LO7: Understand why businesses plan
why businesses plan
businesses fail for many reasons
poor financial control
lack of knowledge of the market
lack of knowledge of competitor behaviour
lack of clear and unique selling point
concentration risk - relying on one major supplier
flawed business plans
good planning reduces the changes of business failure by
improving the chances of business survival
steering a business towards its objectives
avoiding unnecessary risk
producing new ideas to keep business competitive
determine appropriate sources of finance for businesses
businesses can raise funds either from an internal source or an external source
some sources of finance are more suited to meeting short term financial needs, others are more suited to meeting long term financial needs
choice of finance depends on - availability of finance/cost of finance/reason finance is required
availability of finance
not all sources of finance are available to every business
e.g. a new business in its first year of trading does not have any reserves/retained profit
e.g.sole traders and partnerships cannot raise money by issuing shares
e.g mortgages are only available to businesses borrowing against property
e.g. business with a poor financial record is unlikely to be able to borrow money from a bank
cost of finance - internal sources of finance - if available - are usually cheaper than external sources
reason finance is required
to start up a new business
replace outdated machinery
buy out a competitors business
purchase a new building
deal with a cash flow crisis
to buy raw materials
what may be included in a business plan
business plan: formal document explaining a firms intended strategy to meet its objectives
should be written in a clear, untechnical way so that all interested stakeholders can understand its content
it does not have to follow a specific format - what needs to be included depends on the nature of the business venture under consideration
usual for a business plan to contain 8 elements
business plan is beneficial as it can help to...
clarify the details of a proposal to business owners e.g. sole trader, partners, shareholders
attract potential investors
judge the viability of a business venture for business owners, potential investors/lenders
obtain grant funding from charities and government souces
support a loan application to a bank or other lender
share business objectives with employees
executive summary - overview of the content of the business plan
intended product/service e.g. new product/service, extension to product/service range
unique selling point i.e. what makes a business stand out from its competitors
protection of the product/service e.g. need for confidentiality during planning stage, copyright, patenets
prioritsation of business objectives e.g. make a profit, market share, reputation
market research e.g. competitor analysis, consumer research, product testing
resource requirements e.g. finance, number of employees, skills of employees, technological resources, premises location, requirements
financial plan e.g. sources of finance, cash flow forecast, breakeven point
sources of finance
internal
external
owners savings - short/long term - sole traders & partnerships
disads: owners may not have enough savings, may leave the owners with insufficient savings for personal use
ads: no need to repay money, low cost no interest paid
reserves (retained profits) - long term - all
disads: not available to new businesses in their first year of trading, not available to businesses that have made losses
short term
long term
hire purchase - all
credit card - all
trade credit - all
overdraft - all
venture capitalist - all
share issue - companies only
mortgage - all
crowdfunding - all
loan - all
ads: improves cash flow by buying now and paying later/no interest charged if paid within the agreed timescale
disads: any discounts available for cash or early payment will be lost/interest charged if not paid within agreed timescale
ads: payments are spread of a period of time/can obtain equipment that would otherwise could not be afforded
disads: interest and additional charges make it expensive/can only be used to obtain equipment and machinery
ads: if repaid within payment period, the borrowing is free/payment protection, money can be claimed back if there is a problem with a purchase
disads: interest charged if not repaid within the interest free period/high interest rates leads to spiraling debt
ads: can help with short term cash flow problems/interest is only charged on the daily amount over drawn - not the overdraft limit
disads: interest rates are usually high/prolonged use makes it expensive
disads: length of the loan and interest rate can make it expensive/lender may require security on the loan
ads: repayments are spread over a period of time/fixed instalments help with cash flow management
disads: can only be used to purchase a property/if repayments are not kept up then the property will be repossessed
ads: can obtain premises that could not be afforded otherwise/repayments are spread over a long period of time
disads: equity funded - venture capitalist becomes an owner/reduce control over decision making for current owner
ads: finance coupled with advice and expertise/business connections which can help the business grow
ads: no need to repay the money/no interest to be paid
disads: shareholders need to be paid out of profit/issuing more shares may dilute the control of existing shareholders
disads: cost of providing appropriate reward to investors/business intentions made public, so may be copied if not fully protected
ads: finance coupled with promotion of the business/available to businesses struggling to secure funding by conventional methods