Business PlanningBusiness Planning

OutcomesThe student: The focus of this topic is the processes of establishing and planning a small to medium enterprise. - P1 discusses the nature of business, its role in society and types of business structure P3 describes the factors contributing to the success or failure of small to medium enterprises P4 assesses the processes and interdependence of key business functions P6 analyses the responsibilities of business to internal and external stakeholders P7 plans and conducts investigations into contemporary business issues P8 evaluates information for actual and hypothetical business situations P9 communicates business information and issues in appropriate formats P10 applies mathematical concepts appropriately in business situations

Students learn about:Small to medium enterprises Definition Role Economic Contribution Success and/or failureSmall to medium enterprisesDefinition Non-employee business sole proprietorships and partnerships without employees Micro business businesses employing less than 5 people including non-employing business Other small business businesses employing 5 or more people but less than 20 Medium Business business employing 20 or more people but less than 200Agriculture Businesses ABS has developed Estimated Value of Agricultural Operations (EVAO). Small businesses have an EVAO of more than $22,500 but less than $400,000.Role Greater dependence on their community Greater awareness of community needs than larger businesses SMEs are more labour intensive so creates more employment opportunities They are part of a supply chain for larger businesses Act as a beta site for innovations flexibility and risk taking cultureEconomic Contribution 50% of Australian workforce is employed by small business 58% of Australian Gross Domestic Product (GDP) is produced by SMEs New ideas come from entrepreneurs who establish small businessesSuccess/Failure Many small businesses fail because they run out of money and the business is declared bankrupt They fail because of lack of business skills, lack of capital and failure to keep accounting books Business failure offers economic benefits to the economy. It frees up the people and resources that new businesses need to get started and established business to grow

Influences in establishing a small to medium business enterprises Personal qualities qualifications, skills, motivation, entrepreneurship, cultural background, gender Sources of information The business idea competition Establishment options new, existing, franchise Market goods and/or services, price, location Finance source, cost Legal business name, zoning, health and other regulations Human resources Skills Costs wage and non-wage Taxation federal and state taxes, local rates and chargesPersonal QuantitiesQualifications Reason for small business failure is the lack of formal qualifications in business management The manager with practical skills and knowledge to plan, establish and operate a small business is Certificate IV in small business managementSkills Operations Marketing Finance Organisation Analysis and Understanding What is planned actually happen Interpersonal Have vision and can communicate the vision to other people relating well to the people Problem-solving, decision making and ability to embrace changeMotivation Desire and willingness to do something Personal fulfilment Long hours of workEntrepreneurship Entrepreneur is someone who organizes and operates a business and is prepared to take greater than normal financial risks in order to do so Entrepreneurship means taking riskCultural Background Relates to the ideas, customs and social behaviour of societyGender Generally men are considered to be successful businessmen In todays society, women are operating and running successful businessesSources of Information Trade Associations Networks Australian Bureau of Statistics Aus Industry Community Based Services Tafe Colleges and Universities NSW Chambers of Commerce Federal, state and local government departments Solicitors, bank managers and accountants Small business association of Australia and New ZealandThe business idea competitionThe business idea means setting out customers needs that the business activity is designed to meet. It is also matching the business activity to skills and financial capacity of the owner and degree of competition in meeting the customer need. Competition is rivalry amongst businesses that seek to satisfy a market There are two ways of achieving competitiveness goods and servicesEstablishment Options new, existing, franchiseEstablishing a new business Provides the greatest flexibility to design the business the way the owner wants it. The owner can decide on every aspect location, stock, equipment and staff. It is cheaper than buying existing business which requires goodwillBuying a existing business Checks should be made for the last three years to determine the health of the business If the business is struggling, it may not be good purchase Advantages are that sales to existing customers will generate instant income, a proven track record makes it easier to obtain finance and existing employees can provide valuable assistance.

Buying a franchise Franchisee receives the benefits of a successful business formula, a well recognised name and established trademark for a set fee. Franchisee operations have fewer teething problems. Franchise is the fastest growing area of small business with 1300 franchisors in Australia. The investment risk is low and there is immediate benefits from franchisors goodwill.Market goods and/or services, price, location To sell goods and services, businesses need to loo at the market. Market means customers who want to buy products so market analysis is a must. Market analysis involves collecting, summarising and analysing information about the state of the market. It also determines the threat and opportunities that the market presents.Price Prices at which goods and services are provided to customers determine the success of the business. Price setting strategies Percentage mark-up Recommended Retail Price Price Leadership and competition What the market will bear - AuctionLocation Different businesses will be suited for different locations. Business owner should consider number of factors when determining the location of a business. Location might be a shopping centre, retail shopping strip, online presence or a home based business. Local government zoning determines some types of businesses can operate.Zones Industrial such as manufacturing Residential such as Homes Commercial such as businessesFinance source, costFinance means funds or money needed to carry out the activities of a business. There are two main sources of funds:DebtShareholders Equity

Other peoples moneyOwners Money

BanksPartners Money

Financial companiesShareholders Money

Credit unions

Building society

Trust accounts

Trade credit

Trade credit is when a business buys goods and services now from another business and then they pay later.Debt Finance Money obtained through loans. Debt finance is good for owners because the owner does not have to sell any ownership in the business. It has a tax advantage - interest can be deduced form profit as expense.Terms for finance (time period) Short term less than 1 year Medium term 1 to 5 years Long term Greater than 5 yearsShort term finance Funds day to day workings of the business It is called working capital Working capital current assets current liabilities Current Assets accounts receivable, debtors, inventories, stock, cash in hand, cash at the bank Current liabilities overdraft, bank bills, trade credit creditorsMedium Term Finance Loans with a term between one to five years Generally done to expand the business Includes term loans, personal loans and leasingLong Term Finance More than five years Done to purchase buildings, land, plant and equipment Includes mortgage (loan secured on some type of asset such as a land or building)Equity Finance/Equity Capital Funds contributed by the business owners to start and then expand the business.Cost of Finance Cost of debt finance is interest. Interest has to be paid to the institution which has given them the money Cost of equity is profit or rate of return or dividendCost to business Establishment cost include these costs involved in setting up the business legal fees, furniture and equipment, phone and electricity connection, stock and rent in advance. Operating cost include these costs involved in ordinary day to day running of the business wages, advertising, insurance, interest on loans, telephone and electricity, stationary, rent, motor vehicles running costLegal business name, zoning, health and other regulations Licenses, permits and approvals are needed by businesses to establish Statutory regulations must be followed when commencing and operating the business Business that do not follow the regulations lose reputation, get fined and losing the right to continue trading There are three levels of government federal, state and local which impose all regulationsBusiness Name Registration All business names must be registered except when it is in the name of the owner No two businesses can operate under the same name If businesses name is crucial then it should be registered as a trademark with Intellectual Property Australia which administers Trademarks Act 995 (Commonwealth)Zoning Local government administers zoning of different areas. Residential areas are separated from factories A business that uses heavy equipment and wants to operate under a 24hr shift needs to locate where it can operate under zoning conditionsHealth Regulations For businesses that deal with food such as cafs, butchers, restaurants, shops and bakeries Health inspectors assess the premises without warningCompetition and Consumer Act 2010 Seeks to promote competition fair trading Providing protection for customers Administered by ACCC (Australian Competition and Consumer Commission) They have five key ideas: Consumer guarantees Sales practices Produce safely Unfair practices Unfair contract termsHuman Resources Employee is the most valuable resource of any business Hiring the right people at the right time with the right skills and right quantity is crucial for business success Skilled employees are highly productive and result in creating wealth for the businessEmployee Skills People with the most suitable skills for the job must be chosen The skill base of existing employees should be checked so training needs can be identifiedEmployee cost (wage and non-wage) Wages Base Salary Superannuation Annual leave Public holidays Sick leave Workers compensation insurance Payroll tax Recruitment Long service leave Maternity leave Leave loadingTaxation Taxation is the compulsory payment of a proportion of earnings to the government It is an important issue when a person is starting a business.FederalState

Pay as you go PAY-GStamp Duty

FBT Fringe Benefit TaxLand Tax

GST Goods and Services TaxPayroll Tax

Company Tax Capital gains tax

Australian Business Number (ABN) ABN is the single number used by businesses when dealing with a government department If ABN number is not provided then withholding tax of 47.5% can be heldLocal Government and Charges Rates Water and Sewerage Waste Management Services Development and Building Approval fees Sometimes local council offer exemptions in rates to encourage people to establish businesses

The business planning process Sources of planning ideas Situational analysis Vision, goals and/or objectives Vision Business goals Long-term growth Organising resources Operations Marketing Finance Human resources Forecasting Total revenue, Total Cost Break-even analysis Cash flow projections Monitoring and evaluations Sales Budgets Profit Taking corrective action

The business planning processBusinesses do not plan to fail, they fail to planA Business Plan is a 'road map' for the future growth and development within the business.

The Sources of planning ideas Employees Management Research and Development Economic, Political, Social, Technological, Geographic and Legal Factors and Changes Accountants Finance, brokers, consultants, bank managers and solicitors.Situational (SWOT) Analysis Involves identification and analysis of the internal strengths and weaknesses of the business, and the opportunities in and threats from the external environment. S - Strength W - Weaknesses O - Opportunities T - ThreatsSW

OT

In SWOT, strengths and weaknesses are internal factors.A strength could be: A new, innovative product or service. Location of the business. Quality processes and procedures. Global presence.A weakness could be: Lack of marketing expertise. Undifferentiated products or services (i.e. in relation to your competitors) Location of the business. Poor quality goods and services. Damaged reputation.In SWOT, opportunities and threats are external factors. An opportunity could be: A developing market such as the internet. Mergers, joint ventures or strategic alliances. Moving into new market segments that offer improved profits. A new international market. A market vacated by an ineffective competitor.A threat could be: A new competitor in your home market. Price wars with competitors. A competitor has a new, innovative product or service. Product recalls. Taxation is introduced on your product or service. The cost of one of your supplies is going up.

Visions, Goals and Objectives The vision statement states what the business aspires to become, its purpose and its function. Vision Statement or NAB - We will be leading international financial services company which is trusted by you and renowned for getting it right. Purpose of vision statement is to guide and direct the business, owners, managers and employees. It is a benchmark against which to measure all the business's decisions and operations.

Qantas vision statement Qantas is the airline of choice for customers with specific needs, providing a travel experience that is comfortable and hassle free, whilst ensuring the safety of Qantas staff and achieving the company's commercial objectives.Goals and/or objectives Goal is what a business expects to achieve over a set time which will assist in realising the business's vision. Goal can include the following: To become the largest business in the market. To improve market share.Long-term growth Does the business have the ability to continually expand? Depends on business's ability to develop and use its asset structure to increase sales, profit and market share.

Organising ResourcesWhat to do?Who is to do it?How it is to be done?1. Operations - How it makes and supply good and services1. Marketing - How to put the advertisement out in words1. Finance - How to spend money and profit1. Human Resources - How to allocate employees and hire peopleOrganisational Structure Is the framework in which the business defines how tasks are divided, resources are used and departments are coordinated. For example: Who will order stocks? Who will prepare financial reports? Who will meet clients? What equipment is needed?Operations Operations involves transforming different types of inputs (raw materials, labour, equipment and other resources) into finished or semi-finished goods or services. To produce goods or services, businesses need to have equipment and knowledge. Computer Aided Design (CAD) is computerised design tool that allows the business to create product possibilities from a series of input data. Computer Aided Manufacture (CAM) - is software that controls the manufacturing process.Marketing Marketing will succeed if all sections of business are involved in satisfying a customer's needs and wants, while achieving the business's goal. Marketing plan needs to become integrated in all aspects of business's goals. Sales consultant, advertising personnel, market research staff, distribution people, must be provided with informational, financial and physical resources to perform their jobs. Marketing means market analysis, sales forecast and market strategies. Market analysis means detailed description on size of market, how it is growing, trends in the market, competitor analysis and target market.Finance Every business requires fund to operate. Financial planning focuses on financial requirement, forecasts, records and controls. Two main sources of finance: equity and debt. Grant - financial assistance is given by Government to fund the SME's Expanding the business Research and Development Innovation Exporting Equity/Shareholders (Owner's money worth) and Debt (Borrowed money)Human Resources Employees is an organisation's most important resources. Good recruitment and selection processes are needed to find employees who will be an invaluable asset. Extensive training need to be employed to have skilled group of employees.

ForecastingForecasts are the businesss prediction about the future. An owner may need to forecast the availability of labour, raw materials, finance and building requirements. For this task, business owners rely on internal and external information sources.Total Revenue amount of money business may receive as sales TR = P*Q TR = Total Revenue P = Price Q = QuantityIf a good is sold for $25 and the quantity sold is 100, the total revenue (TR) is $2,500.Total Cost Total Cost = Fixed cost + Variable Cost Fixed cost is the cost that do not change with production levels Variable costs (VC are costs that depend on the number of goods or services produced. Variable cost, therefore, will increase more goods and services are produced and decrease when fewer goods and services are produced.TC = FC+VCFC = Rent, Land, Building, Contract of Phones, SalaryVC = 1 shirt buys 3m of fabric, 100 shirt buys 200m of fabric, electricity and waterBreak-Even Analysis Break-even analysis determines the level of sales (total revenue) that needs to be generated to cover the total cost of production Sales above the break-even point will mean a profit, sales below the break-even profit will mean a loss At break-even point, there is no profit or lossBreak Even Quantity Formula

Quantity (Q) = Total Fixed costs/Unit price - Variable costs per unit Example if the new racquet is priced at $200. Fixed costs are $600,000 and variable costs are $80 per racquet. What is the quantity to break even? Solve $600000/200=80 = 5000 You are in charge of Barbeque at school. The school has purchased a gas barbeque for $500. The cost of materials is $1.00. Each sausage sandwich is sold for $2.00. How many sandwiches need to be sold for breakeven?500/2-1 = 500/1 = 500

Cash Flow ProjectionsCash flow projections show the changes to the cash position brought about by the operating, investing and financial activities of the business.Cash flow - means Cash Receipts (Cash inflows) and Cash Payments (Cash Outflow) Cash Inflow - Cash sales, collection of debts and Borrowed Funds. Cash Outflow - Cash Purchases, payment to creditors and Loan Payments. Positive Cash flow when amount coming in the business is greater than amount going out.

-JanFebMarch

Cash in hand200035004200

Cash Inflow300025002000

Cash Outflow150018002500

Cash Balance350042003700

Importance of cash flow projection Clear indication of how much capital investment the business idea requires. Bank loan officer knows that the business is a good credit risk. It is used in the business plan section as a financial plan. It shows how much cash is expected to be made or spent over a period of time into the future.Monitoring and evaluation Business needs to monitor and evaluate its environment and take corrective actions - it adjusts its business plan to avoid any problems. The first step in the monitoring process requires the business to establish a performance standard. The second step is to compare the actual performance with the standard. The 3rd step is to use the strategies again if the business is successful or modify them to succeed next time. Involves comparing actual sales with the budgeted sales and making changes where necessary.

Monitoring and evaluating sales Sales is the revenue earned by a business and is cash inflow. Sales report provide managers with statistial information which allows them to monitor sales. Anticipated sales is frequently compared with forecasted or budgeted sales. Managers can correct problems to improve sales such as increasing advertising.

Monitoring and evaluating - budgets Budget is a financial plan for the future Contains the information about the incomes and expenses over a set period of time It must depend on: A review of past figures and trends Potential market or market share Proposed expansion and discontinuation of projects Proposals to alter the price or quality of product Current order and plant capacity Considerations from external environmentMonitoring and evaluating - profit Profit is the centre of business's activities Five indicators: Profit as a reward Profit maximisation Source of finance Performance indicator Dividend payment (share return)Taking corrective action - Modification Corrective action involves changing existing plans. Planned performance standards are unrealistic so need to change in materials, products, management practices, delivery of products etc.

Critical issues in business success and failure Importance of a business plan Management staffing and teams Trend analysis Identifying and sustaining competitive advantage Avoiding over-extension of finance and other resources Using technology Economic conditions

Critical issues in business success and failureImportance of a business Clear, concise statement of goals of the business what the business wants to achieve Well developed plans for achieving for these goals how the business is going to achieve these goals Reliable control standard for measuring performance The business plan is essential for business success Should be done in a professional manner because they are read by bank managers, accountants, potential investors and partnersManagement Staffing and Teams Role of management is the coordinating of the businesss resources to achieve the goals Management is the process of working with thorough people to achieve the goals of the business in a changing environmentManager role is To solve difficult problems Set and help attain important goals Develop attitudes of commitment and ownership Create a positive business culture Monitor the business culture through their words and action Monitor the businesses external and internal environments Plan and allocate resources Coordinate teams and departments Monitor teams and individual performancesStaffing Motivated and satisfied staff leads to business success They provide competitive advantage to the business So the staffing recruitment, maintaining, training and separating employees should be done with careExternal Recruitment Employee agencies are used by employers to shortlist the staff and hire the best staff Employee skills database records skills and experiences of all present employees Skill inventory is a database containing information on skills, ability and qualifications of existing staffTeams Make more informed and creative decisions Work without the need for close supervision Create greater level of employee supervision Provide improved consumer customer service and production outputTrend AnalysisTrend analysis analyses the change over time and looks for a pattern (trend) to predict the future.Oz track Logistics LimitedYearNet Profit ($ million)

201026

201140

201244

201347

The trend analysis shows the profit is increasing but at a decreasing rate so the future profit may fall.Use of trend analysis forecasting Predict the future based on the past Potential Sales Total Revenue Total Operating Costs Gross and Net Profit Availability of LabourIdentifying and sustaining competitive advantage Competitive advantage refers to the strategies used by a business to gain an edge over its competitors. Strategies for competitive advantage: Price/cost strategy Differentiation strategy Ensuring long-term successPrice Cost StrategyThe business achieves the lowest production costs and thus can reduce the product price. While the price is lower, the quality should not be compromised. Efficiency of operations refers to the ability of a business to streamline the processes. Low-cost labour is one way of gaining cost advantage. Economies of scale can be achieved by using more machinery advanced technology, buying in bulk or increasing specialisation of labour.Differentiation Strategy Offer something to customers that is not already offered by business rivals. It could be: High product quality Innovative design Positive brand image Top-quality service Celebrity endorsing the productSustaining a competitive advantage Research and development help the business develop innovative products Patents/copyrights protect against copying of inventions Exclusive contracts with suppliers, which means a supplier gives preferences to the business Lobbying government to limit foreign competition which aims to restrict imported products Business environment is always changing so managers should always focus on business operations, market share and profitAvoiding over-extension of finance and other resources Businesses should start small and gradually expand. If the businesses overextend themselves, it results in excess expenditure which is usually financed by banks borrowing. Business might have overextended itself by entering long term leasing an asset which it could not finance by capital and has borrowed funds.How to avoid overextended Business Planning Cash projections, preliminary establishment costs, financial costs, financial statement Avoid overdependence on debt financing Long term financial planning A small startOverextension of stock or staff Stock business invest too much money in buying raw-material or by anticipating wrong demand or purchase a bargain from a supplier. Staff Hiring more staff than needed by predicting over-optimistic sales. This can be avoided by: Outsourcing Redefining current job description Using more equipment/machineryUsing technology Has reduced time delays and improved communication between colleagues, suppliers and customers E-business and e-commerce are in words Possible Disadvantages Slowness in displaying webpages Corruption by virus Unwanted spam Information overload Expensive in terms of hardware, software and service provider chargesEconomic conditions Business has no control over economic conditions A country goes through upswing, boom, downswing (downturn) and recessions. Change in economic conditions impact the business. During boom High level of consumer spending falling unemployment and increased production. During recession lower level of consumer spending rising employment and decreased production.

23 Raymond Wang 2015