Business planning: general overview

Business planning, also known as strategic planning or long-range planning, is a management-directed process that is intended to determine a desired future state for a business entity and to define overall strategies for accomplishing the desired state. Through planning, management decides what objectives to pursue during a future period, and what actions to undertake to achieve those objectives.

Successful business planning requires concentrated time and effort in a systematic approach that involves: assessing the present situation; anticipating future profitability and market conditions; determining objectives and goals; outlining a course of action; and analyzing the financial implications of these actions. From an array of alternatives, management distills a broad set of interrelated choices to form its long-term strategy. This strategy is implemented through the annual budgeting process, in which detailed, short-term plans are formulated to guide day-to-day activities in order to attain the company’s long-term objectives and goals.

For entrepreneurs, the first step in successful business planning involves creating a formal business plan, of the type commonly used to attract investors and secure bank loans. Careful preparation of this document forces a business owner to examine his or her own goals as well as the market conditions in which the business operates. It also includes a detailed financial analysis, a look at current staffing levels and future needs, and information about management’s expertise. ‘‘All the elements can be folded together to formulate a strategic plan that focuses on where you want your company to be in the long run, and how you plan to get there,’’ Vince Maietta wrote in The Business Journal. ‘‘That also helps entrepreneurs focus on the strengths and weaknesses of the firm, as well as opportunities and threats.’’

The use of formal business planning has increased significantly over the past few decades. The increase in the use of formal long-range plans reflects a number of significant factors:

1) Competitors engage in long-range planning.

2) Global economic expansion is a long-range effort.

3) Taxing authorities and investors require more detailed reports about future prospects and annual performance.

4) Investors assess risk/reward according to long-range plans and expectations.

5) Availability of computers and sophisticated mathematical models add to the potential and precision of long-range planning.

6) Expenditures for research and development increased dramatically, resulting in the need for longer planning horizons and huge investments in capital equipment.

7) Steady economic growth has made longer-term planning more realistic.

Benefits of planning

Planning provides a means for actively involving personnel from all areas of the business enterprise in the management of the organization. Company-wide participation improves the quality of the plans. Employee involvement enhances their overall understanding of the organization’s objectives and goals. The employees’ knowledge of the broad plan and awareness of the expected outcomes for their responsibility centers minimizes friction between departments, sections, and individuals. Involvement in planning fosters a greater personal commitment to the plan and to the organization. These positive attitudes improve overall organizational morale and loyalty.

Managerial performance also benefits from planning. Planning focuses the energies and activities of managers in the utilization of scarce resources in a competitive and demanding marketplace. Able to clearly identify goals and objectives, managers perform better, are more productive, and their operations are more profitable. In addition, planning is a mental exercise from which managers attain experience and knowledge. It prepares them for the rigors of the marketplace by forcing them to think in a future- and contingency-oriented manner.

The planning horizon

Basically, there are two timetables for planning. The first is long-range, extending beyond one year and normally less than five or ten years. Often called the strategic plan or investment plan, it establishes the objectives and goals from which short-range plans are made. Long-range plans support the organizational purpose by providing clear statements of where the organization is going.

The second planning horizon is short-range, covering a period of up to one year. Short-range plans are derived from an in-depth evaluation of the long-range plan. The annual budget is a quantified expression of the enterprise’s plans for the fiscal year. It generally is divided into quarters, and is used to guide and control day-to-day activities. It is often called the tactical plan

because it sets priorities, in the near term, for the long-range plans through the allocation of resources to specific activities.