The Purpose of Business Planning (AQA GCSE Business)

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Lisa Eades

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Reasons for Developing a Business Plan

A business plan sets out key aspects of a business and how the owners intend it to develop
Producing a business plan helps reduce the risk associated with starting a new business and can help the owners raise finance
- A business plan forces the owner to think about every aspect of the business and organise business activities before they start, which should increase its chance of success
- A well-written business plan can help a business obtain finance
  - Lenders (e.g. banks) and other investors will be able to explore the plan and make an informed decision about whether the business is credible and worth the financial risk
  - Investors (e.g. venture capitalists) will use the business plan to explore whether there is an opportunity to increase the value of their investment and make a worthwhile profit
  - The business, having carried out research to support the plan, will be well-informed about the potential problems and chance of success and can select the most appropriate source of finance based on this information

The Structure of a Business Plan

Although there is no single way to structure business plans, they usually contain some common elements

Diagram: Key Elements in a Business Plan

Common elements of a business plan

Most high street banks can provide a detailed template for business owners to complete when applying for finance
A business plan should be a regularly-updated working document
- As the business grows, plans are likely to change as it faces new threats and opportunities

Key Elements in a Business Plan

Element	Explanation
Executive summary	This section provides an overview of the business idea, its unique selling proposition, target market, and financial projections It should be concise yet compelling enough to grab the reader's attention
Company description	A description of the business mission, vision, and values Information about the legal structure, location and any unique advantages or intellectual property the business may have
Market analysis	A thorough analysis of the target market, including its size, growth potential and key trends Identification of target customers and their needs A competitor analysis to understand their strengths and weaknesses
Products or services	A detailed explanation of the products/services the business will offer, highlighting their features, benefits and any competitive advantages they may have
Marketing and sales strategy	A description of the intended marketing and sales approach, including marketing channels, pricing strategy and promotional tactics A description of how customers will be attracted and their loyalty captured
Organisation, operations and management	An overview of the organisational structure of the business and the key members of the team, including their qualifications, experience and responsibilities A description of how the business will operate on a day-to-day basis, including the production process, stock management and any key partnerships or suppliers
Financial projections	A detailed financial forecast for the business, including projected income statements, balance sheets and cash flow statements An outline of funding requirements and any existing or potential sources of finance
Risk analysis	A consideration of the potential risks and challenges the business may face and the ways it intends to tackle them

Benefits & Drawbacks of Business Planning

While business planning has numerous benefits, it should be weighed against a range of drawbacks
- A business plan is only as good as the research behind it and the individuals who produced it

Evaluating Business Planning

Benefits	Drawbacks
A business plan helps owners and managers set aims and objectives Owners of business can use the plan to review ideas and see if they have the potential to make a profit Success can be measured by comparing actual outcomes to the plan, and changes can be made if necessary Plans can support applications for finance, such as bank loans	Uncertainty of what will happen in the future makes it hard to predict sales, costs and cash flows New business owners may lack the experience to write effective business plans, limiting their usefulness They take time and effort to put together, which may be difficult for small businesses to afford Opportunities can be missed if they are not in the business plan.

Basic Financial Terms & Calculations

The business plan usually makes reference to several basic financial terms and calculations, including
- Costs
- Revenue
- Profit or loss

Types of Costs

Business incur two main types of costs
- Fixed costs
  - These are costs that do not vary with output
  - A business needs to pay these, even if they do not make or sell anything
  - They are sometimes known as expenses or overheads
  - Examples include rent, utilities and employees' salaries
- Variable costs
  - These are costs that vary in direct proportion with output
  - Examples include raw materials, components and packaging
  - Variable costs are sometimes known as the cost of sales
  - Total variable costs are calculated using the formula
    $Total variable costs = Variable cost per item \times Number of items produced$
- Total costs
  - This is the total of a businesses fixed costs and variable costs during a specific period or at a particular level of output
  - Total costs are calculated using the formula
    $Total costs = Fixed costs + Total variable costs$

Revenue

Revenue is money earned from the sale of goods and services
It is sometimes known as turnover or sales revenue
Revenue is calculated using the formula
$Revenue = Selling price \times Number of items sold$

Profit

A business makes a profit when its revenue is greater than its costs
There are different ways to measure profit
- Gross profit is calculated using the formula
  $Gross profit = Revenue - Variable costs$
- Net profit is also known as true profit or the bottom line
- It is calculated using the formula
  $Net profit = Gross profit - Fixed costs$

Loss

A business makes a loss when its costs are greater than its revenue
A negative outcome of the net profit formula indicates a loss

Exam Tip

A common misconception is that business plans are only used when businesses first start up. They are, however, excellent working documents that can be used to focus and coordinate activities over the whole life of a business.

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