By Joe C. David, the author of the bestseller – “Be your own Boss”
To the entrepreneur, the small to medium sized enterprise (SME) has a beauty of its own security, adaptability, profitability, to name a few. These may indeed be found in those SMEs that are both successful and well run. Yet, it is also true that these are not characteristics of the average SME, which needs planning and the effective implementation of plans to ensure that scarce resources are focused in areas that matter.
The Average SME
The familiar picture of the average SME is of a business that muddles along from day to day. It is not in control that is the privilege of outside circumstances. Its executives see little point to planning as a feature of management and there is a general failure to appreciate that using it to look forward, even a little, can be a very effective method of both easing current difficulties and anticipating possible areas. Because they are wary of planning, seeing it as something that is too complicated and resource intensive, managers often fail to see that the nature of their normal day to day muddling may well alter the longer their company survives.
Common Problems of SMEs
Yet to outsiders, like myself, the common problems of SMEs can and do vary overtime as follows:
Getting established in the first one or two years, finding and keeping customers, developing products and services.
Consolidation in the next period – finding and keeping competent staff, delegating, controlling the business.
Problems of expansion in the next phase – attracting investors, competing with much bigger firms in their markets.
However SMEs resources are under severe pressure in a variety of ways: They have few employees and managers, skills are limited and expertise scarce; money is always a problem, but their managers also have few skills to make the best use of what there is; a small management team usually the partners in the business with highly specialized skills which is often also learning the main problems of the business as it goes and therefore always experiences time pressures; a fairly narrowly defined geographic and industry sector; premises that are not totally suitable for the particular business; and inappropriate use of information for decision making by management, managers relying on historic information, which is often based on externally prepared annual accounts that may be at least one year out of date.
Why the Business Plan is so important to the SMEs
Successful business is about the efficient allocation of scarce resources. Large, well- established companies with loads of money can be and often are, wasteful but this is hidden from view because they go broke less often than the SME. With fewer resources, the SME has to be more effective to survive than the large company. It may, arguably have a greater need for planning as this is central to efficient resource allocation in a variety of ways.
Why Plan?
Without a plan, it’s easy to get side tracked by things that seems to be important but have little to do with achieving your original dream.
Planning identifies areas of the business that are not completely under control but which needs urgent action before a realistic approach can be made to outside investors. Planning is an important source of information about a company’s prospects for funding trading organizations, such as banks and other finance houses. Large organisations are generally more successful in gaining access to finance and this is often because they are able to provide more detailed justifications for their requirements. Planning provides a framework for informing employees and others about the company’s future direction. Planning helps ensure that management decisions are based on objective analysis of the company’s strengths and weaknesses. It also makes management aware of whether they are maximising the financial return on their use of scarce resources and ensures that the team considers the future strategy of the firm. Planning demands that management information systems be improved, which benefits all other decision making (entities) within the organisation. It identifies key areas where the firm needs to develop expertise. It provides a basis for analysing whether or not a new product or process will be a success. It also makes managers more knowledgeable about competition in the market place.
The average SME can be regarded as viable if it merely survives the first five years of its existence. Research shows that approximately 85 per cent of businesses fail in the first five years. However; American research on SMEs suggests that the stability of growth measured over a period of five to ten years is closely correlated to the amount of planning that company has carried out. While short-term success does not appear to be greatly affected by the amount of planning done, good planning is fundamental to long term profitable survival. Dutch research suggests that everyday an SME spends planning; it increases its chance of survival by three per cent up to a plateau of fourteen days, beyond which no further improvement occurs. Professionally produced business plans also significantly improve the prospects of the SME receiving external funding. Research on venture capital funding suggests that a fully detailed plan is fifteen times more likely to receive funding than one that is not. Also, bank research suggests that well-prepared business plans receive, on average, double the amount of support of poorly prepared plans.
Finally, approval for grants and loans also depends on well prepared supporting documentation. “Just because your company is small and wants to remain so does not mean that you cannot improve on large company’s performance.”
How does a Feasibility Study differ from A Business Plan?
- A feasibility study is an assessment of a business opportunity to determine whether or not it is worthy of support. It shows whether the idea can be implemented and if it is viable or not.
- It is often a precursor to a business plan.
- Most entrepreneurs can use the data and some of the results that they have obtained during their feasibility studies for their business plan.
But a winning Business Plan
Is a detailed document which articulates a company’s objectives, the strategies for accomplishing these objectives and weighs the risks and the expected returns of the endeavour. It describes an already existing business enterprise or a proposed new business and (how) to be distributed to potential investors. In summary, it is a working document customized to show the procedure of implementing a business idea by a particular promoter.
What the SME wants from a Business Plan
To become a useful development tool, any plan must take account of the peculiar operational circumstances of the SME. It should meet three criteria: Simplicity, Accuracy and Usefulness.
The exact details of the plan will vary by company and year. Some business plans are for internal use, others need to be prepared for external funding or for external shareholders’ approval.
Key Components of a Marketable Business Plan
A fully comprehensive list would include all the information given in the table below:
Outline SME Business Plan
| DETAILS | DESCRIPTION |
| Management overview | Contents |
| The Business and management | * Key points of the plan * When the business was established, results to date, borrowing history, existing commitments, current accountants, bankers, lawyers. * Key personnel, their experiences, knowledge of industry, age, education and training. * Shareholding structure, involvement of major shareholders in other ventures. *Number of employees, including working directors by category. * Expected number of employees after 12 months by category. * Reporting structure, internal organization. * Skills level by department. * Profit sharing or bonus schemes. |
| Past history | * Summary of last three years trading experience. * Successes, failures and lessons learnt. |
| Product or service | * Current product range. * Current customers * Existing customer contacts * Status of product development including percentage of new products in current sales, quality control. * Any patent, trademark or copyright protection. |
| Market and competition | * Market size and growth over five years. * Major competitors. |
| * Product/service trends. distribution outlets/service supply points.*Sales forecasts. * Promotional and pricing plan. * Current and future competitive advantage – including any relevant market research. | |
| Objectives and strategy | * Business goals generals *SWOT(Strengths, Weaknesses, Opportunities, Threats) analysis. * Short and medium term objectives, specific targets of gross profit, return on capital, new product development, personnel targets. |
| Information system and frequency of Reporting | * Accounting methods, cash flow, profit and loss, balance sheet, financial ratios. * Production efficiencies. * Marketing efficiencies. * Personnel efficiencies. * New product development efficiencies. * Equipment layout. |
| Production/service Supply system | * Product certification * Supplier agreements Warehousing, physical distribution, order processing. |
| Financial performance | * Projections stating assumptions of future performance for at least one year or first three years of operations. * Estimation turnover to include: – Balance sheets and profit and loss accounts. – Monthly cash flow projections. – Capital expenditure budgets. – Sensitivity analysis to show effect of 20 per cent increase in sales and 30 per cent decrease. |
| Assumptions | * Main assumptions underlying the plan. |
| Risk assessment and Contingency planning | * What the major risk issues are and how the company is planning to overcome them. |
| Action Plan | * Responsibilities * Time scale and key tasks by month tasks, milestones, success criteria. * Project plan for major investments, including, critical path. |
| Finance required | *Purpose * Level of return on the investment (for large- scale investments, a net present value calculation or some other discounted cash flow). * Total funding required based on projections. * Repayment assumptions. |
Some General Points to note when developing a winning Business Plan
- Involving as many people as possible in the development of the plan improves the quality of the planning. It also commits a larger number of staff to successful implementation because they have put their ideas into the project.
- Try to do your planning away from the inevitable continual interruptions that occur in the office as thought and concentration are nearly impossible to achieve in such an environment.
- Be brutally realistic about the implementation of the plan. It is easy to create plans on paper – It is when they have been implemented that they (have achieved their purpose) fall apart. It is far better to slightly over achieve a modest target than dramatically under achieve a far more ambitious goal.
- Allocate responsibilities immediately the plan is completed and track action from the earliest days.
- Learn from mistakes and try not to repeat them.
- A business plan is not designed solely to generate investment cash for the business. It is a skeleton around which the people in the business can think, generate ideas and work so that targets are met and long-term profits are assured.
- A business plan is not a guarantee of success but it will diminish the chances of failure because as the saying goes, he who does not plan (fails to plan), plans to fail.
The SURE mnemonic
SURE is a mnemonic for specific questions that are at the forefront of the planners’ minds.
- S – Is the plan soundly based? Is it likely to meet a long term demand in the market?
- U – Does the business understand the relationship between the external market and internal resources, can the plans be implemented?
- R – Is the plan realistic? Plans tend to be optimistic but does this one overstep reality when compared with previous years’ experience?
- E – Are the previous experiences and expectations of the group in line with the requirements of the plan?
General Objectives Identifying Common Goals
To make a plan that is SURE means understanding the general objectives of all those involved in making decisions about the allocation of resources. The business owners, stakeholders (never forget that the bank or any other financial institution involved is a stakeholder) and employees all have expectations or objectives that come from the existing business and how it was developed. It is vital to understand individuals’ expectations, identify where major conflicts may exist and by compromise and discussion, create common goals. Unless such common goals are established, the potential for the plan to be acted on is negligible.
It is sensible to start with general issues and then move on to more specific and quantifiable ones via a series of questions. Help in arriving at realistic and objective answers to these questions can be obtained by looking back at previous year and considering where the business succeeded and failed. So far, we have looked at the potentials and pitfalls that surround the SME. We also saw the advantages of having a business plan and lists of what a business plan should ideally include whether it is used to secure external funding or for internal purposes. Above all, I’m convinced right now that at your fingertips lie all the information you need to create a winning business plan for your stake holders which may include: the investors, bankers/credit organizations, board/advisors, employees etc. Get back to your drawing (board), review the outline of SME business plan in this chapter (piece) and as it relates to your business, create something new out of it. But remember the words of Winston Churchill, “The farther backward you can look, the further forward you are likely to see.”
(Culled from “BE YOUR OWN BOSS” by Joe C. David with permission.)
