Business Planning

Definitions
Word

Definition

Break even
analysis

used to determine the level of sales that needs to be

generated to cover the total cost of production

Budget

the business's financial plan for the future

Business goals
Business
Operations
Business Plan

the 'road map' for future growth and development

within a business. It sets out the desired goals and
direction of the business.

Business
planning
corrective action
Cash flow
projection

the changes to the cash position brought about by

the operating, investing and financial activities of the
business

EEO (Equal
Employment
opportunity)
Evaluation

the process of assessing whether the business has

achieved stated objectives

Finance (area of
the business)

how a business sources and manages the risk of its

funding

Fixed cost

costs that do not vary regardless of how many units

of a good or service are produced

Forecasts (or
projections)

the business's predictions about the future

Grant

any monetary or financial assistance that does not

generally have to be repaid

Human resources

the employees of the business and are generally its

most important asset

Lean
manufacturing

an operational strategy aimed at achieving the

shortest possible production time by eliminating
waste

Logistics

Long term
growth

the management of business operations, such as the

purchasing, storage, transportation and delivery of
goods along the supply chain
the ability of a business to continually expand

Marketing

a set of interacting activities designed to plan, price,

promote and distribute products to present and
potential customers. Marketing is more than just
advertising.

Modifying
(corrective
action)

the process of changing existing plans, using updated

information to shape future plans

Monitoring

the process of measuring actual performance against

planned performance

Objectives

a specific statement detailing what a business (or

individual) needs to achieve in order to accomplish its
vision

Operational
Objectives

short-term issues and describe the course of action

necessary to achieve the tactical objective and
strategic goal

Organisational
structure

the framework in which the business defines how

tasks are divided, resources are used, and
departments are coordinated.

Performance
standard

a forecast level of performance against which actual

performance can be compared

Resource
allocation

the efficient distribution of resources so as to

successfully meet the goals that have been
established

Return

any profit that investors make from their investment

Short term
growth
Situational
Analysis
Six sigma
process

a process in which 99.99% of all manufactured

products are defect free

Social justice

adopting a set of policies to ensure that employees or

other community members are treated equally and
fairly

Strategic Goals

long-term, broad aims and apply to the business as a

whole
SWOT Analysis

the identification and analysis of the internal

strengths and weaknesses of the business, and the
opportunities in, and threats from, the external
environment

Tactical
Objectives

mid-term, departmental issues and describe the

course of action necessary to achieve the business's
strategic goals

Total Cost

cost of producing a certain number of goods or

services; the sum of the fixed and variable costs for
those units

Total Revenue

the total amount received from the sales of a good or

service

Variable cost

costs that depend on the number of goods or

services produced

Vision Statement

money that is invested in small and sometimes

struggling businesses that have the potential to
become very successful

Outcomes
The student:
P1 discusses the nature of business, its role in society and types of business
structure
P3 describes the factors contributing to the success or failure of small to medium
enterprises
P4 assesses the processes and interdependence of key business functions
P6 analyses the responsibilities of business to internal and external stakeholders
P7 plans and conducts investigations into contemporary business issues
P8 evaluates information for actual and hypothetical business situations
P9 communicates business information and issues in appropriate formats
P10 applies mathematical concepts appropriately in business situations
Content
Students learn to:
examine contemporary business issues to:

discuss the influence of government on SMEs

assess the effect of two changes in the business environment on SMEs

investigate aspects of business using hypothetical situations and actual business
case studies to:

explain how the business plan is determined in at least one SME

explain how SMEs can enter the global market for long-term growth

identify ways that SMEs gain a competitive advantage

prepare a small business plan:

based on a hypothetical or actual business

presented in a business plan/report format

Business Planning
1
2
3
4
5
6
7
8
9

The Role of the Business Plan

Business Planning process
Sources of Planning Ideas
Vision Statement
Goals/Objectives
Organising Resources
Forecasting
Monitoring & Evaluating
Taking Corrective Action - Modification

1 The Role of the Business Plan

The first task of anyone wanting to commence a business is to undertake

thorough planning.
The planning will provide the foundation on which the business will be

built.
Strong, firm foundations will usually result in a successful business.

Small - Medium Enterprise (SME)

SMEs play an important role within the Australian economy. These roles include:
Providing employment for about 5.3 million people

Produce 50% of all products produced each year

Generate an increasing amount of total exports

Provide a wide range of products used by large businesses

Earn more profits and pay more taxes than large businesses.

Although the individual efforts of each SME may appear insignificant, their total
impact is extremely important and can be seen as the 'engine room' of the
Australian economy. In recent years, SMEs have created many jobs, become
more innovative and are increasingly entering overseas markets.
A business classified by the number of employees, size and legal structure.

Definition of Small to Medium Enterprise (SME)

No universally accepted definition of SME

Most widely accepted is based on number of employees:
Micro - fewer than 5

Small - 5 to 19

Medium - 20 10 199

Other Characteristics of SMEs

Independently owned and operated

Not dominant in industry

Bulk of capital provided by owner
Personalised service
Local (but not always)
Personal qualities

Role of SMEs

Employ about 73% of people working in private sector

Produce about 50% of all products in Australia
Account for 20% of all R&D spending

Economic Contribution
SMEs

contribute to Australia's:
GDP (50% of Australia's GDP)
Employment (7.5 million jobs)
Balance of payments (small but growing rapidly)
Innovation (20% of R&D spending)

Success or Failure of SMEs

Five keys to SME success:
Entrepreneurial abilities

Access to information

Flexibility

Focus on market niche

Reputation

SME Failure

About 71% of all SMEs fail within the first 5 years of operation
Many reasons for failure, including:
Undercapitalism

Lack of planning

Managerial incompetence

Influences in Establishing a Small to Medium Enterprise

Personal Qualities

Qualifications
Few or no formal qualifications required

Skills
Obtained through experience, education and/or training

Motivation
75% of SME owners spend 50 hours/week or more, 25% put in 65

hours/week or more
Entrepreneurship
Risk taker, self-confident, driven, likes being around people,

bounces back from failure

Cultural background
Some cultures are more supportive of entrepreneurial activity

Gender
More men than women start small businesses, but women

entrepreneurs growing faster

Sources of Information

Professional advisors
Accountants, solicitors, bank managers and management

consultants
Government agencies
Small Business NSW (smallbiz.nsw.gov.au)

Business Enterprise Centres (becaustralia.org.au)

Business.gov.au

Other sources
Chamber of commerce

Trade associations

Australia Bureau of Statistics

Small Business Association (smeaustralia.asn.au)

The Business Idea - Competition

The world needs yet another Myspace or Friendster except several years
late. We'll only open it up to a few thousand overworked, anti-social, Ivy
Leaguers. Everyone else will then join since Harvard students are so cool. Facebook
We'll sell books online, even though users are still scared to use credit
cards on the web. Their shipping costs will eat up any money they save.
They'll do it for the convenience, even though they have to wait a week for
the book. - Amazon
We are building the world's 20th search engine at a time when most of the
others have been abandoned as being commoditized money losers. We'll
strip out all of the ad-supported news and portal features so you won't be
distracted from using the free search stuff. - Google
People will use their insecure AOL and Yahoo email addresses to pay each
other real money, backed by a non-bank with a cute name run by 20somethings. - PayPal
Filters! That's right, we got filters! - Instagram
It's like email, SMS or RSS. Except it does a lot less. It will be used mostly
by geeks at first, followed by Britney Spears and Charlie Sheen. - Twitter

Is competition essential for long-term business success? Explain with examples.

Competition can be useful for long-term business success to ensure the business
is motivated to be innovated and create more products. For example, when
Vodafone was in its prime, it ceased creating more innovative technologies,
providing the opportunity for competing businesses to capture the target market,
including Optus and Telstra. Competition also ensures that prices remain at a
reasonable price for consumers.

Establishment options
3 main ways of establishing ownership in a business:
1 Starting a new business yourself
2 Buying an existing business

Buying into a franchise

Starting a new business yourself

Advantages

Freedom to set up
exactly as you want
Owner can drive pace
of growth and change
No goodwill that
needs to be paid
If funds are limited,
can start on small scale

Disadvantages

High risk
Difficult to obtain finance
Time needed to develop
suppliers, customer base and employ
staff
May be considerable period
before generates profits

Buying an existing business

Advantages

Disadvantages

Sales to existing
customers will generate income
Good history increases
likelihood of success

Easier to obtain
finance
Equipment available

for immediate use

Existing employees
can provide assistance

May be difficult to change

image if business had poor reputation
Difficult to assess value of
goodwill, so may overpay
Success of business may have
been due to previous owner's
personality and contacts
Some employees may resent
change

Buying a franchise
Advantages

Disadvantages

Franchisor often provide

training

Immediate benefit from

franchisor's goodwill
Equipment and
premises design usually
established
Advertising strategy
often exists
Volume buying often
possible

Franchisor controls
operations
Profits must be shared with
franchisor
Franchisor often charges fee
for advice
Franchisee may feel like an
employee
Franchisee must share
burden of franchisor's business
mistakes

Market
Market Analysis
In order to determine whether there will be actual demand for a good or service,
businesses should undertake market analysis. A variety of methods can be used,
such as surveys, questionnaires and focus groups.
Market Analysis Questions
What are the demographics of our potential customers?

Why do they want to buy our products?

What do they see as our strengths and weaknesses?

Who are our competitors?

What do our competitors offer that we dont?

Price
What

methods can businesses use to work out what price they should sell at?
Percentage mark-ups
Recommended retail price
Price leadership and competition
What the market will bear

Location
Different businesses are suited to different locations. Options include:
Shopping centre complex

Retail shopping strips

Online presence

Home based business

Finance
Finance refers to the funds required to carry out the activities of a business.

Source
Two main sources of funds:
Debt - borrowed money that must be repaid with interest

Equity - an ownership interest in a business

Sources of Finance:
Credit union

Trust fund

Banks

Family

Debt Finance
Advantages:
Dont have to sell ownership of business

Tax effective (interest costs are tax deductible)

Disadvantages:
Interest must be repaid regardless of whether the business is profitable

Principal must eventually be repaid or refinanced

Types of debt finance

Short term (less than 1 year), includes bank overdrafts, credit card debt,

commercial bills, commercial paper and trade credit

Medium term (1 to 5 years), includes expansion, new equipment,

developing new products

Long term (more than 5 years, includes business loan, line of credit,

mortgage and leases

Equity Finance
Refers to the funds contributed by the owner/s.

Advantages:
No interest needs to be paid, and dividends are only paid if and when the

business is profitable
Principal doesnt need to be repaid

Disadvantages:
Selling ownership in the business reduces the potential upside if the

business is successful
There is an opportunity cost to equity in a business

Cost of Finance
Will depend on:
Type of finance (e.g. secured, unsecured)

Source of finance (e.g. bank, building society, credit union)

Term of finance (e.g. maturity)

Financial Requirements
Costs of running business can be split into:
Establishment costs: fixed costs of setting up the business (e.g. stock,

equipment, legal fees)

Operating costs: ongoing costs of running the business (e.g. wages, rent,

interest)

Legal Considerations
There are several legal issues that must be considered when setting up a
business. These include:

Business name registration and trademarking - Business Names Act 1962,

Trade Marks Act 1995
Zoning: Local council determines whether particular businesses can
operate in specific areas
Health regulations for businesses dealing with foods, which include regular
visits by health inspectors http://www.foodauthority.nsw.gov.au/penaltynotices/default.aspx?template=results
Trade Practices Act 1974 - law which protects both consumers and the
business. It protects consumers from deceptive or misleading practices, and
it regulates the trade practices of businesses.
Consumer and Competition Act 92010), which is designed to protect
consumers from deceptive practices http://www.youtube.com/watch?
feature=player_embedded&v=uE8BB-ioNRw

Human resources
When establishing an SME, the owner needs to decide how many, if any,
employees will be required to operate the business.
Main sources of employees are:
Advertisements

Word of mouth

Schools, universities or TAFEs

Recruitment agencies

Job service Australia

Employee skills
Employers must match the skill requirements of the job vacancy with the skills of
potential employees.
Employers can either:
Recruit people who have the required skills

Provide training to improve the skill level of existing employees

Employee costs
The total cost of an employee is more than the wage/salary paid. These are
called non-wage or on-costs.
These non-wage costs often account for around 30-40% of the total
remuneration package, and include:
Superannuation

Sick leave

Holiday pay

Recruitment costs

Taxation
The main federal taxes imposed on businesses include:
PAYG on behalf of employees

Goods and services tax (GST) of 10%

Company tax (30% of taxable income)

Capital gains tax - calculated on profit made on sale of assets

Fringe benefits tax - tax on the provision of a benefit to an employee eg.

Cars for private use, low-interest loans, entertainment expenses, housing &
accommodation - in place of salary or wage - paid by employer at 48.5%
The main state taxes imposed on businesses include:
Stamp duty on transfer of assets

Land tax (paid on land valued at more than $406,000, but primary

residence and farms exempt - calculated as $100 plus 1.6% of land value
minus threshold)
Payroll tax (5.45% if wages above $750,00 per year

The main local government taxes and charges imposed on businesses include:
Rates based on value of land

Water and sewerage charges waste management services development

and building approval fees

The Business Planning Process

A business plan is a written statement of the business's goals and the steps
taken to achieve them.
Elements of a Business Plan
1 Executive summary
2 Business goals
3 Strategies
4 Business description and outlook
5 Management and ownership
6 Operational plans
7 Marketing plans
8 Financial plans

Human resource plans

Benefits of a business plan

Identifies business strengths and weaknesses

Helps test the viability of the business

Indicates the owner's ability and level of commitment

Forces the owner to think through the detailed steps as to how the

business goals will be achieved

Sources of Planning Ideas

Information for planning is obtained from different sources within and outside the
business.

Situational Analysis
A situational (SWOT) analysis is a techniques for gathering the information
for use in a business plan. It involves doing an internal assessment
(strengths and weaknesses) and an external assessment (opportunities and
threats)

Vision, Goals and/or Objectives

The vision statement broadly states what the business aspires to become.
Why is a vision statement important?
It helps guide and direct the business owners, managers and employees.

It helps create a business's culture - Google's "You can make money

without doing evil."

It acts as a benchmark against which to measure all the business's

decisions and operations.

Goals and Objectives

Vision statements are broad, while goals and objectives are more specific.
Goals are strategic long term (years) aims

Objectives are tactical (months) and specific (SMART)

Example
Part of Google's vision statement might be that you can make money
without doing evil
A goal might be to increase market share
An objective might be something more specific such as increasing
Gmail's active user base by 10% by September 2013

Types of Goals
There are 3 main types of goals owners try to achieve:

Financial - increase profit, market share, increase share price

Social - providing employment, ecological sustainability or community
service
Personal - achieve financial security, work a four day week, successfully
grow a business

Long Term Growth

In order to achieve profit maximisation, a business must aim for long term
growth. Strategies that firms can adopt to achieve long term growth include:
Listen to customer feedback

Develop supplier and customer partnerships

Ongoing product innovation

Organising Resources
Once a business owner has decided on the vision, goals and objectives for a
business, the next stage in the planning process is the organisation of resources.
Organisation of resources involves working out:
What is to be done

Who is to do it

How it is to be done

What sort of resources does a business have?

Money
Employees
Storage
Factories

Operations
The sorts of questions that need to be addressed by the operations function
include:
What type of capital equipment and raw materials are needed?

Which suppliers will be used to purchase the capital equipment and raw

materials?
What will be the impact of the raw materials and capital equipment

purchases on finance?
What storage, warehouse and delivery systems are required?

What level of training will be required for workers?

Marketing
The set of activities which are designed to satisfy a customer's needs and wants.
The business must:
Have a marketing plan

Ensure all aspects of the business are in line with the marketing plan e.g.

adequate resources, personnel

Finance
The funds required to operate a business.
Businesses need to find the most appropriate source e.g. savings, loans

Decisions such as: amount of equity, potential loss of control, access to

government grants (payment which does not have to be repaid for things
such as R & D, innovation and exporting)

Human Resources
The activities associated with managing the people of the business.
Decisions involve recruitment, selection processes, compliance with legislation
such as anti-discrimination and equal employment opportunities.

Forecasting
Forecasts (or projections) are the business's predictions about the future.
A business needs more than just information about present business conditions.
It also needs information about possible future events.
They help with effective planning:
Labour

Raw materials

Money/finance

Building

(4 main Business Functions)

Total Revenue
Total revenue is the total amount received from the sales of a good or service
and is calculated by multiplying the selling price (P) by the quantity (Q) of units
sold. This can be represented mathematically as:
P x Q = TR
Sales forecasting data:
Can be gathered by using market research techniques such as customer

surveys
Are more precise if the business has some previous sales history to act as

a guide
Good for ordering stock/supplies

Total Cost
The costs involved in operating a business can be broadly classified as either
fixed or variable costs.
Fixed costs are costs that do not vary regardless of how many units of a good
or service are produced.
Variable costs are costs that depend in the number of goods and services
produced. Variable cost, therefore, will increase if more goods and services are
produced and decrease when fewer goods and services are produced.
The total cost of producing a certain number of goods or services is the sum of
the fixed costs and variable costs for those units. This can be represented
mathematically as:
FC + VC = TC
It is possible to forecast total cost by estimating the change in variable costs at
different levels of production. Fixed cost will remain the same.

Break-even Analysis
Break-even Analysis
Break-even analysis determines the level of sales that needs to be generated
to cover the total cost of production.
Total cost of production includes:
Fixed costs

Variable costs

Sales above the break-even point will mean a profit; sales below the break-even
profit will mean a loss.
Break-even analysis is an important planning tool because management can
determine the level of sales required to obtain a profit. It can also be used to
determine the effect on profit if sales increase or decrease. This planning tool is
used in the strategic planning stage, before budgets are prepared.
The break-even sales quantity can also be calculated by using the formula:
Quantity = Total fixed costs / (Unit price - variable costs per unit)

Cash Flow Projections

The cash flow projection shows the changes to the cash position brought
about by the operating, investing and financial activities of the business.
By looking at these figures we can predict the future on:
Cash payments we will receive (Accounts Receivable)

Cash payment we will need to pay (Accounts Payable)

The cash flow projection is an important tool for cash flow management. It offers:
The SME owner a clear indication of how much capital investment the

business idea requires

A bank loans officer evidence that the business is a good credit risk

Overall, this information will point out periods when business expenses are too
high or times when a short-term investment is possible to deal with a cash
surplus.

Monitoring
Monitoring is the process of measuring the performance of the business.
Monitoring involves two steps:
Establishing performance forecasts (or estimates)

Measuring actual performance

Evaluating
Evaluating is the process of comparing the performance estimates with the
actual performance.
The business is asking "Have we achieved what we planned to achieve?"
Firms will monitor and evaluate their budgets, of which sales and profit and
important components.

Monitoring and Evaluating Budgets

A budget is a business' financial plan for the future, and contains projections of
income and expenses over time.

Monitoring and Evaluating Sales

Monitoring and evaluating sales is critically important to determine the
effectiveness of marketing strategies. Businesses will examine sales
performance:
Overtime

By geographical area

By product line

Monitoring and Evaluating Profit

As profit is one of the main goals of business, monitoring and evaluating profit is
a key indicator of performance. Profit is important as both a return for owners
and as a potential source of future funding for the business.

Taking Corrective Action

If the actual performance of a business is falling below the forecast performance,
this provides an opportunity to take corrective action. This may involve altering
marketing strategies, modifying operational processes or staff changes.

Critical Issues in Business Success and Failure

Around 70% of SMEs fail within their first 5 years. While there are many reasons
why SMEs can fail, there are some critical issues that are important for all
businesses.

Business Plan
"By failing to prepare, you are preparing to fail" - Benjamin Franklin
"A goal without a plan id just a wish" - Antoine de Saint-Exupery
It is essential that businesses develop a business plan that sets out what they
are trying to achieve, and how they intend to achieve it.
While business plans may differ in their detail, they all contain some key
components:
Clear statement of business goals

Plan for achieving those goals

Standards for measuring performance

A business plan should take a lot of work and thought, and needs to be
presented in a professional manner as it will be read by bank managers,
potential investors, financial advisors, potential directors etc.

Management - Staffing & Teams

"The magic formula that successful businesses have discovered is to treat
customers like guests and employees like people." - Thomas J Peters
Management is the process of working with and through other people to achieve
the goals of the business in a rapidly changing environment.
Much of the success of a business depends on having satisfied and motivated
employees. This means that is essential that owners spend enough time and
money on the recruitment process.

Trend Analysis
Trend analysis is the process of investigating changes over time and looking for a
trend in order to predict the future. Trend analysis helps owners forecast factors
such as:
Sales

Total revenue

Total operating costs

Gross and net profit

Identifying and Sustaining Competitive Advantage

Business success depends on gaining a competitive advantage in the market.
There are two basic ways that a competitive advantage may exist:
Cost advantage

Differentiation advantage

Some of the ways that a firm may maintain a competitive advantage include:
Patents and trademarks

Proprietary know-how

Installed customer base

Reputation of the firm

Brand equity

Avoiding over-extension of finance and other resources

Overextension of financing means that firms often borrow too much, and if their
revenue projections turn out to be overly optimistic they can default (be unable
to pay the interest and/or principal) on their loans.
One cause of overextending finance is inadequate business planning; owners
underestimate the fixed costs of establishing their business and borrow more
than they intended.
Common ways that businesses overextend include:
Purchasing rather than leasing premises, capital equipment and vehicles

Employing too many staff

Purchasing too much stock

Purchasing or leasing high specification capital equipment or fit-outs

before business plan is proven

Using Technology
Improvements in technology have enabled businesses to:
Reach potential customers throughout the globe

Source low cost suppliers, wherever they may be found

Keep track of employees and shipments

Examples of technology in business

Payments - EFTPOS, Paypal, Square, NFC

E-Commerce - Ebay, Amazon, Zappos, Etsy

Communication - mobile phones, VOIP, Google coordinate

http://www.google.com/enterprise/mapsearth/products/coordinate.html
Manage business information - SAP, PeopleSoft

Automation
http://www.ted.com/talks/rodney_brooks_why_we_will_rely_on_robots.html

Economic Conditions

Changing economic conditions can influence business success or failure

A booming economy (strong growth) can increase demand for many goods
and services, particularly luxury goods
While a slowing economy can reduce demand for many goods and
services, some businesses do well in these times (liquidators; discount
retail; gambling; CCC)