Business Planning Theories
Business planning is the process of identifying and defining a business strategy, researching the business environment, providing financial forecasts and estimating the resources required to implement the plan. Business planning sets guidelines on how the company will operate and provides essential information for investors and lenders.
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Significance
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Extensive and correct business planning is a crucial aspect that determines an organization's probability of success. Business planning is the first step for a start-up company prior to receiving any loans or investments; without a detailed, researched-based business plan, no bank or venture capitalist will fund your business idea.
Facts
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The first and most fundamental steps of planning a business venture are the actual writing of the business plan and the determination of what legal business structure to form. Sound business plans will inherently include many theories of business planning such as establishing a business strategy, providing financial and resource estimates, and analyzing the economy, the target market and the level of competition (see References). An organization should select a legal business structure that benefits the theories outlined in the business plan. The important decision of what business structure to form affects the way a company is taxed, the liability protection provided, the legal requirements and much more. The possible choices include a sole proprietorship, a general partnership, a limited liability company, and various corporation options such as C Corporations, S Corporations or Non-profit Corporations.
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Theories
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The most important part of any business planning effort is defining a business strategy that will lead to success. According to the U.S. Small Business Administration, "strategic planning is matching the strengths of your business to available opportunities." The business strategy should at least include a mission and vision statement. A mission statement outlines the fundamental purpose of the company by asking two questions: why does the company exist and how will it achieve success? A vision statement focuses on the organization's strategic direction and states where the company wants to be in the future (see References). Most business strategies will also include a SWOT Analysis, which is research aimed toward uncovering and analyzing the strengths, weaknesses, opportunities and threats of the business opportunity.
Forecasting
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The two most important aspects of financial forecasting are the estimates of future cash flow and a break-even point calculation. Potential investors are concerned with cash flow to ensure the business will be able to continue to operate off the initial investment until it reaches the break-even point. The break-even point of a new business is the time at which the company will start to make a profit (see References).
Considerations
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To closely estimate the break-even point, the founder of the business must have a good understanding of all the resources needed to run the business as well as important aspects of the current business environment such as the target market and level of competition (see References). The target market is the intended customers that the product or service will be used by; it must factor in both the demographics of potential customers as well as the size of the potential market.
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