Why is business planning important?

Setting out to build or grow your business without a business plan is like switching on the ignition and driving out your driveway without knowing where you are going, or how you plan to get there.

Business planning helps you define an agreed route-map for your business. It identifies your key objectives for the next three-to-five years and how they will be achieved. A business plan gives directions and timelines in which to achieve your goals, and provides a guideline for your day-to-day operations and decisions.

Why do I need a business plan?

There is no logical reason to wait for external motivation, like your bank manager asking to see your business plan, before you write one. Committing your plans to writing helps to sharpen your focus and identify your priorities, and can be used as a benchmark to measure your progress towards achieving your goals.

Business plans are an essential management tool that tells you what you plan to achieve, how you plan to achieve it, and when you hope to achieve it by. Set time aside to assess actual progress against your business plan to keep your business on track, and update your plan as economic, market and individual circumstances change.

The primary purpose of your business plan is to map out a strategy and action plan for your business, but it also serves a useful secondary purpose as a reference document for external parties with an interest in your business.

Your business plan is likely to be read by people in your company as well as other people and businesses who are entering some form of partnership or association with you. Since your business plan contains your strategy and action plan for your business, it will be referred to by your staff to ensure that the decisions they make match the overall plans and objectives of your business.

Your business plan (or selected portions of it) is also likely to be shown to people outside your business, like your bank manager or other lenders, when looking to raise finance or investment capital. Similarly, if you are looking to employ a new senior staff member, for example, a professional business plan could help clinch the deal.

Potential business partners or representatives are also likely to be favourably impressed by a comprehensive business plan, and your plan will also play an important role in presenting your business to potential buyers when it comes time to sell your business.

People from outside your company or organisation will primarily be interested in using your business plan to assess the viability and profitability of your business.

Setting your goals

Your business will not operate as efficiently and effectively as it could without specific and defined goals. Your business plan is likely to outline goals for some, or all, of the following:

§  Financial objectives – for example, to increase turnover or reduce operating costs by 5% this year

§  Strategic objectives – for example, to increase the number of corporate clients by 20% within two years

§  Operational objectives – for example, to increase output by 10% within six months

§  Marketing objectives – for example, to increase total sales to existing customers by 10% next year

§  Social / Environmental objectives – for example, decreasing your carbon footprint by 5% each year for three years.

Holding a staff brain storming session is a good way to benefit from the expert knowledge of your staff and get their buy-in and support for your business goals and objectives. Depending on the size of your business you might hold only one brainstorming session, or several, to cover the objectives for various business units.

Keep your goals realistic, and pertinent to current general economic conditions, as well as your specific industry conditions. For example, in a period of global economic downturn it is more effective to look at ways to decrease costs than to increase sales.

Identify your strategy

Your business plan will also include your business strategy and will outline the steps you plan to following order to achieve the goals and objectives you have identified. This in turn, will direct the day-to-day operations of your business. Each of your business goals will need a plan of action that needs to be followed in order to achieve the objective.

As a rule of thumb, your strategy will outline the most practical and cost-effective way to achieve each objective. It will detail any extra equipment or personnel that might be required to achieve this.

For example, you might need an extra staff member and an additional computer to increase output by 10% within the next six months, or you might consider enrolling your sales staff on a course to achieve the objective of increasing sales to existing customers next year.

Forecast the financial implications

The financial implications of your goals and strategies will be reflected in the financial forecasts in your business plan. Your goals will identify the areas of improvement, like an increase in sales or a reduction in costs, and your strategy will identify any additional expenditure in order to achieve these goals.

Most business plans will include a 12-month cash flow forecast, a profit and loss forecast, and a two- or three-year projection.

Your cash flow forecasts will identify whether you have sufficient financial resources to implement your plans immediately, or whether you will need to explore other financing options. Monitoring your actual spend against your projections is a way to ensure that new project costs do not escalate much beyond planned expenditure.

Review your business plan

Your business plan is a living document that grows and changes over the lifespan of you business. It’s objective is to identify your key goals and how to achieve them, while taking market and technological trends into account.

The effectiveness of your business plan as a management tool depends on you referring back to it as a reminder of your plans and objectives, and updating your plans in order to keep them relevant.

Reviewing your progress against your business plan, on an annual basis, is a good way to measure actual performance and will form the basis for revising and updating your plans.

Because the nature of your business and the market you operate in will change over time it is a good idea to review and update your business plan once a year. The most efficient way to achieve this is to set aside a few days every year, at the same time, to do this. 

Interactive online business plan

Quick start business plan

This business planner helps you turn your idea into a reality. It includes a break even template, a cashflow forecast and builds into a comprehensive business plan.

How to use this tool

§  You will be presented with a series of pages containing practical information, examples, tips and downloadable templates to help you implement your ideas.

§  As you navigate your way through the pages, you will be prompted to answer key questions and select items.

Creating your Action Plan

§  Your answers and selections will be added to an Action Plan which you can download in Word format.

§  This Action Plan will be automatically generated, based on the action points which you recorded as you navigated through the pages, so it's important to think carefully about all the information that you add.

Templates

As you navigate your way through the pages, you can download practical templates to help you implement your Action Plan.

Tax obligations when setting up a business

When setting up a business so that you can pay the correct amount of tax, as well as claim the business expenses and deductions you are entitled to receive you need to consider the structure you will use to run your business. You also need to understand which forms and records you will need to complete and maintain and if you will be required to register as an employer or for GST.

§   The Tool for business
The Tool for business helps you get all your small business tax issues sorted quickly and simply.

§   Determining if you are actually in business
Identifies some important criteria for determining whether someone is in business.

§   What structure will you use to operate your business?
Explains basic requirements and liabilities for operating your business as a sole trader, a partnership, or a company.

§   What registrations might you need to complete?
When setting up your business you may need to apply for a different type of  IRD number. You may also need to register as an employer, or for additional tax types such as goods and services tax (GST) or fringe benefit tax (FBT).

§   Your business tax obligations
Learn about the records you need to keep while running your business, the importance of budgeting for tax payments and your balance date.

§   Where to go for more help
Some sources of business advice and the areas they advise on.

§   Kaitakawaenga Maori
Kaitakawaenga Maori work out of most Inland Revenue offices. They offer a free advisory service to help meet the needs of Maori individuals, organisations and businesses.

§   Business tax information officers
Inland Revenue's specialist Business tax information officers offer free tax education and advice to new businesses and smaller organisations.

§   Where to go for more help
Some sources of business advice and the areas they advise on.

Is your business idea viable?

Most people start a business in a flush of enthusiasm. While enthusiasm is an important ingredient for business success, it is not the only one. You need to find out if there is demand for your product, and whether there is enough demand at a price that ensures your business will be profitable.

There's obviously no way to guarantee that your idea is going to succeed, but thorough market research will go a long way to ensuring that you'll be investing your time and effort in a business venture that should offer a reasonable return on investment.

If you can answer yes to the following questions, there is a good chance that your business idea is a viable proposition, which means your next step would be to draw up a business plan.

Do you have a unique selling point?

Unless you've been lucky to find a gap in the market, your product or service is going to have to compete against other similar products for customers and market share. To compete, your business has to stand out from the competition – it has to have a unique selling point that you can use to encourage customers to buy from you.

This doesn't mean you have to invent a totally new product or service. Your offering might:

§  Be cheaper or more economical to use.

§  Smell better or work better.

§  Come in a more fashionable design or appealing colour range.

§  Weigh less, or be made of better material.

§  Anything else that compares favourably with similar products on the market.

If you have a unique selling point, it's worth doing further research into the viability of your business. If you're not sure if your product or service adds value that customers can’t find elsewhere, it might be better to brainstorm a few more business ideas before you forge ahead.

Do you have a market?

Knowing who will buy your product and what motivates their purchasing decisions is vital to the success of your business. Not only will you need to make sure that your product appeals to your target market segment, but you'll need to find out how large your potential market is, whether it is stay-at-home mums, business people, teenagers or retirees.

Think about the size of your market in your area or wider (if you plan to sell online, for example). How many people will be interested in your offering, at the price you're likely to need to charge?

The next step is to look at your potential competitors. Find out what their respective competitive advantages are, and examine their pricing and marketing strategies. Looking at their website, physical Yellow Pages advert or printed advertising material is a good start. Many businesses have social media offerings so check to see if they have a  Facebook or  Twitter profile to get a feel for how they interact online.

Is there room for you to muscle in and get a large enough share of the market to break even and start making a profit? Does your product or service really fill a need that is not met by the competition?

If you're still answering yes, then it's time to crunch some numbers to test if your idea is really viable.

Find out more about understanding your customers.

Do the numbers add up?

What costs will you incur in producing the goods or providing the service? What is your selling price? How much demand do you anticipate? Is there enough demand and are the margins high enough for you to break even after a few months and then start trading at a profit?

Work out a cash flow forecast using your anticipated costs, selling prices and sales quantities. How long will it take to build up your sales to a point that your business is able to break even? How long before your business starts to generate a profit?

Perhaps most importantly, once your business is established, what sort of return-on-investment will you get? There's little point in investing a lot of money, time and effort in running a business if you earn less than the returns you'd get from putting your money into a term deposit. Is your business venture going to do more than keep you busy? Is it going to make you money?

Do you have enough money to last until your business is profitable?

If you're satisfied that your business idea should bring in a good return-on-investment once it is established, the last question you need to consider is whether you have enough money available to meet the start-up costs and operate the business until it is turning a profit.

Work out a cash flow forecast to see how much money you will need. Remember, you might need to rent premises, buy equipment, employ staff and pay salaries, fit out an office, purchase stock or supplies, and get your marketing campaign off the ground. These costs can add up to a sizeable amount.

In addition, you'll need to be able to cover your operational costs, and your personal expenses, for quite a few months before you break even or turn a profit. If you're borrowing money, you will also need to be able to make the interest payments when they fall due.

If you've answered this with another yes, chances are you have a viable business idea. But before you go charging ahead with entrepreneurial enthusiasm and set up your business, it makes senses to formalize your plans and thinking by drawing up a detailed business plan.

Most people start a business in a flush of enthusiasm. While enthusiasm is an important ingredient for business success, it is not the only one. You need to find out if there is demand for your product, and whether there is enough demand at a price that ensures your business will be profitable.

There's obviously no way to guarantee that your idea is going to succeed, but thorough market research will go a long way to ensuring that you'll be investing your time and effort in a business venture that should offer a reasonable return on investment.

If you can answer yes to the following questions, there is a good chance that your business idea is a viable proposition, which means your next step would be to draw up a business plan.

Do you have a unique selling point?

Unless you've been lucky to find a gap in the market, your product or service is going to have to compete against other similar products for customers and market share. To compete, your business has to stand out from the competition – it has to have a unique selling point that you can use to encourage customers to buy from you.

This doesn't mean you have to invent a totally new product or service. Your offering might:

§  Be cheaper or more economical to use.

§  Smell better or work better.

§  Come in a more fashionable design or appealing colour range.

§  Weigh less, or be made of better material.

§  Anything else that compares favourably with similar products on the market.

If you have a unique selling point, it's worth doing further research into the viability of your business. If you're not sure if your product or service adds value that customers can’t find elsewhere, it might be better to brainstorm a few more business ideas before you forge ahead.

Do you have a market?

Knowing who will buy your product and what motivates their purchasing decisions is vital to the success of your business. Not only will you need to make sure that your product appeals to your target market segment, but you'll need to find out how large your potential market is, whether it is stay-at-home mums, business people, teenagers or retirees.

Think about the size of your market in your area or wider (if you plan to sell online, for example). How many people will be interested in your offering, at the price you're likely to need to charge?

The next step is to look at your potential competitors. Find out what their respective competitive advantages are, and examine their pricing and marketing strategies. Looking at their website, physical Yellow Pages advert or printed advertising material is a good start. Many businesses have social media offerings so check to see if they have a  Facebook or  Twitter profile to get a feel for how they interact online.

Is there room for you to muscle in and get a large enough share of the market to break even and start making a profit? Does your product or service really fill a need that is not met by the competition?

If you're still answering yes, then it's time to crunch some numbers to test if your idea is really viable.

Find out more about understanding your customers.

Do the numbers add up?

What costs will you incur in producing the goods or providing the service? What is your selling price? How much demand do you anticipate? Is there enough demand and are the margins high enough for you to break even after a few months and then start trading at a profit?

Work out a cash flow forecast using your anticipated costs, selling prices and sales quantities. How long will it take to build up your sales to a point that your business is able to break even? How long before your business starts to generate a profit?

Perhaps most importantly, once your business is established, what sort of return-on-investment will you get? There's little point in investing a lot of money, time and effort in running a business if you earn less than the returns you'd get from putting your money into a term deposit. Is your business venture going to do more than keep you busy? Is it going to make you money?

Do you have enough money to last until your business is profitable?

If you're satisfied that your business idea should bring in a good return-on-investment once it is established, the last question you need to consider is whether you have enough money available to meet the start-up costs and operate the business until it is turning a profit.

Work out a cash flow forecast to see how much money you will need. Remember, you might need to rent premises, buy equipment, employ staff and pay salaries, fit out an office, purchase stock or supplies, and get your marketing campaign off the ground. These costs can add up to a sizeable amount.

In addition, you'll need to be able to cover your operational costs, and your personal expenses, for quite a few months before you break even or turn a profit. If you're borrowing money, you will also need to be able to make the interest payments when they fall due.

If you've answered this with another yes, chances are you have a viable business idea. But before you go charging ahead with entrepreneurial enthusiasm and set up your business, it makes senses to formalize your plans and thinking by drawing up a detailed business plan.

Business cycle

Business cycle behavior has been relatively synchronized since the mid-nineties. In 2001, the dispersion of economic growth rates across the industrialized economies even fell to its lowest level in over 30 years, as the global economy experienced a downturn that was unusually wide-spread across countries. Broadly speaking, the observed degree of output comovement reflects both the nature of the shocks that have occurred and the degree of economic interdependence. Output developments will be more correlated if common shocks happen to be predominant, while they will be more asymmetric if idiosyncratic shocks are most important. Because of economic relations among economies, countryspecific shocks may get transmitted to other countries, enhancing output comovement indirectly. The higher degree of output comovement in recent years has partly been driven by common shocks, such as large changes in crude oil prices, the rise and fall of the information technology boom and restrictive monetary policies (Peersman 2002). However, it is widely felt that common shocks are not the whole story, raising the question to what extent deeper economic linkages, and what kind of linkages, may have contributed to the more synchronized nature of economic fluctuations. The rise in international economic interdependence has occurred along three dimensions. The first is international trade in goods and services, which is the ‘traditional’ channel through which economies may affect each other. Although imports and exports as a share of GDP have in general increased, there has been no marked across-the board acceleration of this trend recently. It is therefore unlikely that deeper trade interdependencies have contributed significantly to the recent rise in output correlations. The second type of link is provided by international trade in financial assets, such as equity and bonds, and cross-border credit relations. Cross-border holdings of portfolio assets have mushroomed in recent years. For example, foreign holdings of US long-term securities amounted to 42% of US GDP in March 2000, having tripled in less than 2½ years (Griever, Lee and Warnock 2001). Correlations between stock markets of the major countries have greatly increased over the last twenty years, with the exception of Japan (Goetzmann, Li and Rouwenhorst 2001, Berben and Jansen 2002). Financial markets have thus gained importance as a channel for the international transmission of shocks. The third dimension of interdependence is the internationalization of production through foreign direct investment (FDI). Foreign direct investment has grown at rates far beyond those of international trade or output since the late 1980s. Especially in the second half of the 1990s, firms were exceptionally active in cross-border mergers and acquisitions (M&A). The outstanding global stock of FDI more than doubled in ten years time from 8.3% of world GDP in 1990 to 17.5% in 2000 (UNCTAD 2002). At present, about 11% of world output is produced by foreign affiliates (UNCTA 2002). It is conceivable that the larger presence of FDI is partly responsible for the observed increase in cross-country business cycle comovement. The empirical literature on the effects of FDI is often based on firm-level data and mainly deals with supply-side effects on host economies in the longer run, focusing on the transfer of technology, management techniques and business models. This paper focuses on another aspect of FDI, namely the possible role FDI may play in the transmisssion of economic shocks across borders. Using aggregate data, we examine to what extent the rapid expansion of FDI and the internationalization of production can be related to the phenomenon of more synchronized business cycles. Our basic empirical question is: Do countries that have comparatively intensive FDI ties tend to have more synchronous business cycles? To our knowledge we are the first to investigate this issue. To preview  the results, we find that before 1995 there is no strong evidence in favor of an independent role of FDI (next to foreign trade) in explaining cross-country business cycle correlation patterns. But after 1995, FDI linkages are much better able to explain the pattern of international business cycle linkages than foreign trade relations. Moreover, FDI is associated with the vulnerability to foreign output spillovers that occur with a lag, but international trade is not. This result holds for the complete sample as well as the more recent years.

Business cycle

Business cycle behavior has been relatively synchronized since the mid-nineties. In 2001, the dispersion of economic growth rates across the industrialized economies even fell to its lowest level in over 30 years, as the global economy experienced a downturn that was unusually wide-spread across countries. Broadly speaking, the observed degree of output comovement reflects both the nature of the shocks that have occurred and the degree of economic interdependence. Output developments will be more correlated if common shocks happen to be predominant, while they will be more asymmetric if idiosyncratic shocks are most important. Because of economic relations among economies, countryspecific shocks may get transmitted to other countries, enhancing output comovement indirectly. The higher degree of output comovement in recent years has partly been driven by common shocks, such as large changes in crude oil prices, the rise and fall of the information technology boom and restrictive monetary policies (Peersman 2002). However, it is widely felt that common shocks are not the whole story, raising the question to what extent deeper economic linkages, and what kind of linkages, may have contributed to the more synchronized nature of economic fluctuations. The rise in international economic interdependence has occurred along three dimensions. The first is international trade in goods and services, which is the ‘traditional’ channel through which economies may affect each other. Although imports and exports as a share of GDP have in general increased, there has been no marked across-the board acceleration of this trend recently. It is therefore unlikely that deeper trade interdependencies have contributed significantly to the recent rise in output correlations. The second type of link is provided by international trade in financial assets, such as equity and bonds, and cross-border credit relations. Cross-border holdings of portfolio assets have mushroomed in recent years. For example, foreign holdings of US long-term securities amounted to 42% of US GDP in March 2000, having tripled in less than 2½ years (Griever, Lee and Warnock 2001). Correlations between stock markets of the major countries have greatly increased over the last twenty years, with the exception of Japan (Goetzmann, Li and Rouwenhorst 2001, Berben and Jansen 2002). Financial markets have thus gained importance as a channel for the international transmission of shocks. The third dimension of interdependence is the internationalization of production through foreign direct investment (FDI). Foreign direct investment has grown at rates far beyond those of international trade or output since the late 1980s. Especially in the second half of the 1990s, firms were exceptionally active in cross-border mergers and acquisitions (M&A). The outstanding global stock of FDI more than doubled in ten years time from 8.3% of world GDP in 1990 to 17.5% in 2000 (UNCTAD 2002). At present, about 11% of world output is produced by foreign affiliates (UNCTA 2002). It is conceivable that the larger presence of FDI is partly responsible for the observed increase in cross-country business cycle comovement. The empirical literature on the effects of FDI is often based on firm-level data and mainly deals with supply-side effects on host economies in the longer run, focusing on the transfer of technology, management techniques and business models. This paper focuses on another aspect of FDI, namely the possible role FDI may play in the transmisssion of economic shocks across borders. Using aggregate data, we examine to what extent the rapid expansion of FDI and the internationalization of production can be related to the phenomenon of more synchronized business cycles. Our basic empirical question is: Do countries that have comparatively intensive FDI ties tend to have more synchronous business cycles? To our knowledge we are the first to investigate this issue. To preview  the results, we find that before 1995 there is no strong evidence in favor of an independent role of FDI (next to foreign trade) in explaining cross-country business cycle correlation patterns. But after 1995, FDI linkages are much better able to explain the pattern of international business cycle linkages than foreign trade relations. Moreover, FDI is associated with the vulnerability to foreign output spillovers that occur with a lag, but international trade is not. This result holds for the complete sample as well as the more recent years.