Study Notes on Chapter Six

Chapter Six: Planning, Organizing, and Managing a Small Business

Learning Objectives

• Describe why planning is essential yet often neglected in small businesses.

• Explain the roles of strategic and operational planning, including examples.

• Explain the significance of financial planning, including relevant examples.

• Articulate the necessity of a business plan and its intended purpose.

• Produce a sample business plan.

Why Is Planning So Important to Small Businesses?

Definition of Planning

• Planning: The process of setting objectives and determining the actions required to achieve them.

• Criteria for Effective Planning:

  • Be prepared.

  • Be patient.

  • Know where to get help.

  • Form your own support system.

Importance of Planning

1. Vertical Integration: Understanding the power of vertical integration to streamline processes.

2. Self-Assessment: Regularly assess one's position by asking:

   • What business am I in?

   • What finances do I need?

   • What is my sales strategy?

3. Personnel Needs: Identifying where to find required personnel.

4. Profit Expectations: Estimating potential profits.

5. Foundation of Management:

   • Planning is the first managerial function and establishes future actions for all business aspects.

   • It serves as the foundation to build upon.

How Planning Relates to Other Managerial Functions

Benefits of Well-Developed Plans

• Attract interest from potential investors.

• Guide owners and managers in business operations.

• Provide direction and motivation for employees.

• Create an environment that attracts customers and potential employees.

Planning Neglected by Small Business Owners

• Often overwhelmed by daily activities, leaving little time for planning.

• Fear of confronting problems that planning might reveal.

• Lack of knowledge regarding effective planning methods.

• Belief that future changes cannot be predicted or prepared for.

Important Types of Plans and Planning Functions

Strategic Planning

1. Mission: Defines the long-term direction of the business (e.g., to provide financial security at low cost).

2. Objectives: Short-term goals that contribute to accomplishing the mission, such as:

   • Earning a 20% return on investment in 2005.

   • Increasing market penetration by 25% by 2006.

3. Strategies: Courses of action required to achieve objectives, e.g.,:

   • Establishing cost control procedures by 2005.

   • Allocating 1% of sales to improve services.

Operational Planning

1. Policies: Guides to action that ensure consistency in decision-making, especially in repetitive situations. Example: Personnel policy prioritizing internal promotions.

2. Methods and Procedures: Describes how tasks should be performed to achieve results, such as employee selection processes.

3. Budgets and Standards: Plans concerning future activities that employ measures for control. Example: A cash budget for money management.

The Role of Strategic Planning

Overview

• Strategic Planning: Provides comprehensive long-term direction to accomplish the business mission.

Personal Evaluation Questions

• Do I possess the ability to devise an extensive strategic plan to elevate the company?

• Do I have the necessary experience and lessons to advance the company’s strategic vision?

• Do I possess the leadership qualities needed for growth?

• Do investors trust and relate to me?

Examples of Strategic Planning

• Selecting the business type to enter.

• Formulating the company mission.

• Deciding among starting a new business, buying an existing one, or acquiring a franchise.

• Choosing products or services to sell.

• Identifying market niches to exploit.

• Determining the organizational structure.

SWOT Analysis

Definition

• SWOT Analysis: Analyzing opportunities and threats in the external environment along with the strengths and weaknesses present within the internal environment.

Mission and Objectives

Vision

• Explains the future aspirations of the business.

Mission Statement

• Defines the organization’s current business scope and capabilities.

Objectives

• The goals, purposes, and desired outcomes for the business and its components.

Strategic Umbrella

• Components:

  • Vision: The overarching goal of the business.

  • Mission: The underpinning mission with defined objectives and resource alignment.

Setting Firm Objectives

Example of Objectives Setting (Sample Table)

Additional Objectives

• Attain a __ percent market share by the end of 2015.

• Achieve a percent debt-to-equity ratio initially, declining to percent by the end of 2016.

• Develop a new product by the end of 2017.

Internal Resources and Competitive Edge

Human Resources

• Definition: The personnel constituting the workforce of the business.

• Characteristics: Personnel must be motivated, imaginative, qualified, and dedicated to maintain competitiveness.

Financial Resources

• Include cash flow, debt capacity, and available equity.

• Adequate finances are critical for sustaining current operations and seizing future opportunities.

Physical Resources

• Definition: The tangible assets such as buildings, tools, and distribution facilities necessary for business operations.

• Effectiveness depends on optimal location and low operating costs.

Competitive Edge

Definition

• Competitive Edge: A distinguishing feature that enhances a firm's attractiveness to customers compared to competitors.

Alignment

• A small business's mission, objectives, and resources must align with its environment to establish a competitive edge.

Strategies for Achieving Objectives

Explanation

• Strategies are the methods utilized to attain business objectives and fulfill the mission, integrating various business activities for optimal resource use.

Types of Planning

1. Strategic Planning: Conducted before starting the business.

2. Business Plan Development: Aimed at attracting investors and financiers.

3. Continuous Operational Planning and Control: In place before and after business operations commence.

Setting Up Policies, Methods, Procedures, and Budgets

Importance of Operational Planning

• Establishes policies, procedures, and standards necessary for achieving objectives.

Definitions

• Policies: General statements guiding managerial decisions and supervisory actions.

• Methods and Procedures: Directives to employees on job execution.

• Budgets: Detailed monetary plans projecting expected outcomes over a future period.

Planning to Operate the Business

Key Areas for Operation Planning

1. Choosing the business location.

2. Planning for operational needs and facilities.

3. Developing supply sources.

4. Planning human resource requirements.

5. Setting legal and organizational structures.

6. Market approach determination.

7. Efficient record-keeping system establishment.

8. Schedule creation.

Importance of Location

• The business type influences location decisions, which encompass access to customers, suppliers, utilities, and compliance with regulations.

The Role of Financial Planning

Definition

• Financial Planning: The determination of required funds, sourcing, and management. It includes:

  • Income and expense estimation.

  • Estimating initial investments required.

  • Identifying funding sources.

Estimating Income and Expenses

Key Terms

1. Net Profit: Total revenue exceeding total expenses.

2. Cash Flow: Available cash at any given time.

3. Variable Expenses: Fluctuate with production volume.

4. Fixed Expenses: Remain constant regardless of production.

Locating Sources of Funds

Types of Funding Sources

1. Equity Investors: Individuals who become part owners of the business.

2. Lenders: External parties providing funding for limited periods at fixed interest rates.

3. Microloans: Small, short-term loans facilitated by the SBA.

The Role of the Business Plan in Strategic and Operational Planning

Business Plan Definition

• A formal tool designed to assist in attracting necessary components for business formation, including people and funding.

Essential Components of a Business Plan

1. Proposed product details.

2. Expected market analysis.

3. Industry strengths and weaknesses.

4. Planned marketing policies.

5. Operations or production methods and facilities.

6. Financial forecasts including income, expenses, investment, and cash flow predictions.

How to Prepare a Business Plan

Steps to Prepare

• Survey consumer demand regarding products and strategize accordingly.

• Pose comprehensive questions about target markets and competition.

• Develop a long-term strategic plan spanning the entire business entity.

• Craft short-term, detailed action plans for all business participants including owners and employees.

• Ensure staff time is used effectively in the planning process.

Planning is the process of setting objectives and determining actions to achieve them, serving as the foundation of management. It is crucial for understanding vertical integration, self-assessment of essential business aspects (e.g., finances, sales strategy), personnel needs, and profit expectations. Despite its importance, small business owners often neglect planning due to daily demands, fear of problems, lack of knowledge, or the belief that the future is unpredictable. Well-developed plans attract investors, guide operations, motivate employees, and attract customers.

Important Types of Plans and Planning Functions

Strategic Planning

Strategic planning provides comprehensive long-term direction for the business mission. It involves:

1. Mission: Defines the long-term purpose (e.g., providing financial security at low cost).

2. Objectives: Short-term goals contributing to the mission (e.g., 20% ROI by 2005, 25% market penetration by 2006).

3. Strategies: Courses of action to achieve objectives (e.g., establishing cost control, allocating sales to improve services).
   Key elements include selecting the business type, formulating the mission, choosing products/services, identifying market niches, and determining organizational structure.

Operational Planning

Operational planning establishes policies, procedures, and standards for achieving objectives. It includes:

1. Policies: General statements guiding managerial decisions for consistency.

2. Methods and Procedures: Directives on how tasks should be performed.

3. Budgets and Standards: Detailed monetary plans for control.

Key Concepts

• SWOT Analysis: Analyzes internal strengths/weaknesses and external opportunities/threats.

• Vision: Explains future aspirations of the business.

• Mission Statement: Defines the organization’s current business scope and capabilities.

• Objectives: Specific goals and desired outcomes for the business, often expressed in financial terms (e.g., net profit, ROI, market share) or product development.

• Internal Resources: Include human (motivated, qualified personnel), financial (cash flow, debt capacity), and physical (buildings, tools, distribution) resources.

• Competitive Edge: A distinguishing feature that enhances a firm's attractiveness. Achieving it requires alignment of mission, objectives, and resources with the business environment.

The Role of Financial Planning

Financial planning involves determining required funds, sourcing, and management. This includes:

• Estimating income and expenses using terms like Net Profit, Cash Flow, Variable Expenses (fluctuate with production), and Fixed Expenses (remain constant).

• Locating sources of funds such as Equity Investors (part owners), Lenders (external parties with fixed interest), and Microloans (small, short-term SBA-facilitated loans).

The Role of the Business Plan

A business plan is a formal tool designed to attract necessary components (people, funding) for business formation. Its essential components include product details, market analysis, industry strengths/weaknesses, marketing policies, operations methods, and financial forecasts. Preparing a business plan involves surveying consumer demand, analyzing target markets and competition, and developing both long-term strategic plans and short-term action plans for all participants.