organization is going.
The second planning horizon is short-range, covering a period of up to one year. Short-range plans are derived from an in-depth evaluation of the long-range plan. The annual budget is a quantified expression of the enterprise\’s plans for the fiscal year. It generally is divided into quarters, and it is used to guide and control day to day activities. It is often called the tactical plan because it sets priorities, in the near term, for long-range plans through the allocation of resources to specific activities.
Types of Plans
In addition to differentiation by planning horizon, plans are often classified by the business function they provide. All functional plans emanate from the strategic plan and define themselves in the tactical plans. Four common functional plans are:
- Sales and marketing: for developing new products and services, and for devising marketing plans to sell in the present and in the future.
- Production: for producing the desired products and services within the plan period.
- Financial: for meeting the financial needs and providing for capital expenditures.
- Personnel: for organizing and training human resources.
Each functional plan is interrelated and interdependent. For example, the financial deals with moneys resulting from production and sales. Well trained and efficient personnel meet production schedules. Motivated salespersons successfully market products.
Two other types of plans are strategic and tactical plans. Strategic plans cover a relatively long period and affect every part of the organization by defining its purposes and objectives and the means of attaining them. Tactical plans focus on the functional strategies through the annual budget. The annual budget is a compilation of many smaller budgets of the individual responsibility centers. Therefore, tactical plans deal with the micro organizational aspects, while strategic plans take a micro view.
Steps in the Planning Process
The planning process is dir5ectly related to organizational considerations, management style, maturity of the organization, and employee professionalism. These factors vary among industries and even among similar companies. Yet all management, when applying a scientific method of planning, performs similar steps. Completion of each step, however, is prerequisite to successful planning.
The main steps in the planning process are:
- Conducting a self-audit to determine capabilities and unique qualities.
- Evaluating the business environment for possible risks and rewards.
- Setting objectives that give direction.
- Establishing goals that quantify objectives and time frames.
- Forecasting market conditions that affect goals and objectives
- Stating actions and resources needed to accomplish goals
- Evaluating proposed actions and selecting the most appropriate ones.
- Instituting procedures to control the implementation and execution of the plan.
In order to create an effective overall plan, management must first know the functional qualities of the organization and what business opportunities it has the ability to exploit. Management conducts a self audit to evaluate all factors relevant to the organization’s internal workings and structure.
A functional audit explores such factors as: sales and marketing (competitive position, quality and service); production (operational strategies, productivity, use and conditions of equipment and facilities, maintenance costs); financial (capital structure, financial resources, credit facilities; investments, cash flow, net worth, profitability, debt service); and personnel (quality and quantity of employees, organizational structure, decision making policies and procedures).
THE BUSINESS ENVIRONMENT
Management surveys the factors that exist independently of the enterprise but which it must consider for profitable advantage. Management also evaluates the relationships among departments in order to coordinate their activities. Some general areas of the external environment considered by management include: demographic changes (sex, age, absolute numbers, location, movement, ethnicity); economic conditions (employment level, regional performance, sex, age, wage levels, spending patterns, consumer debt); government fiscal policy and regulations (level of spending and entitlements, war and peace, tax policies, environmental regulations); labor supply (age, sex, education, cultural factors, work ethics, training); competition (market penetration and position, market share, commodity or niche product); and vendors (financial soundness, quality and quantity of product, research and development capabilities, alternatives, foreign, domestic, just in time capabilities).
SETTING OBJECTIVES AND ESTABLISHING GOALS
The setting of objectives is a decision-making process that reflects the aims of the entire organization. Generally, it begins at the top with a clear statement of the organization’s purpose. If well communicated and clearly defined throughout the company, this statement becomes the basis for short-range objectives in the annual budget.
Management articulates the overall goals to and throughout the organization in order to coordinate all business activities efficiently and effectively. It does this by: formulating and distributing a clear, concise statement of the central purpose of the business; leading in the formation of long-range organizational goals; coordinating the activities of each department and division in developing derivative objectives; ensuring that each subdivision participates in the budget process; directing the establishment or short-term objectives through constructing the annual budget; and evaluating actual results on the basis of the plans.
The organization must know why it exists and how its current business can be profitable in the future. Successful businesses define themselves according to customer needs and satisfaction with products and services. Management identifies the customers, their buying preferences, product sophistication, geographical locations, and market level. Analyzing this data in relation to the expected business environment, management determines the future market potential, the economic variables affecting this market, potential changes in buying habits, and unmet needs existing now and those to groom in the future.
In order to synchronize interdepartmental planning with overall plan, management reviews each department’s objectives to ensure that they are subordinate to the objectives to the next higher level. Management quantifies objectives by establishing goals that are: specific and concrete, measurable, time specific; realistic and attainable; open to modification, and flexible in their adaptation.
Because goals are objective oriented, management generally lists them together. Some examples of goals might include:
- Profitability: Profit objectives state performance in terms of profit, earnings, returns on investments, etc. A goal might call for an annual increase in points of 10 percent for each of the next five years.
- Human Resources: This broad topic includes training, deployment, benefits, work issues, and qualification. In an architectural consulting firm, management might have a goal of in-house computer aided designs (CAD) training for a specific number of hours in order to reach a certain level of competence.
- Customer Service: Management can look at improvements in customer service by stating the number of hours or the percentage of complaints it seeks to reduce. The cost or cost savings are in the prevailing currency terms. If the business sells service contracts for its products, sales goals can be calculated in percentage and currency increases by type and level of contract.
- Social Responsibility: Management may desire to increase volunteerism or contributions to community efforts. It would calculate the number of hours within a given time frame.
FORECASTING MARKET CONDITIONS
Forecasting methods and levels of sophistication vary greatly. Each portends to assess future events or situations that will affect either positively or negatively the business’s efforts. Managers prepare forecasts to determine the type and level of demand for products currently produced or that can be produced. Management analyzes a broad spectrum of economic, demographic, political, and financial data for indications of growing and profitable market.
Forecasting involves the collection and analysis of hard data, and their interpretations by managers with proven business judgment. Individual departments such as sales, and divisions such as manufacturing, also engage in forecasting. Sales forecasting is essential to setting production volume. Production forecasting determines the materials, labor, and machines needed.
STATING ACTIONS AND RESOURCES NEEDED
With the objectives and forecasts in place, management decides what actions and resources are necessary in order to bring the forecast in line with the objectives. The basic steps management plans to take in order to reach an objective are its strategies. Strategies exist at different levels in an organization and are classified according to the level at which they allocate resources. The overall strategy outlines how to pursue objectives in light of the expected business environment and the business’s own capabilities. From the overall strategy, managers develop a number of more specific strategies.
- Corporate strategies address what business (es) an organization will conduct and how it will allocate its aggregate resources, such as finances, personnel, and capital assets. These are long-term in nature.
- Growth strategies describe how management plans to expand sales, product line, employees, capacity, and so forth. Especially necessary for dynamic markets where product life cycles are short, growth strategies can be, a) in the expansion of the current business line, b) in vertical integration of suppliers and end users, and c) in diversifying into a different line of business.
- Stability strategies reflect a management satisfied with the present course of action and determined to maintain the status quo. Successful in environments changing very slowly, this strategy does not preclude working toward operational efficiencies and productivity increases.
- Defensive strategies, or retrenchment, are necessary to reduce overall exposure and activity. Defensive strategies are used to reverse negative trends in profitability by decreasing costs and turning around the business operations; to divest part or all of a business to raise cash; and to liquidate an entire company for an acceptable profit.
- Business strategies focus on sales and production schemes designed to enhance competition and increase profits.
- Functional strategies deal with finance, marketing personnel, organization, etc. These are expressed in the annual budget and address day to day operations.
EVALUATING PROPOSED PLANS
Management undertakes a complete review and evaluation of the proposed strategies to determine their feasibility. Some evaluations call for the application of good judgment; the use of common sense. Others use sophisticated and complex mathematical models.
ASSESSING ALTERNATIVE STRATEGIC PLANS.
Because of the financial implication inherent in the allocation of resources, management approaches the evaluation of strategic alternatives and plans using comprehensive profit planning and control. Management quantifies the relevant strategies into pro forma statements that demonstrate the possible future financial impact of the various courses of action available. Some examples of pro forma statements are: budgets, income statements, balance sheets, and cash flow statements.
The competing strategic long-range plans constitute simulation models that are quite useful in evaluating the financial effects of the different alternatives under consideration. Based on different sets of assumptions regarding the interaction of the company with the outside world, these plans propose various scenarios of sales, production costs, profitability, and viability.
Generally categorized as normal (expected results), above normal (best case), and below normal (worst case), the competing plans project possible outcomes at input/output levels within specified operating ranges attainable within the fiscal year.
Management selects courses of action relative to pricing policy, advertising campaigns, capital expenditure programs, available financing, R&D, and so forth based on the overall return on investment (ROI) objective, the growth objective, and other dominant objectives. In choosing between alternative plans, management considers:
- The volume of sales likely attainable,
- The volume of production currently b sustainable,
- The size and abilities of the sales forces,
- The quality and quantity of distribution channels.
- Competitors’ activities and products,
- The pace and likelihood of technological advancements,
- Changes in consumer demand,
- The costs and time horizon of implementing changes,
- Capital required by the plan. And the ability of current employees to execute proposed plans.
CONTROLLING THE PLANS THROUGH THE ANNUAL BUDGET
Control of the business entity is essentially a managerial and supervisory function. Control consists of those actions necessary to assure that the company’s resources and operations are focused on attaining established objectives, goals, and plans. Control compares actual performance to predetermined standards and takes action when necessary to correct variances from the standards. Exercised continuously, control flags potential problems so that crises may be prevented. It also standardizes the quality and quantity of output, and provides managers with objective information about employee performance.
In recent years, some of these functions have been assigned to the point of action, the lowest level at which decisions are made. This is possible because management carefully grooms and motivates employees through all levels to accept the organization’s way of conducting business.
The planning process provides for two types of control mechanisms: feedforward, which provides a basis for control at the point of action (the decision point); and feedback, which provides a basis for measuring the effectiveness of control after implementation.
Management’s role is to feedforward a futuristic vision of where the company is going to and how it is to get there, and to make purposeful decisions coordinating and directing employee activities. Effective management control results from leading people by force of personality and through persuasion; providing and maintaining proper training, planning, and resources; and improving quality and results through evaluation and feedback.
Effective management means good attainment. In a profit making business or any income generating endeavor, success is measured by the amount of cash at hand and its derivative percentages. The comparison of actual results to budget expectations becomes a formalized, routine process that:
- Measures performance against predetermined objectives, plans, and standards,
- Communicates results to appropriate personnel,
- Analyzes variations from the plans in order to determine the underlying causes,
- Corrects deficiencies and maximizes success,
- Chooses and implements the most promising alternatives,
- Implements follow-up to appraise he effectiveness of corrective actions, and
- Solicits and encourages feedback to improve ongoing and future operations.
Business planning is more than simply forecasting future events and activities. Planning is a rigorous, formal, intellectual, and standardized process. Planning is dynamic, complex decision making process where management evaluates its ability to manipulate controllable factors and to respond to uncontrollable factors in an environment of uncertainty.
Management evaluates and compares different possible courses of action it believes will be profitable. It employs a number of analytical tools and personnel, especially in accounting, to prepare the appropriate data, make forecasts, construct plans, evaluate competing plans, make revisions, choose a course of action, and implement that course of action. After implementation, management control consists of efforts to prevent unwanted variances from planned outcomes, to record events and their results, and to take action in response to this information.
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